Forbes: U.S. Housing Slump: No End In Sight

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U.S. Housing Slump: No End In Sight
Oxford Analytica 09.08.08, 3:15 PM ET

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Even after U.S. Treasury Secretary Henry Paulson placed government-sponsored enterprises Fannie Mae and Freddie Mac under federal "conservatorship" on Sunday, the outlook for U.S. housing prices is poor. Unsold home inventories remain at record levels, and foreclosures are increasing at an alarming pace.

Balancing act. Paulson has promised that the government will simultaneously direct Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ) to increase "proactively" the availability of mortgage financing and discourage excessive "risk taking."

However, this will entail a delicate balancing act. If the government takes steps to stimulate the mortgage market by, for example, reducing the fees that the government-sponsored enterprises charge banks, this could ultimately increase the government's losses if housing prices continue to fall. Yet any pullback in home mortgage purchases to improve the risk characteristics of Fannie and Freddie could add to the housing market's woes.

Poor housing outlook. There is little sign of stabilization in the housing market:

--Price plunge. Over the 12 months through July, home prices at the national level, as measured by the S&P/Case-Shiller index of prices in 20 major cities, fell by 17%--the fastest rate of decline since the Second World War.

--Excessive inventories. Despite falling home prices, unsold housing inventories have continued to rise to their present record level of over 11 months' supply, which weighs heavily on the housing market.

--Rising delinquencies. The pace of delinquencies on subprime mortgages extended in 2006-07 is now approximately double that of earlier subprime mortgage vintages. Moreover, these abnormally high delinquency rates have spread from subprime loans into higher-quality "Alt-A" and prime mortgages.

--Negative equity. The proportion of homeowners with negative equity in their homes is rising. The National Realtors Association estimates that nearly one-third of homeowners who bought houses in 2002-06 now have negative equity. .......(more)

The complete piece is at: http://www.forbes.com/business/2008/09/08/fannie-freddie-mortgages-cx_0908oxford.html