As Foreclosures Rise, Analyst Predicts Wide Impact

There are more signs that the overall housing market will take a hit from the woes of the subprime mortgage sector. The real estate industry's main trade group expects that unsold homes will pile up as foreclosures mount. That is likely to slow the pace of home sales in coming months.

Spring is a busy time of year for the real estate industry. People put their homes on the market ahead of summer vacation, and before the start of the new school year. But this year, depending on where you live, you may be noticing a lot of For Sale signs.

Barb Jandric is general sales manager of Edina Realty in Minneapolis, Minn. She says inventories of unsold homes in her area are up 20 percent above last year, while house prices are treading water.

"I think if I were going to get out my crystal ball and make a prediction," Jandric says, "I think we may lose 4 or 5 points on the average selling price."

Jandric thinks there are variety of factors pushing home prices lower, including left-over housing inventory from last year and sellers who aren't willing to reduce their asking prices.

But she also sees a reason to believe some people are running into trouble with their mortgages.

"One of the things that I have observed and heard from a lot of our agents is that more of the inventory they are looking at is vacant — and that isn't because of transfers," Jandric says. "When we start to see a rise in it like that, that, to me, is one of the signs of a foreclosure market that's growing a bit."

And she says the problems may not only be felt among subprime borrowers, but also people who bought more house than they could afford, using adjustable-rate mortgage loans that are now moving higher.

But for now, much of the problem appears to involve the subprime sector of the market, loans given to buyers with a checkered credit history.

Susan Wachter teaches real estate and finance at the Wharton Business School. She says the run-up in subprime lending that helped fuel the rise in home prices is now having the opposite effect.

"Part of this price boom was unsustainably related to these new mortgage instruments," Wachter says, "that were out there last year that are not out there now."

A recent study done for Standard and Poor's shows home prices in 20 major U.S. cities declined between January of last year and January of this year.

And a report out this week from the UCLA-Anderson Forecast group projects a 5 percent to 10 percent drop in home prices nationally. David Schulman is the economist who authored the study.

"We've never seen a 5 percent to 10 percent drop," Schulman says, "but we've never seen the kind of price increases we saw in the past five years. So, I mean, this is new — just as the big increases in house prices between 2001 and 2005 were totally unprecedented."

That would be a steep drop, but Schulman notes the price falloff would not take place all at once, but would be spread out over a period of years.

In terms of the broader economy, Schulman expects the slowdown in the housing market to subtract a full percentage point from U.S. economic growth. Schulman also projects that the nation's unemployment rate will rise from its current 4.5 percent to 5 percent by the second half of the year.

Those predictions indicate that the downturn in housing could ripple much deeper through the broader economy than many people think.

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