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.
 

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]
 

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]
 

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]
 

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 www.nahb.org/cfcwebcast. [return to top]
 

To learn more, visit www.HousingEconomics.com. [return to top]