New Jersey Real Estate Report

From the Financial Times:

Subprime woes hit credit markets

The cost of insurance against credit defaults hit record levels on both sides of the Atlantic on Monday amid concerns that some investors were being forced to sell assets to cover losses on subprime mortgages.

Investors rushed to buy contracts that would protect them against corporate credit defaults after it emerged that more European institutions had suffered losses following the crisis in the US subprime mortgage market.

IKB, a German lender specialising in providing credit to smaller companies, and Commerzbank, the country’s second-biggest bank, both warned they would be hit by losses from risky US home loans to borrowers with poor credit histories.

In spite of the heightened risk aversion in credit derivatives markets US stocks rose. The S&P 500 was up 1.2 per cent in late trade, after a sharp tumble on credit market concerns last week. The safe haven of government bonds also gave up some of last week’s gains with the yield on the 10-year bond 5 basis points higher at 4.81 per cent.
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Analysts warned that the financial markets could stay jittery in coming days, since the credit turmoil could force more financial institutions to offload troubled assets.

“At a minimum, credit travails are apt to create a higher volatility environment across all asset classes for much of this year,” said Alan Ruskin, global strategist at RBS Greenwich Capital. “Credit derivatives liquidity and risk management characteristics are finally being tested in a crisis and are performing poorly.”

The speed of the swing in the credit derivatives markets has shocked many investors, particularly since it has not come amid a sharp deterioration in the macroeconomic background. Some traders consequently blame price swings on hedge funds that may have been rejigging their portfolios before the end of the month.

However, there are also mounting concerns that some investors are being forced into liquidations because prime brokers are trimming credit lines to groups with heavy exposure to subprime mortgages.

From the Boston Globe:

Tangle of loans feeds foreclosure crisis

Each month, Stephen and Kim Martinelli sent their mortgage payment to Chase Home Finance, and when they fell behind, it was Chase that launched foreclosure proceedings, with an auction of their Lawrence home scheduled for later this week.

The Martinellis, squeezed by the cost of caring for a disabled son and carrying an adjustable-rate mortgage that boosted their monthly payments by $900 over the past year, pleaded with Chase for a break: for a new payment plan, a lower, more affordable rate, or a delay in the foreclosure, due to hardship.

Chase’s answer: “No.”

What the Martinellis did not know was that Chase was not calling the shots. Chase merely services the loan, acting as bill collector and administrator.

The mortgage was held by an unknown investor, whom Chase declined to identify and who refused to modify the terms of the Martinellis’ loan.

They are among thousands of delinquent borrowers caught in the maze of modern mortgage financing as they desperately try to save their homes. Unlike in the last real estate bust, when local banks and credit unions wrote nearly 80 percent of mortgages in Massachusetts, most home loans issued today pass through a nationwide chain of brokers, lenders, service companies, Wall Street firms, and investors. That makes tracing ownership difficult, if not impossible.

In a rising real estate market, the system worked well, spreading loan risks among various players and expanding credit and homeownership.

But as foreclosures mount, the system is proving ill-suited to respond, analysts said. The reason: Spreading risk muddled responsibility.

“It’s perfect deniability,” said Patricia McCoy, a University of Connecticut law professor who specializes in financial services. “When there’s a problem, each person in line says, ‘Don’t talk to me, talk to the other person.’ “

From NJ.com:

Corzine says rebates will continue next year

As the first of $2.2 billion in property tax rebate checks moved through a sorter at the Treasury Department’s plant in West Trenton today, Gov. Jon Corzine said he would deliver the same type of relief next year and the year after. But he stopped short of guaranteeing it.

“We intend to stay with the program we put in place,” Corzine said. “I’m not writing a guarantee, like a no-new-taxes pledge, (but) I’d make a high-probability bet we’ll be back here next year.”

Critics of the program, mainly Republicans, have argued that while the rebate checks will be welcomed by taxpayers this year, the program cannot be sustained in coming years because it is funded with increased sales tax collections drawn over two years.

‘It will be very difficult to achieve (in future years),” Senate Minority Leader Leonard Lance (R-Hunterdon) said. “The public, before it votes for every seat in the Legislature in November, should realize the constraints under which we operate.”

Corzine insisted he and the Legislature will find the funds again next year for tax relief of some sort.

“This was a consistent pledge I made in my gubernatorial campaign,” he said. “I’m committed to it. The public deserves it.”

Corzine insisted there was nothing political about the checks or the timing of their delivery: “This has nothing to do with the election calendar,” he said.

From the Record:

Will the value of Paramus homes drop?

Tainted soil found at West Brook Middle School months ago has some Paramus homeowners concerned that their property values will drop.

So far, there’s no hard evidence that prices in the neighborhood around West Brook have dipped in response to the pesticide contamination. But those who predict a downswing feel sure that the school district’s tarnished reputation for covering up the contamination can mean only one thing for property owners.

“When people hear stories like that, let’s face it, they’re concerned,” said Gary Siramarco, whose twin daughters attend West Brook. “It’s going to affect property values.”

The public first learned of tainted soil at West Brook in May, about four months after environmental consultant Melick-Tully and Associates alerted school officials to pesticides in the soil at levels 39 times state safety guidelines.
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Richard Curran, an independent real estate appraiser, said concerns over property values there are by no means unjustified.

“Perceptions are what create value,” he said. “Is that going to hurt it? Most likely.”

As a real estate appraiser, Curran’s job is to value property based on past sales, not on speculation. He said he does not have recent sales figures on homes in the neighborhood around West Brook, and thus could not make any definitive judgments on property values there.

“We can only compare to the past, not project to the future,” he said. “There’s no way to really tell until someone tries to [sell].”

Paramus Councilman Richard LaBarbiera said he was unaware of any impact on property values. “I don’t know how anybody could draw such a conclusion after such a short period of time,” he said.

He still doesn’t think it will affect people’s perceptions of the town.

“I trust that Paramus will remain a very desirable community in the years to come,” he said.
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But the fears remain. Michael Evangel is concerned that property values throughout Paramus will be adversely affected.
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“We need to bring back the town’s reputation,” she said. “Everybody’s fearful property values will plummet.”

From the New York Daily News:

City’s not quite home free

When it comes to the one-two punch of risky mortgages gone bad and a housing slump, New York has largely bucked the national trend.

But there are troubling signs city homeowners are increasingly feeling the same pain afflicting much of the country.

Foreclosure filings this spring, while actually down in much of the city, jumped 92% in Queens. Foreclosure filings also rose substantially in Manhattan in the second quarter, although the actual number totaled just 255.

“From where I sit, foreclosures are a tremendous problem,” said Carol Finegan, a foreclosure prevention counselor at nonprofit Brooklyn Housing & Family Services.

RealtyTrac, an online real estate database, reported 6,083 foreclosure filings citywide during the second quarter, including default notices issued after two or three consecutive missed mortgage payments, as well as property-auction notices. The figure was up 4% over the second quarter of 2006.

Some experts argued that the number of foreclosure filings represent a miniscule number of the city’s 3.2 million households. And filings actually dropped 15% in the Bronx, 19% in Brooklyn and 51% in Staten Island. But in Queens, the number of filings spiked to 2,555.

Like foreclosure figures, sales figures vary from borough to borough. Nationally, prices are down and the numbers of houses for sale are up.

From Bloomberg:

Five Signs That Subprime Infection Is Worsening: Mark Gilbert

The collapse in subprime mortgages doesn’t pose “any threat to the overall economy,” U.S. Treasury Secretary Henry Paulson said last week. He would, wouldn’t he? He’s hardly going to advocate we all stock up on tinned food and bottled water in our basements.

The tremors from the subprime debacle are vibrating throughout the interconnected web of modern global financial markets. Derivatives, corporate debt, loans and bank stocks are all getting trashed. Here are five reasons to expect the turmoil to worsen.

Don’t Bet on Helicopter Ben . . .

A week ago, traders in the futures and options markets were pricing the chances of December interest-rate cuts from the U.S. Federal Reserve at about 21 percent. Prices now suggest a 47 percent chance that Fed Chairman Ben Bernanke will sanction lower borrowing costs to rescue the mortgage market, based on July 26 closing levels.

The rapid turnaround in interest-rate expectations shows the financial community is far from convinced that the wider economy is immune from the woes afflicting particular pockets of the bond and credit markets.

Is Helicopter Ben, as he was dubbed early in his monetary- policy career, really going to fly over the global financial markets and shower investors with dollar bills in the form of cheaper money? Even a hint that the Fed might be planning a rescue would be a signal that the outlook is bleaker than officials have admitted so far.
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That hasn’t prevented the iTraxx Crossover index, a barometer of creditworthiness for 50 European companies, from surging to as high as 440 basis points last week, up from about 260 basis points two weeks ago and a low for the year of 170 in February. The higher the index, the less confident investors are about the outlook for corporate bonds.

Once fear grips a leveraged market, the so-called credit fundamentals aren’t worth the paper you print your spreadsheets on. The yield on the benchmark 10-year U.S. Treasury note has declined to about 4.8 percent from as high as 5.3 percent seven weeks ago, as investors seek the warm, comforting embrace of the U.S. debt market.

“While the fundamentals, such as global growth and corporate balance sheets, are at their best for arguably decades, the technicals are as bad as we’ve ever known them and arguably the worst in the era of leveraged finance,” Jim Reid, a London- based credit strategist at Deutsche Bank AG, said in a research note last week. “Never has so much money been thrown at and been levered up in credit and never has there been such a liquid derivatives market to hedge risk.”

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From Bloomberg:

Franco Is Still Dead, and Housing Is Still Bust

The latest round of housing statistics — sales, starts, homebuilders’ outlook surveys and earnings reports — offered little hope that residential real estate would be back on its feet anytime soon.

“Housing is bust, and wishful thinking cannot unbust it anytime soon,” says Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

Just to recap what we learned this week: New home sales plunged 6.6 percent in June to 834,000, just above the seven- year low set in March. Sales are down 22 percent from a year earlier, even with builders throwing in the kitchen sink to sweeten incentives and lighten the load (inventories).

Home resales fell 3.9 percent last month to 5.75 million, a five-year low. They’re down 11 percent in the last 12 months.

The only surprise is that prices haven’t fallen more. The median price of an existing home was unchanged from a year earlier while new home prices fell 2.2 percent, removing the refinancing/cash-out option for strapped homeowners but not much of a real loss given soaring home prices from about 2001 through 2005.

Shepherdson warns against taking any comfort in the stabilization in home prices for two reasons: one, the deterioration in the supply picture; and two, the lack of adjustment in median prices for either seasonal variations or the mix of properties sold from one month to the next.

Because most of the problems have been in the subprime and Alt-A sectors, and because non-prime borrowers probably buy lower-priced homes, “their absence from the market will limit the speed of the decline in the median home price,” he says.
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Haven’t we seen this movie before? Every bubble has a credit kicker when the price of whatever asset folks were chasing stops rising. Banks find religion when it comes to making new loans. Regulators step in to make sure there will be no repeat of the last bubble. Consumers save more; businesses invest less.

Housing has been the economy’s weakest link for some time, subtracting about 1 percentage point from growth in every quarter from the second quarter of 2006 through the first quarter of 2007.

Residential investment, as it’s referred to in the gross domestic product accounts, may not be the real threat to the U.S. economy. The danger lies in the fact that “there’s a lot more household debt associated with housing” than there was with the stock-market bubble, Carson says.

Maybe you can take housing out of the economy for analytical purposes (see “GDP ex-housing”). But when it comes to the real world, the two are inextricably linked.

From the Wall Street Journal:

Wall Street’s Double Trouble
Faulty Mortgages, Debt-Risk Jitters Weigh on Banks
By APARAJITA SAHA-BUBNA
July 27, 2007; Page C5

Wall Street is dealing with the twin problems of faulty home loans and decreased demand for risky corporate debt.

In the credit-derivatives markets, the rising cost of credit protection for Bear Stearns Cos., Lehman Brothers Holdings Inc., Goldman Sachs Group Inc. and Merrill Lynch & Co., among others, coupled with declines in their respective stocks, reflect investors’ concerns that banks and brokers are at risk of potential big losses.

That’s because Wall Street could be left holding the bag on billions of dollars of debt-laden corporate deals at a time when bad bets on risky home loans are already putting a crimp on earnings and business in the banks’ mortgage units.

Investors in the credit-derivatives market currently see Bear — which has already told clients in two of its hedge funds that their investments are virtually worthless — and Lehman as banks worthy of a speculative, or junk, rating. Both banks are rated investment grade by major rating agencies.

“It’s a double whammy for banks and brokers,” said Sid Bakst, a senior portfolio manager at New York-based Robeco, Weiss, Peck & Greer Investments with $9 billion in fixed-income assets.

“The increasing risk of those two issues is resulting in a repricing across the whole capital structures of securities, with banks and brokers taking the brunt of it,” said Mr. Bakst. “The same concerns are being reflected in equity and debt prices.”

The cost of protecting a notional amount of $10 million of Bear bonds against a possible default for five years jumped to $105,000 a year yesterday, according to one market participant, citing credit default swaps levels. A day earlier, it was $83,500, according to CMA DataVision, a London-based credit-information specialist.

Lehman’s cost of credit protection for $10 million of bonds rose to $100,000 a year for five years from $81,500 Wednesday, while Goldman’s increased by $12,000 to $80,000. The cost of protection for Merrill bonds jumped to $80,000 a year from $69,000 a day earlier.

Sentiment was further damped by weak sales data on new and existing homes, and, dismal earnings from home builders who set off new alarm bells on the distressed U.S. housing market, with D.R. Horton Inc. and Beazer Homes USA Inc. posting losses while WCI Communities Inc. said it couldn’t find a buyer.

From Reuters:

Mortgage delinquencies seen peaking in 2008

The credit quality of U.S. mortgages is set to weaken substantially through the remainder of 2007 and well into next year, with delinquencies peaking in mid-2008, Moody’s Economy.com said on Thursday.

Delinquencies will peak at 3.6 percent of all mortgage debt outstanding in the summer of 2008, up from 2.9 percent in this year’s first quarter, according to the study by the consulting firm based in West Chester, Pennsylvania.

“This will result in substantial financial damage,” Mark Zandi, chief economist of Moody’s Economy.com, said during a teleconference after the release of the study.

Subprime, “Alt-A”, jumbo interest-only and option adjustable-rate mortgages, or ARMs, account for about 25 percent of all mortgage debt outstanding, or around $2.5 trillion. Of that amount, approximately $1.4 trillion is at serious risk of default, he said.

Of those mortgages, about $460 billion should actually end up defaulting some time this year or in 2008 and of that, $113 billion will be a loss to investors after recovery efforts are made, said Zandi.

That’s more pessimistic than Federal Reserve Chairman Ben Bernanke, who last week estimated losses between $50 and $100 billion.

The deterioration of mortgage credit quality can partly be blamed on falling U.S. house price prices, with all parts of the housing market experiencing declines. The high-end of the market, however, is holding up a bit better than the middle- and low-end, said Zandi.

The erosion of mortgage credit quality will also be due to the fact that many borrowers will soon be facing measurably higher mortgage payments. October will be the peak reset month when about $50 billion worth of mortgages will be adjusted to reflect higher interest rates, he said.

“As the resetting mounts, that will put significant financial pressure on many of the subprime borrowers and this pressure is already very intense,” he said.

From the Wall Street Journal:

The State of the Slump
Tighter Credit Helps Keep Housing Inventories Rising,
Though Some Hard-Hit Cities See Signs of a Turnaround
By JAMES R. HAGERTY and RUTH SIMON
July 26, 2007; Page D1

Tighter credit is prolonging a deep slump in home sales, but a quarterly Wall Street Journal survey of 28 major metro areas shows that the surge in inventories of unsold homes is slowing. In two of those markets — Boston and Denver — the number listed for sale has actually declined from a year ago.

The latest trends offer some hope for an eventual recovery in a U.S. housing market that generally has been cooling since mid-2005. Even so, many economists and industry executives say that recovery will be very gradual and won’t start before 2008 at the earliest. That’s partly because more-stringent lending policies are keeping many potential buyers on the sidelines, while others are holding off in hopes of prices heading even lower. Meanwhile, there is still a glut of homes on the market in much of the country, especially in Florida and parts of Arizona, Nevada and California.

Home sales and prices generally should bottom out around mid-2008, says Mark Zandi, chief economist at Moody’s Economy.com, a research firm in West Chester, Pa. “The market will not revive quickly, however,” he says. “It won’t be until the turn of the decade before housing activity returns to more normal conditions.”
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Median prices can be skewed by shifts in the market, however. Lenders are turning down more and more people with weak credit records or high debt in relation to income, and that is hurting sales of lower-end homes. Jeffrey Mezger, chief executive of KB Home, one of the nation’s largest mass-market builders, says its average home price has fallen about 12% from a year ago. In some markets, such as Southern California, he says, “there are two markets emerging.” While the high-end housing market has remained strong, prices are down in the entry-level and first-time move-up market.

As measured by the S&P/Case-Shiller national index, house prices in this year’s fourth quarter are likely to be down about 7% from a year earlier, says Thomas Lawler, a housing economist in Vienna, Va. He expects a further fall of about 3.5% in 2008.
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But tight credit is squeezing lots of people still trying to buy a first home. William and Kimberly Glass were preapproved for a mortgage in May and found a $540,000, four-bedroom, three-bathroom home in Santa Clarita, Calif., near Los Angeles. But by the time they made the offer, lending standards had tightened to the point where they could no longer buy the home with no money down. “It’s a little frustrating that a month and a half ago we were in a better position than we are now,” says Mr. Glass, an actor. Putting “3% to 5% down would have basically drained our savings and put us in a precarious position with the renovations [the house] needed.”
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“The noose is definitely tightening” around interest-only loans and option adjustable-rate mortgages, two products that were often used by cash-strapped borrowers to make their loan payments more affordable, says Brian Chappelle, a mortgage banking consultant in Washington. About one-third of borrowers who have used these loans in recent years wouldn’t qualify under the tighter standards, he says.

House prices are likely to remain weak in many areas until inventories of unsold homes fall. That process has begun in a few places, including the Boston metro area, where the number of homes listed for sale at the end of June was down 16% from a year earlier. Boston’s market cooled in early 2005, before most other areas, and so has had more time to adjust. Some frustrated sellers who don’t need to move have taken their homes off the market.
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In the New Jersey suburbs near New York, listings surged in 2005 and 2006. At the end of June, though, listings in 12 northern New Jersey counties were up just 3% from a year ago, according to Otteau Valuation Group, an East Brunswick, N.J., appraisal firm. In Manhattan, inventories are down 17%, according to Corcoran Group, a real-estate brokerage. A torrent of Wall Street bonuses and foreign buyers lured by the weaker dollar have helped keep the market firm there, says Jonathan Miller, chief executive of Miller Samuel Inc., an appraisal firm in New York. The median sale price for co-ops and condos in Manhattan was $895,000 in the second quarter, up 1.7% from a year earlier, according to Miller Samuel.

Jeffrey G. Otteau, president of Otteau Valuation Group, says the parts of New Jersey popular with commuters into New York are doing best. In those areas, he says, sales are no longer slumping and the number of homes on the market has leveled off. “Proximity to Manhattan is once again becoming the primary force in the market,” he says.

From the Record:

Housing news bleak

Demand for new housing is still declining and won’t start to rebound until 2008, the chief economist of the National Association of Home Builders said Wednesday.

“The big question is: Is this ball still rolling downhill? I think it is,” said the economist, David Seiders, in his midyear forecast for the home-construction industry. “We’re dealing with some major problems out there.”
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Seiders, speaking from Washington, said the housing market began sliding in 2005, in reaction to the boom that dramatically inflated prices in the first half of this decade.

“That destroyed affordability,” he said.

And “unanticipated and sudden turmoil” in the sub-prime mortgage market this year has further weakened the outlook for the rest of this year and 2008, Seiders said. With overextended borrowers struggling to repay their mortgages, lenders have tightened their lending standards. As a result, fewer borrowers are able to get mortgages, dampening demand for houses.

Moreover, many would-be home buyers are reluctant to buy now because they believe prices have further to drop. Seiders predicted prices for existing single-family houses, as measured by the Standard & Poor’s Case-Shiller Index, will bottom out in the last quarter of this year, down about 8 percent to 10 percent from 2005’s peak.
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In the Northeast, sales of existing homes were down 7.3 percent from a year ago. The NAR will release second-quarter sales figures for existing homes in New Jersey in mid-August.

“It appears that some buyers are looking for more signs of stability before they have enough confidence to make an offer,” said Lawrence Yun, senior economist for the Realtors.

Yun forecasts that sales of existing homes will fall by 5.6 percent this year, to 6.11 million, with prices dropping by 1.4 percent, to a median $218,800. That would be the first annual price decline on record.

From the Herald News:

Clifton planners want to restrict huge homes

Some residents say large homes on small lots are eyesores that can ruin the character of a neighborhood.

In an effort to prevent more outsized homes from being built, the Planning Board is recommending that the City Council restrict home size by changing zoning laws. The board wants to reduce the maximum height and area of single-family homes and restrict the number of condominiums per acre.

It is beginning with the city’s master plan, a document that each of the state’s 566 municipalities must create and bring up-to-date every six years. The board plans to have a new one finalized next month.

The move comes as several North Jersey municipalities try to crack down on huge homes.

Currently in Clifton, single-family homes can cover between 25 and 30 percent of their lots — depending on the zoning category — while their height can reach 30 feet, and a developer can build up to 15 units per acre.

Under proposed revisions to the master plan, maximum lot coverage of single-family homes would be 22 to 27 percent, said Dennis Kirwan, the city planner. The highest point of a house would be used to calculate the height — which would remain at 30 feet — instead of using the midpoint between the bottom and top of the roof, as is now done. Developers would only be allowed to build eight units per acre, Kirwan said.

“I think that’s a great idea,” said resident Jeff Stephens, who lives in a cul-de-sac of what he describes as modest Cape Cod homes in the Athenia section.

But Patrick O’Keefe, spokesman for the New Jersey Builders Association, cautioned that limiting home size would force property values down.

“It would just cause the parcel to be less valuable,” he said.
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Across North Jersey, municipalities have ramped up efforts over the past five years to restrict the size of residential homes, said Jill Hartmann, the city’s Mahwah-based planning consultant, who is helping to revise the city’s master plan.

The goal is to prevent the eyesore of huge homes built next to smaller ones, she said.

“You have a small house next to a large house – it puts everything out of proportion,” she said. With the rising cost of new homes, people are adding to existing homes rather than buying new ones, she added.

“It really coincides with the absolute blowout of the cost of housing in North Jersey,” Hartmann said.
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During the meeting, officials cited the area west of Grove Street between Van Houten Avenue and Route 3, home to some of the city’s largest residential parcels, as particularly vulnerable, he said.

“A lot of potential large-scale growth is still able to take place within the city,” Kirwan said.

An alarm bell went off recently for Kirwan when a resident planning to sell a home said he’d based the property value on the potential for eight homes to be built on the lot, he said.

From the Home News Tribune:

Home sales plunge in July

Sales of existing homes fell in July for a fourth consecutive month, further evidence that housing troubles are far from over.

The National Association of Realtors reported Wednesday that sales of existing homes dropped by 3.8 percent in June to a seasonally adjusted annual rate of 5.75 million units. That is the slowest sales pace since November 2002 and the decline was about twice what had been expected.

The median price of an existing home edged up to $230,100, 0.3 percent more than a year ago. The median is the point where half the homes sold for more and half for less.

It was the first price gain in 11 months. Analysts, however, said they were looking for prices to fall further because of the high level of unsold homes.

For June, the median price of a single-family home rose by 0.1 percent, and the price of a condominium increased by 2.6 percent when compared with a year ago.

“With inventories still way out of line, unless prices fall a lot more, the housing market will not turn around any time soon,” said Joel Naroff, chief economist at Naroff Economic Advisors.
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The declines in existing home sales in June covered all parts of the country. Sales fell by 7.3 percent in the Northeast, 6.8 percent in the West, 2.8 percent in the Midwest and 1.7 percent in the South.

The supply of unsold homes did drop by 4.2 percent in June, to 4.2 million units. That level, however, still was seen as a drag on the market Some analysts said part of the decline occurred because disappointed owners pulled their homes off the market or decided to rent rather than sell.

From the New York Times:

Top Lender Sees Mortgage Woes for ‘Good’ Risks

Countrywide Financial, the nation’s largest mortgage lender, said yesterday that more borrowers with good credit were falling behind on their loans and that the housing market might not begin recovering until 2009 because of a decline in house prices that goes beyond anything experienced in decades.

The news from Countrywide, widely seen as a bellwether for the mortgage market, initiated a sell-off in the stock market, which is at its most volatile in more than a year. The Standard & Poor’s 500-stock index fell 30.53 points, or 2 percent, to 1,511.04, its biggest one-day drop in nearly five months. The dollar dropped to a new low against the euro, edging closer to $1.40 to 1 euro. Stocks opened sharply lower in Japan this morning.

The slumping housing market has become the biggest worry for the stock market, which just four days ago set records, because of its potential impact on the broader economy and financial system.

Countrywide’s stark assessment signaled a critical change in the substance and tenor of how housing executives are publicly describing the market. Just a couple of months ago, some executives were predicting a relatively quick recovery and saying that most home loans would be fine with the exception of those made to borrowers with weak credit who stretched too far financially.

Executives at Countrywide had for some time been more skeptical than others but the bluntness of their comments yesterday surprised many on Wall Street. In a conference call with analysts that lasted three hours, Countrywide’s chairman and chief executive, Angelo R. Mozilo, said home prices were falling “almost like never before, with the exception of the Great Depression.”

Nationally, home prices have not fallen in the 35 years or so that the government and private services have tracked them. Some researchers like Robert J. Shiller of Yale have compiled data that goes as far back as 1890 and shows that home prices fell for several years during the 1930s.

Mr. Mozilo said that because of a large number of homes on the market, the housing sector would continue to suffer until sometime in 2008 and not begin recovering until 2009.
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“Where you will see prime borrowers have trouble is where they took the riskiest of adjustable-rate mortgages and put nothing down with a first and second combined,” Thomas Lawler, a housing economist, said.

Many of Countrywide’s home equity loans were second mortgages made to people who were financing the full or nearly full cost of their homes. These loans are particularly risky because when house prices are falling and a home is foreclosed and resold, the holder of the first lien is paid off and often there is little left to apply to the second mortgage.

“Countrywide is highlighting what is an industrywide problem,” said Christopher C. Brendler, an analyst with Stifel Nicolaus, an investment firm in St. Louis. A second mortgage “is really an unsecured loan like a credit card.”