Merrill: Housing Prices To Drop 15% This Year

Analysts at Merrill Lynch predict that Real Estate prices will fall 15% in 2008, and continue to slide in 2009. The NAR disagrees: in their rosy outlook, prices will be flat this year, with a 5.3% drop in the first quarter and a rebound in the second half of the year. According to Merrill Lynch, housing starts will drop 30% by the end of the year – a likely scenario that doesn’t bode well for home builders. “The reduction in housing starts is not stabilizing the economy, but it will stabilize the market”, said the NAR’s Lawrence Yun – at least he got this one right. The Fed’s rate cut will probably help sales, but it is unlikely to change the situation dramatically. Rather, 2008 will be just as bad for homebuilders as 2007. There’s little hope for a successful spring buying season, although lower interest rates and dropping prices could lure buyers to the market. Much will depend on consumer confidence and commodity prices in coming months. If the slowdown is more severe than expected and unemployment keeps growing at the same pace, many potential buyers may choose to delay a home purchase.

Banks suffer amid housing woes

Japan’s largest securities company Nomura Holdings Inc. will post a pretax loss of $620 million, its first quarterly loss in four years, caused by troubled residential mortgage-backed securities. It was also announced that Nomura will cut 400 jobs in the U.S. and shut down its residential mortgage-backed securities business. According to CEO Nobuyuki Koga, “the pace of the collapse” was quicker than expected. Japanese banks Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. also reported losses on investments in securities backed by subprime mortgages.

In the U.S., Merrill Lynch and UBS expect to report substantial losses with their third-quarter results, related to home-loan investments. Citigroup revealed a 57% drop in third-quarter profit, including higher-than-expected losses of $1.56 billion on mortgage-backed securities. No wonder that no one wants to originate subprime anymore.

Lenders are adopting federal guidelines

General Electric’s WMC Mortgage and Merrill Lynch’s First Franklin Financial are adopting the federal underwriting guidelines proposed in March. Lenders will have to determine the borrowers’ ability to make fully-indexed monthly payments instead of the initial, smaller payments at “teaser” interest rates. For many subprime borrowers, this will mean cutting off or limiting credit, but it’s probably better than putting them into a mortgage they cannot afford to repay. A large part of those who took adjustable-rate loans in recent years wouldn’t have qualified had the lenders taken into account the full monthly payments, scheduled to kick in two or three years down the road. No wonder we see a spike in delinquencies and foreclosures. The bad news is, economists say even more foreclosures are to be expected as ARMs begin adjusting later this year and in 2008.

The Fed is still considering steps to prevent “predator” lending and encourage “responsible” loan providers, but a number of economists are skeptical. “Bailing out” troubled borrowers would mean paying with taxpayers’ money for other people’s foolish and irresponsible financial decisions, instead of letting them bear the consequences of assuming too much risk. Plus, the market is already casting out lenders who were all too willing to provide junk loans, and the rest are tightening underwriting standards. In the months and years to come, fewer loans will be originated, so there will probably be fewer buyers house-hunting out there. Sounds like a nasty housing slump to me.

Shares of Countrywide Financial Rise

Shares of mortgage lender Countrywide Financial rose after Merrill Lynch called the company an “attractive buying opportunity”. Stocks were up 3.7% at $35.65, while shares of other mortgage lenders showed gains, too. Shares of Accredited were up 59% at $9.60, those of NovaStar made a 22% jump to $5.11, and Fremont reached $7.38. Goldman Sachs, Lehman and Bear Sterns said they are considering purchasing mortgage portfolios, teams of lenders or even entire subprime lending companies. Are they giving subprime another chance? In fact, this could be a smart move on investors’ part, because they could be acquiring fully-operating facilities along with experienced staff – on the cheap – as lenders face their financial hardships.

On a side note remark, Angelo Mozilo, chairman and CEO of Countrywide Financial, has been selling his company’s shares in bulk lately. On Mar. 12 alone he got rid of 70,000 CFC shares, raising 2.45 million, following the 70,000 shares he sold for $2.62 million on Mar. 8 and the 46,000 shares he dumped for 1.67 million on Mar. 6. Is it just me or does something smell fishy?