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?
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