Subprime Florida Mortgage Turmoil Will Cut Home Prices
Most economic forecasters in a new Wall Street Journal survey believe recent turmoil in the subprime mortgage market is likely to spread to the broader Florida mortgage market - and they expect a widely followed index of home prices to fall this year.
But they still think the U.S. will avoid a recession and even a significant rise in unemployment.
“The markets may have over-reacted,” said John Lonski of Moody’s Investors Service. “Only businesses significantly exposed to subprime will be hurt. Mortgage repayment problems aren’t as widespread as we are led to believe. If most people were having trouble paying the mortgage, it would lead to declining consumer confidence and we haven’t seen that.”
Of the 60 economists surveyed, 32 said it is either “very” or “somewhat” likely that the intense and speedy unraveling of the market for subprime mortgages - home loans made to people with poor credit histories - will spill over to the rest of the mortgage market.
But 26 said that’s not likely. Two didn’t respond.
The woes of the bad credit Florida mortgage market are the latest chapter in deterioration of the housing market. Concerns about the sector and the ripple effects on the economy have been blamed for gyrations in the stock market the past week, including a 2% drop in the Dow Jones Industrial Average Tuesday.
But just 22% said difficulties in the subprime market have caused them to downgrade their economic forecasts and, by a 4-to-1 margin, they agreed with the statement that “the worst of the housing bust is behind us.”
The economists slightly reduced their forecasts for the economy this quarter but still expect moderate growth all year, at around a 2.3% rate this quarter, increasing to 3% by year-end - with unemployment rising just a bit. They put the odds of recession in the next 12 months at about 25%, slightly less than former Federal Reserve Chairman Alan Greenspan’s odds of about 33%.
The economists are markedly more optimistic - both about the U.S. economy and about the stock market - than the public is, as measured in a recent WSJ/NBC News poll.
But, as is often the case, there is disagreement among the economists about the risks that the subprime market poses to the overall U.S. economy.
“Mortgage credit-quality problems go well beyond the subprime sector,” wrote Jan Hatzius, chief U.S. economist at Goldman Sachs in New York, in a research note. “The underlying problem is not the subprime market per se, but the reset of large quantities of [adjustable-rate Florida home loan] debt - some of which is classified as subprime some as prime - to higher interest rates in an environment of flat or falling house prices in most of the United States.”
Mr. Hatzius notes that the so-called teaser rate, or low initial rate on adjustable-rate mortgages, expires sooner for subprime mortgages. This implies that mortgage-holders with prime rate ARMs may come to experience the same woes currently making waves in the subprime sector.
The extent of any spillover from subprime to the broader housing market remains unclear.
“You can tell a lot of scary stories,” said Richard DeKaser of National City Corp., “but they’re not broadly accurate. We’re still talking about a small segment of the nation’s homes that are affected.”
According to the American Housing Survey for 2005, the most recent date for which data are available, 33% of all homes are owned outright and 57% have traditional Florida mortgages, leaving just 10% potentially affected by ARM woes.
The subprime concerns are also likely to weigh on Florida home prices, according to Mr. Lonski: “Home sellers will be forced to accept lower prices in the spring. The subprime issue reinforces that home prices would be subject to price recession, creating an expectation of lower prices among buyers.”
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