If you're among the more than three million Americans hoping that a rebound in the housing market will help you sell your home soon, perhaps you shouldn't get your hopes up just yet.
Because the housing slump, alas, is likely to continue in 2007.
The latest significant sign that the housing slump may be prolonged is the implosion in the market for subprime mortgages. The term subprime means that such mortgages charge above-average interest rates to compensate for the risks of lending to borrowers with scant or spotty credit histories. Subprime mortgages helped power the housing boom, which sent the average U.S. home price soaring by 65 percent from 2000 to 2006 and resurrected the adjective frothy in the vocabularies of business reporters and economists.
In the process, subprime loans grew in prominence to such an extent that, by 2006, they accounted for more than 20 percent of all mortgages and totaled $605 billion, 404 percent higher than in 2001.
Now the housing boom and the subprime-mortgage market are souring like a rotting grapefruit. The Center for Responsible Lending, a Durham, N.C., nonprofit research group, estimates that 2.2 million subprime loans granted between 1998 and the third quarter of 2006 - about 15 percent of the total - will end in foreclosure.
To date, about 488,000 subprime borrowers have defaulted on their mortgages, and that number will probably climb much higher. According to Morgan Stanley, the share of subprime loans that were in foreclosure or delinquent for at least 90 days has risen from about 7 percent in 2003 to more than 12 percent today. (To put that figure into some perspective, the foreclosure/delinquency rate for all U.S. mortgages is 1.4 percent.)
All of this suggests that the housing slump is likely to get worse before it gets better, to the disadvantage of people wanting to sell their homes sweet homes. Sellers had been heartened recently by inklings that the housing market was stabilizing: Statistics for declining home sales and home prices had leveled off in some metropolitan areas; mortgage applications had been rising; and the supply of existing homes for sale had shrunk in the final two months of 2006. About 3.6 million existing homes are on the market - a supply of 6.6 months at the current rate of sales, down from a record 7.4 months last October.
Unfortunately the subprime-mortgage market's mounting woes might result in newly foreclosed homes flooding the market, which would weigh down the housing market and prices further. Subprime mortgages account for 14 percent of home mortgages outstanding, according to the Mortgage Bankers Association. About 80 percent of them are adjustable-rate mortgages, which carry interest rates that are reset upward when rates rise.
Seemingly everyone in the subprime-mortgage world of borrowers and lenders was happy until the Federal Reserve began its series of 17 interest-rate hikes in the summer of 2005. As a result of rising rates, borrowers who received subprime mortgages in 2005 may soon be making monthly payments that are 25 percent or more higher than before . . . and lenders who approved imprudent mortgages are rediscovering the hard facts of high risk.
In essence, the housing boom was a product of easy credit that boosted demand for homes, drove up housing prices, and helped a record 69 percent of American households own homes - including (critics say) many Americans who shouldn't have qualified for mortgages in the first place. In their effort to cash in on the housing boom, subprime lenders relaxed their credit standards and introduced unconventional loans that, for instance, required no down payments and no documentation to confirm borrowers' incomes.
As those renowned investment strategists Blood, Sweat & Tears pointed out in their hit song "Spinning Wheel" in 1969, "What goes up must come down." And just as looser credit standards created demand that elevated home prices earlier in the decade, the tighter credit standards now being imposed by lenders are likely to depress demand and home prices.
The problems created by subprime loans will only complicate the plight of most homeowners hoping to sell. The fallout should generally keep housing prices soft, especially since the supply in aggregate exceeds the demand. So if you're now trying to sell your home, this famous and sobering bit of advice, courtesy of Bette Davis in the movie All About Eve may regrettably prove all too apropos in 2007: "Fasten your seat belts; it's going to be a bumpy night."