Construction declined in May

New construction dropped 2.1% in May from a month earlier, and was 24.2% lower than last year. Permits were up 3%, but that came after a 7.1% drop in April, so the rebound is not that significant

David Seiders, chief economist for the National Association of Home Builders, predicted that new construction will decline by 22% this year. “Improvements in housing starts”, he said, will come no earlier than next year.

Housing starts dipped 3.4%, and were 26% lower than in May 2006. All regions reported year-over-year declines, but monthly data varied. In the Northeast, starts increased by 0.9% month-over month, but were down 20.6% compared to May 2006. In the West, starts were down 12.1% from April and 33.3% from a year earlier. In the Midwest, starts increased by 9.1% month-over-month, but were nevertheless down 23.2% year-over-year. In the South, single family starts declined 3.4% on a monthly basis and 24.2% from May 2006.

All this comes to say that monthly fluctuations of 1-2%, whether up of down, do not change the bigger picture. Currently demand for housing is exceptionally low, due to a number of reasons, and naturally this is dragging construction down. As long as inventories – and home prices – remain high, construction will not show any improvement.

Homebuilder confidence is dropping

The homebuilder sentiment index, which tracks how builders evaluate the market situation, reached the lowest reading in 16 years in June. The index dropped to 28 from 30 in May, a sign that even more builders are pessimistic about market prospects.

According to the National Association of Home Builders (NAHB), home prices will continue to decline until the end of the year, and housing will be “a drag on economic growth” in 2007. Troubles in mortgage lending are affecting home builders, who “continue to trim prices and offer a variety of non-price incentives” to prospective buyers. Since February, when the index reached 39, builder confidence has been falling steadily, to rates dramatically lower than a year ago. In June 2006, builder sentiment was at 42.

Fair Isaac to put a stop on “credit score borrowing”

A credit score scheme that emerged recently allowed consumers to boost their credit scores in as little as several weeks by being added – for a pay – as an authorized user on someone else’s credit card with a long history of perfect payments. Parents often add their children as authorized users on their credit cards, in order to help them establish credit and improve their scores. Adding strangers as authorized users, however, is considered a scheme, even though no regulation currently defines who can be added and the maximum number of authorized users on a credit card.

Businesses that offer the service actually help borrowers manipulate the credit scoring system and get better terms on any loans they apply for. Some borrowers wouldn’t be able to get loans if they didn’t get a “credit boost”, which is why banks are increasingly concerned about the practice. Fair Isaac, the company which created the FICO scoring system is working to modify the score. As of September, the cardholder’s credit will not be transferred to authorized users, which will essentially stop the scheme, but will also harm law-abiding borrowers who wish to help their children establish good credit.

Mortgage rates moved up again

Reading mortgage-related news has been quite boring lately. Another story on low price appreciation, another story about a family of immigrants who were driven into a mortgage they couldn’t afford, some politician inventing new ways to preserve home ownership, some gloomy stats from the MBA … I’m almost getting used to all this. And then – shock horror – mortgage rates keep rising steadily for weeks and weeks. We were talking about 6.15% on a 30-year fixed-rate mortgage a month ago, and now the rate is 6.74%, up from 6.53 last week. Another bite out of affordability.

According to data released by Freddie Mac, 15-year fixed-rate mortgages carried an interest of 6.43, up sharply from 6.22% last week, and the five-year adjustable-rate home loans were at 6.37%, compared to 6.24% a week ago. One-year adjustable-rate mortgages averaged 5.75%, an increase from last week’s 5.65.

Another report issued by Freddie Mac on Thursday is drawing analysts’ attention – its first quarterly financial results in several years. Freddie Mac announced a loss of $211 million, or $0.46 per share, way lower than the expected $1.01 gain. Last year, Freddie Mac reported profit of $2 billion, $2.80 a share. Richard Syron, Freddie Mac’s CEO, however, believes that the company is on the path to stabilization and its “credit position has remained strong”. We’ll be looking forward to second-quarter results.

Foreclosures jumped 90% in May

Home foreclosures increased 90% from a year earlier in May, according to RealtyTrac data. The total of 176,137 foreclosures was 19% higher than the April number. Economists fear that the rate of foreclosures will accelerate in the coming months, which will pour additional homes on the already glutted market, all this amidst what turned out to be a not-so-robust-at-all spring/summer buying season. Such a scenario spells serious trouble for home builders, many of which are experiencing financial difficulties and even closing doors.

On average, there was 1 foreclosure for every 656 U.S. households in May, the highest total filings being in California, Florida, Ohio, Texas, Michigan and Georgia. Home prices, however, have not yet seen sharp drops. They have declined somewhat, but not enough to lure large numbers of buyers to the market. With less cash in their homes and less credit available, consumers hesitate to purchase Real Estate now.

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.

Freddie Mac to return to regular reporting

Freddie Mac will resume making regular quarterly reports this Thursday, June 14. The mortgage giant has only stated annual results since 2002, when it was involved in an accounting scandal. In 2003, the company said it had overestimated earnings for 2000 through 2002 by approx. $5 billion.

Analysts expect Freddie Mac to report first-quarter earnings of a little more than $1 a share, down from $2.80 a year ago. The financial results will be released before the opening bell on Thursday, and a conference call will be held at 10:00 a.m. The call will be webcast live on the company’s website, http://www.freddiemac.com.

In April, Freddie Mac announced it will purchase $20 billion in subprime loans and is currently developing new mortgage products designed for subprime borrowers. Legislation for stricter oversight of the two government-sponsored mortgage giants, Fannie Mae and Freddie Mac, is currently being developed.