From the Wall Street Journal:
Housing Sector May Be Knocked By Mortgages
Investors looking to see whether trouble in risky mortgages will spill over into the broader housing market could find solace in today’s home-sales report.
But such complacency would come at a heavy price. Economists polled by Dow Jones Newswires estimate that today’s report will show that an annualized 6.24 million existing (that is, previously owned) homes were sold in January, up from December’s 6.22 million pace. Taken on its own, that would suggest that the housing market is holding its ground, allowing the glut of unsold homes on the market to get worked off in an orderly way.
Let’s put that number in some perspective. With lenders tightening standards on the subprime mortgages they offer to high-risk borrowers, home sales will have to take a hit, says Goldman Sachs economist Andrew Tilton. He estimates that loose lending standards boosted home sales for the past three years by about 200,000 homes a year. If lenders ratchet their standards up to normal levels, those sales will go away, he says. That represents 3.1% of last year’s existing-home sales.
The total fallout could be even broader. When banks trip up by lending too freely, their usual reaction has been to overcompensate and put standards in place that are far more stringent than the banks otherwise would deem necessary. Having discovered that they took on far more risk than they thought they were, lenders need to go through a period of taking on less risk. Those subprime-mortgage lenders that have ceased operations won’t be taking on any more risk.
The good news is that despite the subprime shakeout, default and delinquency rates for prime mortgages remain low. The worry is that fresh declines in the housing market could spur lenders to be more cautious even with low-risk borrowers.