NAR Chief Economist Upbeat But Points To A Few Possible Problems
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David Lereah, the chief economist for the National Association of Realtors
(NAR) has weighed in on the bankruptcies, foreclosures, and predicted Armageddon
in the subprime
mortgage market.
In a column on the NAR website titled "The Subprime Mess" Lereah
gives his take on what has happened and what might. Much of it is a recounting
of the familiar history leading up to the current tumult, but he does have an
interesting take on the psychology behind the mess.
"Just as children in an orderly classroom stir up a wild ruckus when the teacher
leaves the room," he says, "some people and businesses stray from fundamental
behavior during a frenzied market environment." He cites the savings
and loan crisis of the 1980s when S&Ls were purchasing pricy art
while the bank was floundering and the all too familiar behavior of investors
during the dot.com boom when fundamental investment principles were viewed as
tools for sissies. The subprime mess, he maintains, is just another example
of typical human behavior in a frenzied environment.
So, according to this theory the current mess was either inevitable or should
have been foreseen and stopped in its tracks. The looming danger hardly went
unnoticed; many people were warning about the risks two and three years ago
but they were, in general people and organizations who did not have the means,
power, or connections to do anything about it. Maybe, therefore, it was inevitable.
In any case it is now water under the bridge.
So where does Lereah see us going from here? First of all, he disagrees with
the media and their doomsday prognosis about the crisis which
needs to be weighed against his reputation as a cheerleader for the housing industry.
Still, he again has some interesting ideas about the future.
He says we should expect a drop-off of subprime originations
through 2008 which may mean that half of high risk borrowers will fail to secure
loans. This, if it happens, will depress home sales. What he sees is more likely,
however, is that these buyers will be serviced by a newly revitalized FHA and
from lenders stepping into the breech to make loans meeting Freddie and Fannie
standards and offering "fair and affordable mortgage options to subprime borrowers."
He, like The Mortgage Bankers Association, the National Association of Mortgage
Brokers and other advocacy groups have warned again overkill by regulators and
Lereah does so as well, asking for responsible lending practices as opposed
to practices that cause a credit crunch.
He warns we should expect that 10 to 25 percent of households that fit the
subprime profile will be unable to secure a mortgage under today's stricter
lending standards but that "many of these households will probably, over time,
purchase a home when they have attained the financial capacity to do so... So
the long-term health of the housing market will probably stay in tact (sic)."
In the short term Lereah expects that home sales will fall by 100,000 to 250,000
annually during the next two years due to tighter underwriting practices.
He quotes, as did we several weeks ago, First American CoreLogic estimates
that about 1.1 million of the 8 million adjustable rate loans originated over
the last three years are likely to end up in foreclosure. He predicts that most
lenders will attempt to work out problem loans before they become critical by
refinancing borrowers into other mortgages and that disproportionate numbers
of the foreclosures that do occur will do so in high cost areas such as California
but views this as relatively good news as those more or less healthy local economies
will present fertile ground for lenders to sell the foreclosed properties in
a reasonable amount of time. "Foreclosures will create temporary
inventory problems, but inventories will be eventually worked out."
Although this presents a fairly optimistic picture of what is to come (depending
on your perspective as a lender, a real estate agent, or a hapless homeowner)
Lereah does add a disquieting note. He expects that today's subprime problems
are likely to spill over into the housing sector and the economy in a number
of ways. He projects that, if lenders exercised poor underwriting in the subprime
market, it is likely that these practices were also used for their Alt
A loans (the medium credit range of lending about which little had
been said in the current climate) and possibly even into prime mortgage lending
as well. This could mean that delinquencies and foreclosures in these markets
will also become a factor.
In addition, he fears that the tightening of underwriting standards in the
subprime market may lead cautions lenders to tighten their approach to borrowers
in the prime market as well, keeping some households from purchasing homes even
though they are well able to afford them. And, the media comes
in for a piece of the blame. Lereah says that continual problems and media reports
about subprime activity may drive away buyers and reduce overall consumer confidence
in the housing sector. Last, an increase in foreclosures could raise the inventory
of homes in individual local markets, softening prices and the demand for homes.
But from a broader perspective, he says, today's subprime problems are
occurring against a backdrop of cyclically low mortgage rates and a growing,
healthy economy. Jobs and liquidity are plentiful in the marketplace, suggesting
that the subprime problems may be a manageable problem within our $10 trillion-plus
economy.
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