U.S. Housing Market May Continue to Slump in 2008

by Jeff Kearns - Bloomberg.Com

posted 12/07/07

The biggest surge by homebuilders was "sparked by misplaced optimism'' because President George W. Bush's plan to freeze some mortgage rates won't prevent higher losses from bad home loans next year, JPMorgan Chase & Co. said.

Lennar Corp. and Pulte Homes Inc. led the Standard & Poor's 500 Homebuilding Index to a 13 percent rally yesterday, the most since the gauge was created in 1989, after Bush's announcement.

``The plan is not broad enough to prevent 2008 from being worse than 2007,'' wrote Michael Rehaut, a New York-based analyst who covers homebuilders. ``It will be difficult to implement for the subprime segment eligible for assistance.''

The low point in the U.S. housing market may not come for another three to six months, Rehaut wrote, citing a report yesterday that third-quarter home delinquency rates rose to the highest since 1986.

The Bush plan is flawed because it holds rates for only one segment of subprime borrowers and doesn't help home owners who are already delinquent in their mortgage payments, Rehaut wrote. Also, the lack of a legal enforcement mechanism means eligible borrowers may not get the assistance they need, he said.

The number of Americans who fell behind on their mortgage payments rose to a 20-year high in the third quarter as borrowers were unable to refinance or sell their homes, Mortgage Bankers Association said yesterday.

All-Time High

The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.59 percent, the highest since 1986. New foreclosures hit an all-time high for the second consecutive quarter in a survey that goes back to 1972.

Bush yesterday announced an agreement to freeze subprime mortgage rates for five years for a portion of about 1.8 million borrowers in the U.S. whose interest rates will reset higher in the next two years.

The agreement between the government and the lending industry is intended to prevent a wave of foreclosures from undoing the six-year U.S. economic expansion. It would freeze rates for five years on some variable rate mortgages and provide assistance to as many as 1.2 million homeowners.

Following Bush's announcement, U.S. stocks climbed yesterday to the highest level in a month, led by financial companies and builders. The Standard & Poor's 500 Index added 1.5 percent while the Dow Jones Industrial Average climbed 1.3 percent.