The end is NOT near!

"In the next six months, one year, two years, the problems in the mortgage market can cause a lot of problems with consumers and hurt buying power in the United States,” Billionaire investor Warren Buffett said at a press conference.

Mr. Buffett has sobering words for consumers and investors who hope that the end is near for the subprime crisis — it’s not. Nevertheless, he did suggest that, "overall, the economy will make progress.”

Housing Sector Stabilizing?

Here's the economic outlook according to Simon Kwan of the San Francisco Fed. The bottom line is that:

There is little evidence that the ongoing weakness in the housing sector is spilling over to the broader economy, and there are some tentative signs that the housing sector may be stabilizing. Furthermore, there appears to be a fair amount of strength in both consumer spending and labor market developments. Thus, the current economic slowdown seems like a well-timed opportunity to bring the somewhat elevated inflation down to a more acceptable level.

Based on all available information, real GDP growth during the current quarter is likely to be at just under 2 percent at an annual rate. As the drag on the economy due to housing gradually disappears, economic growth is expected to pick up slowly in 2007, but seems likely to remain at a below-trend rate of about 2.5 percent.

Existing-Home Sales Fall To Record Low

Sales of existing U.S. homes sank to a record low in September, part of a slew of bad news Wednesday that sparked renewed fears about the economy and hopes for aggressive Fed action.

Home resales fell 8% to an annualized 5.04 million last month, the lowest since the National Association of Realtors began tracking combined home and condo sales in 1999. Economists had expected sales to fall to 5.25 million.

Housing starts tumble to 14-year low

Can it get any worse? Construction of new homes plunged by a bigger-than-expected amount in September, reflecting the deepening troubles in housing.

Groundbreaking for new U.S. homes and permits for future building both hit a 14-year low last month. The Commerce Department reported on Wednesday that housing construction fell by 10.2 percent last month to a seasonally adjusted annual rate of 1.191 million units. Applications for building permits, considered a good sign for future activity, also fell sharply in September, dropping by 7.3 percent to 1.226 million units.

Housing sales, which had set records for five straight years, have been slumping since 2006, a downturn that has intensified in recent months as mortgage lenders have tightened standards for getting loans in response to soaring defaults.

Economists taken by surprise

Economists had expected housing starts to slip, but the sharpness of the downturn took them by surprise.

"There is no end in sight," said Kurt Karl, chief U.S. economist with Swiss Re in New York. "The builders didn't realize how many cancellations they are going to face. If we hit 1.0 million start range, it's consistent with recessions in the past. And we are heading in that direction."

The dour report pushed up prices for bonds and weighed on the dollar as traders saw greater likelihood the Federal Reserve would follow up a rate cut it made last month with another at its next meeting on October 31.

Index That Forecasts Near-Term Home Sales Fell in August

An index that forecasts near-term home sales fell in August to a record low as would-be homebuyers had difficulty getting mortgages. Economists said the housing market's woes show no sign of improving soon.

The National Association of Realtors said Tuesday its seasonally adjusted index of pending sales for existing homes fell 6.5 percent from July and 21.5 percent from a year ago.

The pending home sales index has done a farily good job of predicting sales levels over the following two months said Joshua Shapiro, chief U.S. economist with MFR Inc. in New York.

Shapiro and other analysts expect prices to fall further before home sales rebound. Developers are already making big price cuts to move unsold new homes, but existing homeowners are more reluctant to do so.

"We haven't reached bottom yet," Shapiro said.

August's reading of 85.5 was below analysts' expectations and the lowest ever for the index, which started in January 2001. An index reading of 100 is equal to the average level of sales activity in 2001.

With defaults rising among borrowers with weak credit, lenders in August backed off from all but the safest mortgages.

The problems, experts say, were seen especially in expensive areas where borrowers need to take out "jumbo" home loans above $417,000 that can't be sold to government-sponsored mortgage companies Fannie Mae and Freddie Mac

In late August, the gap in mortgage rates between jumbo loans and "conforming" loans below the $417,000 limit widened to 0.93 percentage points, up from a typical level of 0.2 percentage points, according to financial publisher HSH Associates.

That difference makes it harder for prospective buyers -- particularly in the pricey Northeast and West Coast markets -- to afford more expensive homes.

"This is probably the most challenging credit market environment that's faced the housing market in 10 years," said Keith Gumbinger, vice president of HSH.

As of last week, the gap had narrowed to a difference of 0.76 percentage points, with 30-year fixed rate jumbo home loans nationwide averaging 7.22 percent and conforming loans averaging 6.46 percent, according to HSH's weekly survey.

While that's an improvement, Gumbinger said, it could take months for the situation to improve.

In some areas, up to 30 percent of signed contracts fell through in August, said Lawrence Yun, senior economist at the real estate trade group.

"Some creditworthy people are trying to buy homes but can't," Yun said in a prepared statement.

The Realtors' index is based on a sample representing about 20 percent of existing home sales nationwide.

Last week the trade group said that sales of existing single-family homes dropped by 4.3 percent in August to the lowest point in five years. Sales dropped to 5.5 million units that month, the slowest pace since August 2002.

While the real estate trade group has forecast a recovery in home sales by next year, some investors see a long, deep housing market decline and a recession ahead.

"The housing bubble has burst," said Peter Schiff, president of Euro Pacific Capital in Darien, Conn. "Prices are going to collapse and sales are going to fall through the floor."