Excess supply, buyer psychology and tightened underwriting standards in subprime and Alt-A mortgage lending have analysts at Fitch Ratings more pessimistic about the prospects for new-home construction and sales in 2007.

In their latest “Chalk Line” quarterly report on new-home construction and the home-building industry, Fitch analysts forecast new-home sales in 2007 will fall 15 percent, to 902,000. Fitch had previously forecast an 11.5 percent decrease.

That would still be less severe than last year’s 17.9 percent decline in new-home sales. But Fitch is forecasting a 19.9 percent cutback in single-family housing starts for 2007, which fell 15.1 in 2006.

The National Association of Home Builders on Tuesday predicted a 23 percent decline in single-family housing starts this year, followed by 2 percent growth in 2008. Fitch said it will release its forecasts for 2008 three months from now, in the next Chalk Line.

Excess supply continues to be the most troubling issue, Fitch analysts said, a problem largely driven by the fact that investors who represented a large portion of buyers in 2005 remain absent from the market.

The “dumping of their housing on the market has caused considerable pain,” Fitch analysts said, and the negative impacts will continue to be felt by builders in 2007.

Negative psychology “seems to have become pervasive,” the report said, with an “expectation or fear” that home prices have peaked and buying now would be a mistake. Such fears apply especially to trade-up and second-home buyers.

Problems in subprime lending, including a sharp rise in delinquencies and defaults, have resulted in “clearly tightened” credit standards for subprime and Alt-A borrowers, the report noted.

“Certain mortgage products, such as no-documentation and no-down-payment loans, are no longer available to such customers,” Fitch analysts said. “There is fear that market disruptions could spread further into the Alt-A market and even to the prime market.”

Even if credit-quality problems don’t spread further, “it is clear there will be reduction in net sales in 2007 due to tighter lending standards and there will be increases in unsold inventories due to greater mortgage foreclosures.”

In its survey of 400 home builders in June, NAHB reported 45 percent said tighter lending standards were hurting home sales, with 28 percent reporting increased sales cancellations due to tighter credit.

The tightening of loan standards was more abrupt than in past housing downturns and was not prompted by the economy, Fitch analysts said.

Much of the increase in subprime loan delinquency appears to be associated with faulty underwriting and fraud, the report said. While prime mortgage delinquency rates have also increase, they have done so “to a much lesser degree, and continue at relatively low levels.”

As a result, the financial markets, Freddie Mac and Fannie Mae “are in effect cutting off liquidity to subprime lenders,” Fitch analysts said. “Credit-challenged borrowers will have trouble accessing credit.”

According to Fitch, if the economy were to stall or go into recession later this year or in 2008, “the credit-tightening process likely would deepen and extend longer. In any case, the credit-tightening process, which typically lags during the early stages of a housing contraction, often lasts longer than ‘experts’ anticipate.”

Fitch analysts said affordability issues could also dampen demand for newly constructed homes. The average new-home price rose from $149,800 in 1990 to $305,900 in 2006, a 104.2 percent increase.

Housing affordability in general and for the first-time home buyer “continues to be generally reasonable despite the escalation in home prices, primarily because of attractive mortgage rates,” Fitch noted.

Source:

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