by Calculated Risk on 2/17/2007 02:59:00 PM

What will be the impact of tighter lending standards in the subprime mortgage market on existing home sales? First, some numbers ...

UPDATE: Here is a graph from immobilienblasen (via mish):



This graph is from Inside Mortgage Finance and shows the subprime share of the mortgage market near or over 20% for each of the last 3 years.

Original Post:

From America’s Second Housing Boom (hat tip: Blackstone):

By 2005, subprime originations had risen to $625 billion, now up to 20 percent of total originations and 7 percent of the total outstanding mortgage stock.

This is 2005 data, and other sources (and here) suggest non-prime (subprime and Alt-A) mortgage lending was about one third of all originations in 2005 and 2006.

Nonprime originations were 33% of market in 2005, up from 11% in 2003

And, according to this note perhaps 25% of subprime borrowers will be unable to obtain loans in 2007:

Merrill researcher Kamal Abdullah raised the specter of a subprime "contagion" that could lead to the inability of the "bottom" 25% of all subprime borrowers to get loans.

So if one fourth of potential subprime borrowers are unable to purchase homes in 2007, as compared to 2005 and 2006, then 25% of 20%, equals 5% of the total market. In 2006, there were 6.48 million existing homes sold, so 5% would be just over 300K homes.

But it's worse: The housing market is a sequence of chained reactions (just ask any agent or broker). If 300K buyers are excluded, the number of fewer houses sold in 2007, compared to 2006, is some multiple of that number. So this will probably have a significant impact on sales in 2007.

How far will sales fall?

Click on graph for larger image.
This graph shows sales normalized by the number of owner occupied units. This shows the extraordinary level of sales for the last few years, reaching 9.5% of owner occupied units in 2005. The median level is 6.0% for the last 35 years.

Some of the sales were for investment and second homes, but normalizing by owner occupied units probably provides a good estimate of normal turnover. If sales fell back to 6% that would about 4.6 million units. If sales fell back to the level of 1998 to 2001 (7.3% of total owner occupied units sold) that would be about 5.6 million units in 2007.

Fannie Mae is projecting existing home sales will fall to 5.925 million units in '07. My guess is existing home sales will "surprise" to the downside, perhaps in the 5.6 to 5.8 million unit range.

by Calculated Risk on 2/16/2007 04:23:00 PM

From MarketWatch: Merrill, J.P. Morgan pull back in credit crunch at low-end of mortgage market. This article is mostly a summary of recent events:

A credit crunch in the market for low-end mortgages has left companies specializing in these subprime loans at the mercy of big banks like Merrill Lynch & Co. and J.P. Morgan Chase.
...
Warehouse lenders have started worrying about the quality of subprime loans that have been originated in recent years. Some are now asking subprime specialists for bigger haircuts, putting the originators in financial peril and forcing some into bankruptcy.

"Warehouse lenders are the lifelines for a lot of these subprime originators because they don't have the financial capacity to fund these loans by themselves," Ernie Napier, head of the specialty finance team at rating agency Standard & Poor's, said. "To the extent that these warehouse lenders go away, the whole process starts to unravel."

But this is interesting:

"We have eight different warehouse lenders; I would say the majority of them are acting very rationally," [Stuart Marvin, executive vice president, Accredited Home Lenders] said. "There is one that is acting somewhat irrationally, although I won't mention them by name. We have migrated the fundings away from that warehouse lender to one of the other seven until they begin to act more rationally again."

Industry publication National Mortgage News said this week that Merrill Lynch has been making margins calls. A Merrill spokesman declined to comment.

Someone is acting "irrationally"? Maybe someone has taken some huge losses. Or maybe, in Mr. Marvin's view, the seven other warehouse lenders will start acting "irrationally" soon.

by Calculated Risk on 2/16/2007 02:48:00 PM

From Credit Suisse Financial Services Forum, "[Banks are] Bracing for a challenging year of EPS growth due to tepid net interest income growth and rising credit losses..." and Wells Fargo President and Chief Operating Officer John Stumpf amde it clear that "roughly 72% of the mortgage originations attributed to Wells Fargo Financial in the league tables for the 1H06 were co-issue originations."

by Calculated Risk on 2/16/2007 09:11:00 AM

The Census Bureau reports on housing Permits, Starts and Completions. Seasonally adjusted permits declined:

Privately-owned housing units authorized by building permits in January were at a seasonally adjusted annual rate of 1,568,000. This is 2.8 percent below the revised December rate of 1,613,000 and is 28.6 percent below the January 2006 estimate of 2,195,000.

Starts declined significantly:

Privately-owned housing starts in January were at a seasonally adjusted annual rate of 1,408,000. This is 14.3 percent below the revised December estimate of 1,643,000 and is 37.8 percent below the January 2006 rate of 2,265,000.

And Completions declined slightly and are just 8% below the level of last January:

Privately-owned housing completions in January were at a seasonally adjusted annual rate of 1,880,000. This is 1.2 percentbelow the revised December estimate of 1,902,000 and is 8.0 percent below the January 2006 rate of 2,044,000.

Click on graph for larger image.
The first graph shows Starts vs. Completions.

Starts are now at the lowest level since Aug 1997. Completions are still just 8% below one year ago, and are at about the same level as early 2005.



This graph shows starts, completions and residential construction employment. (starts are shifted 6 months into the future). Completions and residential construction employment are highly correlated, and Completions lag Starts by about 6 months.

Based on historical correlations, it is reasonable to expect Completions and residential construction employment to follow Starts "off the cliff". This would indicate the loss of 400K to 600K residential construction employment jobs by this Summer.

by Calculated Risk on 2/15/2007 07:12:00 PM

From CNNMoney: Record home price slump

The slump in home prices was both deeper and more widespread than ever in the fourth quarter, according to a trade group report Thursday.

Prices slumped 2.7 percent in the fourth quarter compared to the fourth quarter a year earlier, according to the report from the National Association of Realtors (NAR). That's the biggest year-over-year drop on record and follows a 1.0 percent year-over-year decline in the third quarter.

Here is the NAR report: Fourth Quarter Metro Home Prices & State Sales Likely Have Hit Bottom

I mostly use the OFHEO House Price Index, not the NAR data. OFHEO will release Q4 data on March 1st.