Existing Home Sales Continue to Fall

Sales of existing homes plunged in March by the largest amount in 18 years, reflecting in part rising troubles in the subprime mortgage market.

Analysts cautioned that tougher approval standards by lenders in response to the increase in mortgage delinquencies will depress sales further in coming months. They said a rebound in housing may not occur until 2008.

The National Association of Realtors reported Tuesday that sales of existing homes fell by 8.4 percent in March, the sharpest drop since a 12.6 percent plunge in January 1989.

The decline, which was three-times what had been expected, pushed sales down to a seasonally adjusted annual rate of 6.12 million units, the slowest pace in nearly three years.

The drop, which followed three straight months when sales had risen, was blamed in part on bad weather in February which depressed house hunting in much of the country after a string of warmer-than-normal months had pushed sales higher.

Existing home sales are not counted until the deal is closed though contracts signed in February do not get counted until March.

But analysts said the severity of the decline showed that factors other than weather played a part.

They said troubles in the subprime mortgage market, which supplied loans to borrowers with weak credit, was starting to have an impact on sales. Potential buyers are having more trouble getting loans as lenders tighten standards.

In addition, because of a rising number of mortgage delinquencies more homes are being dumped onto an already glutted market. RealtyTrac, which follows mortgage foreclosures, reported that foreclosures surged by 47 percent in March compared to a year ago.

The Realtors' report said that with sales faling, the amount of time it would take to exhaust the existing inventory of unsold homes at the March sales pace rose to 7.3 months, 30 percent longer than a year ago.

The glut of unsold homes depressed prices further with the median home price dropping for a record eighth straight month to $217,000 in March, down 0.3 percent from the median sales price a year ago. The median is the point where half the homes sold for more and half for less.

"The number of homeowners trying to unload their properties is still so ridiculously high that pressures on prices will likely continue," said Joel Naroff, chief economist at Naroff Economic Advisors. "How much lower the housing market can go is unclear, but it is not likely that we have seen the bottom."

Sen. Charles Schumer, chairman of Congress' Joint Economic Committee, said that the weakness in existing home sales underscored the need for action to help borrowers at risk of losing their homes.

"With a brewing storm of subprime mortgage foreclosures on the horizon, the quickest way to instill more confidence in the overall housing market is to curb the wave of foreclosures," Schumer, D-N.Y., said in a statement.

David Lereah, chief economist for the Realtors, said he didn't expect a full recovery in housing until 2008. He predicted that sales of existing homes would drop by about 3 percent this year with the decline in sales of new homes an even steeper 15 percent.

"The negative impact of subprime is considerable,' he said.

He said that the median price for homes sold in 2007 would fall by 1 percent to 3 percent, which would be the first price decline for an entire year on the Realtors' records, which go back four decades.

There was weakness in every part of the country in March. Sales fell by 10.9 percent in the Midwest. They were down 9.1 percent in the West, 8.2 percent in the Northeast and 6.2 percent in the South.

The steep slump in housing over the past year has been a major factor slowing the overall economy. It has subtracted around 1 percentage point from growth since mid-2006.

Many analysts believe the serious slump in housing is the result of a speculative bubble bursting after home sales set records for five straight years. The boom years triggered a rush of investors into the market who pushed demand higher by buying second homes in hopes of reselling them for quick profits.

Wall Street had earlier hoped that the weakness in housing might convince the Federal Reserve to start cutting interest rates, but Fed officials continue to signal that their greater worry remains that the slowing economy will not bring inflation pressures down quickly enough.

Interest Rate increases 'could spell hardship for mortgage borrowers'

Mortgage borrowers could face several years of financial hardship, after experts predicted a series of interest rate increases will be necessary to curb inflationary pressures in the US economy.

A group of leading economists have already warned that interest rates could have to increase to 7.5 per cent in the next two years if the Federal Reserve hopes to control inflation.

The predictions made by the economists were backed up by the latest figures from the Mortgage Bankers Association (MBA) which showed that mortgage lending continued to increase rapidly in the first quarter of 2007, despite previous interest rate increases.

Coupled with recent figures which showed that consumer price index (CPI) inflation rose to 3.1 per cent in March - 1.1 per cent above government targets - it looks increasingly likely that interest rates will be increased when the Monetary Policy Committee meets early next month.

"Mortgage borrowers could be facing a massive rise in their mortgage repayments with a typical monthly payment rising if the group of leading economists are right and the base rate rises to 7.5 per cent to quell inflation."

"The last time mortgage rates neared this level was 15 years ago. With one in five (19 per cent) borrowers on the lender's SVR, this could be a real concern," he added.

"Nearly two thirds (63 per cent) of borrowers say they would be forced to refinance if their repayments increase again," he explained.

Despite these gloomy economic forecasts, some experts think that current data suggests recent interest rate increases are already slowing the housing market.

"Since interest rates began rising last August, higher mortgage costs have been absorbed by households and high lending growth continued, to keep up with rising prices.

"In the last two months, demand has moderated a little and, with no short-term prospect of costs reducing, mortgage lending growth should ease further in the months ahead."

New home sales seen rising in March

The pace of U.S. new home sales is expected to have risen slightly in March, reflecting stronger home loan demand and favorable weather, a Reuters poll of economists shows.

New home sales, historically a volatile indicator, are forecast at an annual rate of 888,000 units for March, up from the prior month's 848,000 units, which was its lowest rate in nearly seven years, according to a median forecast of 68 economists polled by Reuters.

Forecasts vary widely, from a 790,000- to a 1.100 million-unit annual rate.

March's predicted jump would follow a 3.9 percent drop in February, which was its second straight monthly slide.

Analysts' expectations for March are based on a range of data, particularly the Mortgage Bankers Association's seasonally adjusted index of mortgage application activity. The MBA's seasonally adjusted purchase index, considered a timely gauge of U.S. home sales, was above the 400 threshold during the month.

Housing Starts Show Gain

U S consumer prices eased in March and housing starts unexpectedly rose, suggesting the economy will grow at a moderate pace with contained inflation.

The 0.1 percent increase in core consumer prices, which exclude food and energy costs, was the smallest in three months and follows a 0.2 percent February gain, the Labor Department said yesterday . Builders broke ground on new homes at an annual rate of 1.518 million, up 0.8 percent from the prior month, the Commerce Department reported.

The inflation figures mean Federal Reserve chairman Ben S. Bernanke may keep interest rates unchanged even as he predicts the economic expansion, currently in its sixth year, will pick up. Treasury notes rallied after the price report and held their gains after the Fed said industrial production fell.

"This is a big relief for the Fed," said Nigel Gault, chief U S economist at Global Insight Inc. in Lexington, Mass . "It's one good month, and the Fed is going to have to see more good numbers before it can relax, but it comes after a few months where inflation was rising."

Housing Market to Worsen

The National Association of Realtors (NAR) admitted that the subprime mortgage mess will continue to depress the home resale market through the rest of this year. This is based on the Pending Home Sales Index, which has been on a downward trend since last July. The Pending Home Sales Index is based on contract signings, and so can forecast actual home closing for the next few months.

The NAR also forecast, for the first time in 40 years, a decline in home prices for the next 12 months. Median sale prices for existing single family homes will decline to a low of $213,400 in the first quarter of 2008, down 6% from the high of $226,800 in the second quarter of 2006.

Since home prices will have declined so much, the NAR is predicting that sales will start to pick up again by 2008. From a high of 7 million sales in 2005, the resale housing market will decline 10% to a rate of 6.3 million sales in 2007,and recover to a rate of 6.5 million sales in 2008.