Economy

Soft Landing Revisited

By Ryan McGreal
Published February 23, 2007

Many economists have predicted a "soft landing" for the housing market, where prices peak and stall but do not crash. Well, maybe. I admit I've been surprised at how gently the housing market has stalled - I expected a much rougher ride by now.

However, troubling signs suggest the market hasn't quite landed yet, as Bloomberg reports:

ResMae Mortgage Corp. may be on the cutting edge of a trend in the U.S. subprime-loan industry. It's bankrupt and selling assets for pennies on the dollar.

ResMae, which made home loans to people with bad credit, will be auctioned off next week. The opening bid, by Credit Suisse Group, is $19.1 million, less than half the size of an offer received by ResMae before it went bankrupt Feb. 13.

ResMae is the third company to go bankrupt this year; and Doug Duncan, chief economist at the Mortgage Bankers Association, predicts over a hundred other mortgage companies will follow in ResMae's footsteps in 2007.

The problem is that lenders are being squeezed by falling home sales and hence falling demand for mortgages to higher risk borrowers. With falling demand, the 2-3 percent risk premium fell to zero even as bankruptcies and defaults hit record highs.

Moodys has reported that it may cut its ratings for some of the largest subprime lenders.

"I do not think it is surprising we have trouble in this sector of the market; I think the surprise is the speed at which it has unfolded in the last couple of months," said Mary Miller, director of fixed-income at Baltimore-based T. Rowe Price Group Inc., which manages about $335 billion in assets.

The effects are starting to ripple outward. Home improvement and building supply stores Home Depot and Lowe's have seen their profits drop sharply, and homebuilders like Toll Brothers are suffering "dismal earnings".

Perhaps surprisingly, the only home building companies doing well are so-called "green builders" - companies that specialize in materials for energy efficient and sustainable buildings.

Purveyors of such building components as foam insulation and faux wood shingles are continuing to see gangbuster sales, almost as though the housing boom that ended a year ago were still at full tilt. Materials are considered "green," in industry parlance, when they generally help reduce energy use more than conventional materials or are manufactured in a way that has less of an impact on the environment.

Sustainability is a good investment. Who knew?

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan writes a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. He also maintains a personal website and has been known to post passing thoughts on Twitter @RyanMcGreal. Recently, he took the plunge and finally joined Facebook.

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By Ryan (registered) - website | Posted March 13, 2007 at 22:17:32

The subprime situation is deteriorating:


Stocks plunged Tuesday, driving the Dow Jones industrials down more than 240 points to their second-biggest drop in almost four years, as troubles piled up for subprime lenders.

Investors, bracing for a wilting economy, fled the already deflated subprime mortgage sector on more news that lenders New Century Financial Corp., Accredited Home Lenders Holding Co. and General Motors Acceptance Corp.'s residential unit are facing financial problems. The Mortgage Bankers Association bolstered the belief that the struggles are widespread after it said new foreclosures surged to an all-time high in the last quarter of 2006.

All three major stock indexes were knocked down about 2 percent.

Japanese stocks followed suit, and the benchmark Nikkei 225 index fell 2.6 percent Wednesday morning in Tokyo.

"The market's still jittery, and they're starting to get full-blown concerns over a bleed in the larger subprime mortgage market," said Matt Kelmon, portfolio manager of the Kelmoore Strategy Funds.

http://biz.yahoo.com/ap/070313/wall_street.html?.v=30

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By Ryan (registered) - website | Posted March 15, 2007 at 14:01:22

More mortgage woes, this time on Bloomberg:


Tighter credit standards among mortgage lenders might lower U.S. home prices by 10 percent this year and push the economy into recession if the Federal Reserve doesn't respond by lowering interest rates, Merrill Lynch & Co. said in a report.

Merrill analyst David Rosenberg, who previously forecast the Fed would lower interest rates in the second half of 2007, said there are two possible scenarios. With a rate cut, economic growth will slow to about 1 percent. If rates are left unchanged, and housing prices fall 10 percent, the probability of a recession is "very close to 100 percent," Rosenberg wrote.

"There could well be potentially significant further drags on home prices, construction activity and of course consumer spending," he said in a March 13 note to investors.

http://bloomberg.com/apps/news?pid=20601087&sid=aYtEcwn_eunw&refer=home

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