For home builders, the worst is to come

For home builders, the worst is to come

MSN Money
October 2, 2007

The era of NINJA (“no income, no job or assets” ) subprime loans sold by fast-talking storefront mortgage brokers is dead, after all. By some estimates, up to three quarters of sales made in Southern California, Nevada and Florida in the go-go era of 2004-2006 involved some sort of fraud, particularly in the form of exaggerated income.

Foreclosure rates are soaring, and as those owners are kicked out of their homes for not paying, the structures are sitting empty, with no one waiting in line to buy at any price. Meanwhile, more than $1 trillion in adjustable-rate loans will kick mortgage payments much higher by June 2008 for tens of thousands of homeowners, which will push foreclosure rates even higher as people simply walk away from houses they can’t afford. I saw this happen in the last down-cycle in Los Angeles in the late 1980s; it gets ugly and stays that way for years, not months.

According to a report by investment bank Punk Ziegel, there are 17.4 million vacant houses in the country, and only 4.3 million of those are second homes. That means there are more ownerless houses in the United States today as a percentage of total inventory than at any time since records have been kept.

Not only are there not enough qualified households available to take them over, but demographics are heading the opposite direction. A Punk Ziegel analysis shows that the number of people aged 25 to 34 — the age of most home buyers — peaked in 1989 and will not get back to that level until 2013.

Waiting for a bankruptcy

As a result of too few buyers facing too many homes, the rate of price depreciation has been accelerating, with a 3.9% year-over-year decline in July nationwide after a 3.4% decline in June and a 2.8% decline in May. There is little doubt that builders will be forced to write down more of their inventory as losses over the next quarter, further eroding book values.

Although there are pockets of strength, such as my hometown of Seattle, home values in areas like Detroit, Los Angeles, Phoenix, Tampa, Miami and Washington, D.C., are plunging, with year-over-year declines as great as 9.7%, according to data released by research group Case-Shiller.

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