By Les Christie, CNNMoney.com staff writer
March 13 2007: 5:01 PM EDT
NEW YORK (CNNMoney.com) — Subprime lenders are already getting crushed, but the impact rising mortgage delinquencies will have on home prices overall is still an open question.
At a minimum, it means financing is drying up for those with less-than-perfect credit and that spells fewer home buyers.
Current Mortgage Rates
Type Overall avgs
30 yr fixed mtg 5.68%
15 yr fixed mtg 5.44%
30 yr fixed jumbo mtg 6.00%
5/1 ARM 5.45%
5/1 jumbo ARM 5.63%
Find personalized rates:
Video More video
The subprime mortgage market is heading for a meltdown with some major lenders defaulting on current financial agreements. CNN’s Gerri Willis reports. (March 10)
Play video
And foreclosed properties will add supply to a housing market that already has too much.
“It’s going to be a really big deal,” says Dean Baker, co-director of the Center for Economic and Policy Research.
“[National] inventory is 20 percent higher than last year, vacancy rates have soared and prices are down about 3 percent,” he says. “Now, with the tightening of credit, I don’t see how prices don’t fall another 5, 6 or 7 percent.”
The tightening of credit could take as many as one million buyers out of the market, says Baker, citing Bear Stearns research. “Even if you cut that in half, say to 400,000 or 500,000, that’s huge.”
Mark Zandi, chief economist for Moody’s Economy.com, is also concerned. “I think the subprime problems will take housing activity to a whole other level,” he says.
Zandi is projecting a doubling of subprime defaults this year to 800,000. “Those homes will go on the market at a discount and will weigh on the market,” he says. He also believes that 500,000 fewer Americans will be able to obtain financing because of the tighter standards.
All that has led Zandi to alter his projection of a 3 percent decline in housing prices this year to a mid-single digit decline. The hardest hit areas, which he thinks will be Arizona, Nevada, parts of California and Florida, will absorb high single digit or even double-digit punches.
Not everyone paints as bleak a picture. “We don’t know how many subprime mortgage holders will actually default,” says Christopher Mayer, an economist at Columbia University. “Banks are working with borrowers [so they can keep their homes]. Plus, there’s plenty of liquidity around for people looking for mortgage loans.”
That’s not to say he sees everything as hunkey-dorey. Mayer thinks values in speculative markets had gotten way ahead of fundamentals and that weak local economies in the Midwest will depress values there.