May 23, 2007
By David F. Seiders
NAHB Chief Economist
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Fed and NAHB Surveys Document Subprime Mortgage Effects
The Federal Reserve released its quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices, covering the February-to-April time frame, on May 14. For the first time, the Fed asked banks about changing credit standards for three types of first-lien home mortgages — prime, subprime and “nontraditional” (IO&PO ARMs and Alt-A products).

The survey results showed substantial net tightening of credit standards on all three types over the prior three months:

  • 56% of respondents in the subprime area
  • 45% for nontraditional mortgages
  • 15% in the prime mortgage market

Although the Fed’s commentary downplayed the importance of the relatively modest tightening in the prime area, 15% is hardly a minor shift and it follows a sizeable tightening of overall mortgage lending standards in the previous survey.

NAHB surveyed builders of all sizes in early May, following up on our surveys of mortgage lending impacts in March and April, and we now have a solid response rate to the May survey.

We find that 44% of all builders reported adverse effects on their home sales during the previous month, and nearly 78% of large companies (starting more than 100 units per year) said their sales had been reduced because of tighter mortgage lending standards. Among companies reporting adverse impacts, the median reduction was 15%.

We also found adverse impacts on sales cancellations, heavily concentrated among big builders:

  • 28% of all respondents said their cancellations had been adversely affected.
  • 79% of companies starting more than 100 units per year reported adverse impacts.

The affected companies (on average) said that the upswing in cancellations in April had wiped out 10% of their backlog of signed sales contracts.

Fed Chairman Ben Bernanke Addresses the Subprime Mortgage Problem
On May 17, Fed Chairman Ben Bernanke delivered an address on “The Subprime Mortgage Market” at the Federal Reserve Bank of Chicago. Bernanke reviewed factors behind the development of the subprime market, recent problems in this market, possible regulatory responses and the macroeconomic implications for the housing sector and the overall economy.

Bernanke’s assessments of the macroeconomic implications appears to be quite similar to NAHB’s assessments — i.e., while the tightening of mortgage lending standards in the wake of the subprime debacle has created another down leg for effective housing demand, extending the drag on GDP from the contraction in Residential Fixed Investment for a few more quarters, housing will not fall out of bed and the economy will not experience a housing-induced recession.

With respect to subprime loans already out there, Bernanke stressed that the evolving upswing in mortgage delinquencies, defaults and foreclosures is occurring primarily in the adjustable-rate component of the subprime market (less than 10% of all first mortgages outstanding).

He also discussed efforts of private sector participants and regulatory agencies to help work out or modify distressed subprime ARMs.

The workouts/modifications will limit the number of loans that go all the way through the foreclosure process and the number of homes that actually are repossessed and resold on the markets.

NAHB’s forecast assumes significant additions to the inventory overhang from a rising tide of subprime loan problems, but we don’t view these additions as an overwhelming negative factor in the housing outlook. [return to top]

The Supply-Demand Balance Still Is Deteriorating
The supply-demand balance in the housing sector has been deteriorating badly. With respect to supply, the housing markets already are heavily burdened with record numbers of vacant units for sale and for rent, the flow of completions of new units onto the markets still is quite sizeable, the pipeline of units still under construction still is elevated, and a rising tide of mortgage foreclosures is sure to add some additional supply over the course of this year and in 2008.

With respect to demand, the subprime-related tightening of mortgage lending standards clearly is cutting into effective home buyer demand.

Our proprietary survey of 30 large builders shows serious erosion of net sales in both March and April, and our broad-based Housing Market Index shows further erosion of builder confidence in May following slippage in March and April.

It’s also inevitable that the confidence of prospective home buyers has been shaken by the avalanche of media attention to the subprime debacle as well as by accumulating evidence of downward pressures on home prices in many parts of the country. [return to top]

The 2007 Housing Outlook Is a Bit Weaker

Recent revelations on the evolving supply-demand situation have prompted another downward revision to NAHB’s housing outlook for the balance of this year.

Our current forecast for this year has the following major features:

  • 23% decline in single-family starts
  • 14% decline in multifamily starts
  • 22% decline in manufactured home shipments
  • 22% decline in total new housing units
  • Modest slippage in the real value of residential remodeling
  • 13% decline in real Residential Fixed Investment
[return to top]
Fundamental Supports to Housing Demand Will Help Stem the Tide
The current and projected housing downswing now looks a lot like earlier setbacks that were part-and-parcel of official economic recessions. In those earlier periods, housing downswings generally were provoked by upswings in interest rates and were then countered by aggressive easing of monetary policy and major declines in the interest rate structure.

But this housing cycle is fundamentally different, and we can’t count on interest rate declines to turn things around this time.

The good news is that we’re not in an economic recession this time, and outright recession is not likely during the balance of this year or in 2008.

Thus, we can look to some basic economic fundamentals to put a floor under housing demand by later this year — paving the way for our projected upswing in housing production in 2008 and beyond.

These fundamentals include solid growth in employment and household income, combined with a low and reasonably stable interest rate structure. Indeed, Bernanke recently cited the “fundamental factors in place that should support the demand for housing” while arguing that the subprime mortgage problem will not take down housing and the economy. [return to top]

Discussions From Construction Forecast Conference Now Available on the Internet
The Webcast of the Construction Forecast Conference — Spring 2007 held in Washington, D.C. on April 26 now is available for purchase.

Those interested can purchase the conference Webcast, which includes panels of nationally recognized experts discussing economic trends, government policies, developments in the housing industry and the results from NAHB's recent surveys.

Purchasers will receive unlimited access to the Webcast archive for three months, as well as electronic copies of the conference handouts and presentation material. Purchasers can watch at their own pace, rewind, fast forward and review important sections.

To Purchase the Webcast

To purchase the Webcast, visit [return to top]

Want to Know the Housing Forecast for the Top 100 Metros?
Find out in’s 2007-2008 Metro Forecast (free preview). Get the metro forecast with in-depth analysis, overviews and downloadable Excel tables.

To learn more, visit [return to top]

For more information or to contact us directly, please visit l ©2007, National Association of Home Builders

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