Where�s Real Estate Headed In 2007?
Funky Loans May Hold
�liars� loans� (those with little or no documentation required)
amounted to 24% of mortgage originations. Last year they accounted
for 62%. And interest-only mortgages have vaulted in the same period
from virtually no market share in the mainstream lending business to
a 50% share.
Gary Gordon, a member of the investment committee of Annaly Mortgage
Management, has build a coherent and persuasive case that a housing
downturn will continue, and proceed in three phases:
Phase I, now under
way, where home sales will drop to cure what are politely known as
Phase II, starting
soon, will see job growth faltering as the pace of lending and
Phase III, lingering
into 2008, wherein mortgage lenders will relearn the fine art of
saying no. The resulting withdrawal of easy credit will add new
downward pressure on both home prices and consumer spending.
the fundamental problem is that the typical American home buyer
can�t afford a home at today�s prices. (Yale economist Robert
Shiller says that inflation-adjusted house prices in the past five
years logged the second-fastest cumulative growth since the
administration of William McKinley 110 years ago.)
And the potent
stimulus of above-trend borrowing growth is about to be removed with
falling house prices. Americans pulled out over $500 billion of
equity in their homes in 2005 in order to buy other stuff. That
number shot up from about $100 billion in 2001. When you reduce or
reverse this housing appreciation you stymie the borrowing boom.
Gordon points out, the Federal Reserve can engineer a lowering in
mortgage-borrowing costs by trimming the funds rate. Although such
actions can invite lenders and borrowers to do business together,
the Fed can only do so much. But it can hardly hold a gun to their