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The Honolulu Advertiser

Updated at 1:32 p.m., Wednesday, June 20, 2007

Experts see ongoing weakness in U.S. housing market

By Kathleen M. Howley
Blooomberg News Service

BOSTON — The worst is yet to come for the U.S. housing market.

The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported.

"It's a blood bath," said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. "We're talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit."

Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week. Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession.

ECONOMIC RECESSION' EVIDENT

"It's not just a housing recession anymore, it looks more and more like an economic recession," said Nouriel Roubini, a Clinton administration Treasury Department director and economic adviser who now runs Roubini Global Economics in New York.

Goldman Sachs Group Inc., the world's biggest securities firm, and Bear Stearns Cos., the largest underwriter of mortgage-backed securities in 2006, said last week that rising foreclosures reduced their earnings. Bear Stearns said profit fell 10 percent, and Goldman reported a 1 percent gain, the smallest in three quarters. Both firms are based in New York.

The investment banks, insurance companies, pension funds and asset-management firms that hold some of the U.S.'s $6 trillion of mortgage-backed securities have yet to suffer the full effect of subprime loans gone bad, said David Viniar, Goldman's chief financial officer. Subprime mortgages, given to people with bad or limited credit histories, account for about $800 billion of the market.

"I continue to believe that we haven't seen the bottom in the subprime market," Viniar said on a June 14 conference call with reporters. "There will be more pain felt by people as that works through the system."

He didn't return calls this week seeking additional comments.

'DRAG ON THE ECONOMY'

"This has been a drag on the economy," Treasury Secretary Henry Paulson said at a press briefing today after he testified in front of the House Financial Services Committee. "I do believe that we are at or near the bottom."

Homebuilding stocks are down 20 percent this year after falling 20 percent in 2006, according to the Standard & Poor's Supercomposite Homebuilding Index of 16 companies. Before last year, the index had gained sixfold in five years.

"There isn't a recovery about to happen," said Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., the Red Bank, New Jersey-based homebuilder. The company's stock tumbled 42 percent this year through yesterday.

The share of people taking out all types of adjustable-rate home loans averaged 29 percent during the past three years, compared with the 17 percent average of the prior three years, according to data compiled by Mclean, Virginia-based Freddie Mac.

Higher fixed mortgage rates and stricter lending standards mean some of those borrowers won't be able to refinance into fixed- rate loans. Many of them have seen their home's value drop even as their interest rates adjust higher.