United States housing market correction

United States housing market correction

A United States housing market correction is a market correction or "bubble bursting" of a United States housing bubble; the most recent one started in 2005.A real estate bubble is a type of economic bubble that occurs periodically in local or global real estate markets. A housing bubble is characterized by rapid increases in the valuations of real property such as housing until unsustainable levels are reached relative to incomes, price-to-rent ratios, and other economic indicators of affordability. This in turn is followed by a market correction in which decreases in home prices can result in many owners holding negative equity, a mortgage debt higher than the value of the property.


see Timeline of the United States housing bubble

Market correction predictions

The booming housing market appears to have halted abruptly for many parts of the U.S. in late summer of 2005, and as of summer 2006, several markets are facing the issues of ballooning inventories, falling prices, and sharply reduced sales volumes. In August 2006, "Barron's" magazine warned, "a housing crisis approaches", and noted that the median price of new homes has dropped almost 3% since January 2006, that new-home inventories hit a record in April and remain near all-time highs, that existing-home inventories are 39% higher than they were just one year ago, and that sales are down more than 10%, and predicts that "the national median price of housing will probably fall by close to 30% in the next three years … simple reversion to the mean." "Fortune" magazine labelled many previously strong housing markets as "Dead Zones;"This article classified several U.S. real-estate regions as "Dead Zones", "Danger Zones", and "Safe Havens."] Several home builders have revised their forecasts sharply downward during summer 2006, e.g., D.R. Horton cut its yearly earnings forecast by one-third in July 2006, [cite news | title=D.R. Horton warning weighs on builders: Largest home builder cuts 2006 outlook on difficult housing market | publisher=Dow Jones | date=14 July 2006 | url=http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BB9264E12%2DEB3C%2D4572%2DB46A%2DDAECCED62EC2%7D&siteid=myyahoo&dist=myyahoo ] the value of luxury home builder Toll Brothers' stock fell 50% between August 2005 and August 2006, [cite news | title=Toll Brothers, Inc. (NYSE:TOL) | publisher=MarketWatch | accessmonthday = 22 August | accessyear = 2006 | url=http://www.marketwatch.com/tools/quotes/intchart.asp?symb=TOL&siteId=yhoo ] and the Dow Jones U.S. Home Construction Index was down over 40% as of mid-August 2006. [cite news | title=U.S. Home Construction Index (DJ_3728) | publisher=Dow Jones | accessmonthday = 18 August | accessyear = 2006 | url=http://www.marketwatch.com/tools/quotes/intchart.asp?symb=DJ_3728&sid=171546&freq=1&time=8&siteid=myyahoo ] CEO Robert Toll of Toll Brothers explained, "builders that built speculative homes are trying to move them by offering large incentives and discounts; and some anxious buyers are canceling contracts for homes already being built." [cite news | title=Toll Brothers lowers outlook: Luxury home builder says buyers still waiting on sidelines | publisher=MarketWatch | date=22 August 2006 | url=http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B7DA32685%2DEC81%2D4C3B%2D80F0%2D95C91D3AFD51%7D&source=blq%2Fyhoo&dist=yhoo&siteid=yhoo ] Homebuilder Kara Homes, known for their construction of "McMansions", announced on 13 September 2006 the "two most profitable quarters in the history of our company", yet filed for bankruptcy protection less than one month later on 6 October. [cite news | title=BANKRUPTCY CONSIDERED: Kara Homes lays off staff; talk of filing for Chapter 11 makes local clients anxious | publisher=Asbury Park Press | date=6 October 2006 | url=http://www.app.com/apps/pbcs.dll/article?AID=/20061006/NEWS/610060412 ] Six months later on 10 April 2007, Kara Homes sold unfinished developments, causing prospective buyers from the previous year to lose deposits, some of whom put down more than $100,000. [cite news | title=Kara Homes buyers may lose deposits | publisher=Asbury Park Press | date=10 April 2007 | url=http://www.app.com/apps/pbcs.dll/article?AID=/20070410/NEWS/704100305 ]

As the housing market began to soften in winter 2005 through summer 2006, ["Reports of falling sales and investors stuck with properties they can't sell are just the beginning. Property owners should worry; so should their lenders." cite news | last=Fleckenstein | first=Bill |title=The housing bubble has popped | publisher=MSNBC | date=24 April 2006 | url=http://moneycentral.msn.com/content/P149596.asp] [“A variety of experts now say, the housing industry appears to be moving from a boom to something that is starting to look a lot like a bust.” cite news | title=Sales Slow for Homes New and Old | publisher=The New York Times | date=26 July 2006 | url=http://www.nytimes.com/2006/07/26/business/26home.html?_r=1&oref=login&ref=business&pagewanted=print] NAR chief economist David Lereah predicted a "soft landing" for the market. [cite news | last=Lereah | first=David |title=Realtors' Lereah: Housing To Make 'Soft Landing' | publisher=Forbes | date=1 January 2006 | url=http://www.forbes.com/facesinthenews/2006/01/25/existing-home-sales-cx_gl_0125autofacescan08.html] However, based on unprecedented rises in inventory and a sharply slowing market throughout 2006, Leslie Appleton-Young, the chief economist of the California Association of Realtors, said that she is not comfortable with the mild term "soft landing" to describe what is actually happening in California's real estate market. [“Leslie Appleton-Young is at a loss for words. The chief economist of the California Assn. of Realtors has stopped using the term ’soft landing’ to describe the state’s real estate market, saying she no longer feels comfortable with that mild label. … ‘Maybe we need something new. That’s all I’m prepared to say,’ Appleton-Young said Thursday. … The Realtors association last month lowered its 2006 sales prediction. That was when Appleton-Young first told the San Diego Union-Tribune that she didn’t feel comfortable any longer using ’soft landing.’ ‘I’m sorry I ever made that comment,’ she said Thursday. … For real estate optimists, the phrase ’soft landing’ conveyed the soothing notion that the run-up in values over the last few years would be permanent.” cite news | last=Appleton-Young | first=Leslie |title=Housing Expert: 'Soft Landing' Off Mark | publisher=Los Angeles Times | date=21 July 2006 | url=http://www.latimes.com/business/la-fi-soft21jul21,0,3311200.story?coll=la-home-headlines] The "Financial Times" warned of the impact on the U.S. economy of the "hard edge" in the "soft landing" scenario, saying "A slowdown in these red-hot markets is inevitable. It may be gentle, but it is impossible to rule out a collapse of sentiment and of prices. … If housing wealth stops rising … the effect on the world's economy could be depressing indeed." [cite news | title=Hard edge of a soft landing for housing|date=19 August 2006|publisher=Financial Times | url=http://www.ft.com/cms/s/97a6e948-2f1f-11db-a973-0000779e2340.html ] "It would be difficult to characterize the position of home builders as other than in a hard landing", said Robert Toll, CEO of Toll Brothers. [cite news | last=Toll | first=Robert | title=Housing Slump Proves Painful For Some Owners and Builders: 'Hard Landing' on the Coasts Jolts Those Who Must Sell; Ms. Guth Tries an Auction; 'We're Preparing for the Worst' | date=23 August 2006 | publisher=Wall Street Journal | url=http://online.wsj.com/article_email/SB115630090176442994-lMyQjAxMDE2NTI2MzMyMDMwWj.html ] Angelo Mozilo, CEO of Countrywide Financial, said "I've never seen a soft-landing in 53 years, so we have a ways to go before this levels out. I have to prepare the company for the worst that can happen." [cite news | last=Mozilo | first=Angelo | title=Countrywide Financial putting on the brakes | date=9 August 2006|publisher=Wall Street Journal|url=http://www.contracostatimes.com/mld/cctimes/news/nation/15231922.htm ] Following these reports, Lereah admitted that "he expects home prices to come down 5% nationally", and said that some cities in Florida and California could have "hard landings."cite news |last=Lereah |first=David |title=Existing home sales drop 4.1% in July, median prices drop in most regions |date=2005-08-24 |work=USA Today |url=http://www.usatoday.com/money/economy/housing/2006-08-23-july-sales_x.htm ] National home sales and prices both fell dramatically again in March 2007 according to NAR data, with sales down 13% to 482,000 from the peak of 554,000 in March 2006 and the national median price falling nearly 6% to $217,000 from the peak of $230,200 in July 2006. The plunge in existing-home sales is the steepest since 1989.cn|date=May 2008 The new home market is also suffering. The biggest year over year drop in median home prices since 1970 occurred in April 2007. Median prices for new homes fell 10.9 percent according to the Commerce Department. [cite news | title=http://www.msnbc.msn.com/id/18842917/ | date=24 May 2007 | publisher=MSNBC | url=http://www.msnbc.msn.com/id/18842917/]

Based on slumping sales and prices in August 2006, economist Nouriel Roubini warned that the housing sector is in "free fall" and will derail the rest of the economy, causing a recession in 2007.cite news |last=Roubini |first=Nouriel |title=Recession will be nasty and deep, economist says |date=2006-08-23 |work=MarketWatch |url=http://www.marketwatch.com/news/story/story.aspx?guid=%7BE18E95AF-DBFF-4EE4-ACF7-530A3CD714D3%7D |quote=This is the biggest housing slump in the last four or five decades: every housing indicator is in free fall, including now housing prices. ] Joseph Stiglitz, winner of the Nobel Prize in economics in 2001, agreed, saying that the U.S. may enter a recession as house prices decline. [cite news | last=Stiglitz | first=Joseph | title=Stiglitz Says U.S. May Have Recession as House Prices Decline |date=8 September 2006 | publisher=Bloomberg | url=http://www.bloomberg.com/news/av/ ] The extent to which the economic slowdown, or possible recession, will last depends in large part on the resiliency of the U.S. consumer spending, which now makes up approximately 70% of the US$13.7 trillion economy. The evaporation of the wealth effect amid the current housing downturn could negatively affect the consumer confidence and provide further headwind for the U.S. economy and that of the rest of the world. The World Bank recently lowered the global economic growth rate due to a housing slowdown in the United States, but it does not believe that the U.S. housing malaise will further spread to the rest of the world. The Fed chairman Benjamin Bernanke said in October 2006 that there is currently a "substantial correction" going on in the housing market and that the decline of residential housing construction is one of the "major drags that is causing the economy to slow"; he predicted that the correcting market will decrease U.S. economic growth by about one percent in the second half of 2006 and remain a drag on expansion into 2007. [cite news | title=Bernanke Says `Substantial' Housing Downturn Is Slowing Growth|date=4 October 2006|publisher=Bloomberg | url=http://www.bloomberg.com/apps/news?pid=20601087&sid=ah6TAhIScG0M&refer=home ]

Others speculate on the negative impact of the retirement of the Baby Boom generation and the relative cost to rent on the declining housing market. ["The golden age of McMansions may be coming to an end. These oversized homes—characterized by sprawling layouts on small lots, and built in cookie-cutter style by big developers—fueled much of the housing boom. But thanks to rising energy and mortgage costs, shrinking families and a growing number of retirement-age baby boomers set on downsizing, there are signs of an emerging glut. … Some boomers in their late 50s are counting on selling their huge houses to help fund retirement. Yet a number of factors are weighing down demand. With the rise in home heating and cooling costs, McMansions are increasingly expensive to maintain. … The overall slump in the housing market also is crimping big-home sales. … Meantime, the jump in interest rates has put the cost of a big house out of more people's reach." cite news | last=Fletcher | first=June |title=Slowing Sales, Baby Boomers Spur a Glut of McMansions | publisher=The Wall Street Journal | date=19 July 2006 | url=http://www.realestatejournal.com/buysell/markettrends/20060619-fletcher.html] ["With economic signals flashing that the housing boom is over, speculation has now turned to how deep the slump will be and how long it will last … conventional wisdom holds that as long as you don’t plan to sell your house any time soon … you can cash in later. Or can you? The downturn in housing is overlapping with the retirement of the baby boom generation, which starts officially in 2008 … Most of them are homeowners, and many of them will presumably want to sell their homes, extracting some cash for retirement in the process. Theoretically, that implies a glut of houses for sale, which would surely mitigate an upturn in prices, and could drive them ever lower. … The house party is over, but we don’t yet know how bad the hangover is going to be." cite news | title=It Was Fun While It Lasted | date=5 September 2006|publisher=New York Times|url=http://www.nytimes.com/2006/09/05/opinion/05tue2.html?_r=1&oref=slogin&pagewanted=print ] In many parts of the United States, it is significantly cheaper to rent the same property than to purchase it; the national median mortgage payment is $1,687 per month, nearly twice the median rent payment of $868 per month.cite news |title=For some, renting makes more sense |work=USA Today |date=2006-08-10 |url=http://www.usatoday.com/money/perfi/housing/2006-08-09-rent-1a-usat_x.htm ]

Major downturn and subprime mortgage collapse, 2007

In March 2007, the United States' subprime mortgage industry collapsed due to higher-than-expected home foreclosure rates, with more than 25 subprime lenders declaring bankruptcy, announcing significant losses, or putting themselves up for sale.cite news |title=The Mortgage Mess Spreads |date=2007-03-07 |work=BusinessWeek |url=http://www.businessweek.com/investor/content/mar2007/pi20070307_505304.htm?chan=rss_topStories_ssi_5 ] The stock of the country's largest subprime lender, New Century Financial, plunged 84% amid Justice Department investigations, before ultimately filing for Chapter 11 bankruptcy on 2 April 2007 with liabilities exceeding $100 million. [cite news | title=New Century Financial files for Chapter 11 bankruptcy|date=2 April 2007|publisher=MarketWatch | url=http://www.marketwatch.com/news/story/new-century-financial-files-chapter/story.aspx?guid=%7BB6C60623-1D41-4209-A347-4BEA486963D2%7D&dist=rss&siteid=mktw ] The manager of the world's largest bond fund PIMCO, warned in June 2007 that the subprime mortgage crisis was not an isolated event and will eventually take a toll on the economy and whose ultimate impact will be on the impaired prices of homes.cite news |title=PIMCO's Gross |date=2007-06-27 |work=CNNMoney.com |url=http://money.cnn.com/2007/06/26/news/economy/bc.usa.markets.gross.reut/?postversion=2007062616 ] Bill Gross, "a most reputable financial guru", sarcastically and ominously criticized the credit ratings of the mortgage-based CDOs now facing collapse:

AAA? You were wooed Mr. Moody’s and Mr. Poor’s, by the makeup, those six-inch hooker heels, and a “tramp stamp.” Many of these good looking girls are not high-class assets worth 100 cents on the dollar. … And sorry Ben, but derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets. Houses anyone? … AAAs? [T] he point is that there are hundreds of billions of dollars of this toxic waste and whether or not they’re in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind. [T] he subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in "The New York Times" … The flaw lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005, and 2006. Because while the Bear hedge funds are now primarily history, those millions and millions of homes are not. They’re not going anywhere … except for their mortgages that is. Mortgage payments are going up, up, and up … and so are delinquencies and defaults. A recent research piece by Bank of America estimates that approximately $500 billion of adjustable rate mortgages are scheduled to reset skyward in 2007 by an average of over 200 basis points. 2008 holds even more surprises with nearly $700 billion ARMS subject to reset, nearly ¾ of which are subprimes … This problem—aided and abetted by Wall Street—ultimately resides in America’s heartland, with millions and millions of overpriced homes and asset-backed collateral with a different address—Main Street.cite news | title=When mainstream analysts compare CDOs to “subslime”, “toxic waste” and “six-inch hooker heels”… |date=27 June 2007 | publisher=RGE Monitor | url=http://www.rgemonitor.com/blog/roubini/202280 ]

Financial analysts predict that the subprime mortgage collapse will result in earnings reductions for large Wall Street investment banks trading in mortgage-backed securities, especially Bear Stearns, Lehman Brothers, Goldman Sachs, Merrill Lynch, and Morgan Stanley. The solvency of two troubled hedge funds managed by Bear Stearns was imperliled in June 2007 after Merrill Lynch sold off assets seized from the funds and three other banks closed out their positions with them. The Bear Stearns funds once had over $20 billion of assets, but lost billions of dollars on securities backed by subprime mortgages. [cite news | title=Merrill sells off assets from Bear hedge funds|date=21 June 2007|publisher=Reuters | url=http://www.reuters.com/article/gc06/idUSN2024502520070621 ] H&R Block reported that it made a quarterly loss of $677 million on discontinued operations, which included subprime lender Option One, as well as writedowns, loss provisions on mortgage loans and the lower prices available for mortgages in the secondary market for mortgages. The units net asset value fell 21% to $1.1 billion as of April 30 2007. [cite news | title=H&R Block struck by subprime loss|date=21 June 2007|publisher=Financial Times | url=http://www.ft.com/cms/s/2485fd88-1ffa-11dc-9eb1-000b5df10621.html ] The head of the mortgage industry consulting firm Wakefield Co. warned, "This is going to be a meltdown of unparalleled proportions. Billions will be lost." Bear Stearns pledged up to US$3.2 billion in loans on 22 June 2007 to bail out one of its hedge funds that was collapsing because of bad bets on subprime mortgages.cite news | title=$3.2 Billion Move by Bear Stearns to Rescue Fund|date=23 June 2007|publisher=New york Times | url=http://www.nytimes.com/2007/06/23/business/23bond.html?_r=3&hp=&oref=slogin&pagewanted=all&oref=slogin&oref=slogin ] Peter Schiff, president of Euro Pacific Capital, argued that if the bonds in the Bear Stearns funds were auctioned on the open market, much weaker values would be plainly revealed. Schiff added, "This would force other hedge funds to similarly mark down the value of their holdings. Is it any wonder that Wall street is pulling out the stops to avoid such a catastrophe? … Their true weakness will finally reveal the abyss into which the housing market is about to plummet." [cite news | title=Bear Stearns Hedge Fund Woes Stir Worry In CDO Market|date=21 June 2007|publisher=Barrons | url=http://users2.barrons.com/lmda/do/checkLogin?mg=evo-barrons&url=http%3A%2F%2Fonline.barrons.com%2Farticle%2FON-CO-20070621-815034.html ] The "New York Times" report connects this hedge fund crisis with lax lending standards: "The crisis this week from the near collapse of two hedge funds managed by Bear Stearns stems directly from the slumping housing market and the fallout from loose lending practices that showered money on people with weak, or subprime, credit, leaving many of them struggling to stay in their homes."

In the wake of the mortgage industry meltdown, Senator Chris Dodd, Chairman of the Banking Committee held hearings in March 2007 and asked executives from the top five subprime mortgage companies to testify and explain their lending practices; Dodd said, "predatory lending practices" endangered the home ownership for millions of people.cite news |title=Top five US subprime lenders asked to testify-Dodd |first=John |last=Poirier |work=Reuters |url=http://www.reuters.com/article/bankingfinancial-SP/idUSN1930923820070320 |date=2007-03-19 |accessdate=2008-03-17 ] Moreover, Democratic senators such as Senator Charles Schumer of New York are already proposing a federal government bailout of subprime borrowers in order to save homeowners from losing their residences. Opponents of such proposal assert that government bailout of subprime borrowers is not in the best interests of the U.S. economy because it will simply set a bad precedent, create a moral hazard, and worsen the speculation problem in the housing market. Lou Ranieri of Salomon Brothers, inventor the mortgage-backed securities market in the 1970s, warned of the future impact of mortgage defaults: "This is the leading edge of the storm. … If you think this is bad, imagine what it's going to be like in the middle of the crisis." In his opinion, more than $100 billion of home loans are likely to default when the problems in the subprime industry appear in the prime mortgage markets.cite news | title=Next: The real estate market freeze|date=12 March 2007|publisher=MSN Money | url=http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/NextTheRealEstateMarketFreeze.aspx ] Fed Chairman Alan Greenspan praised the rise of the subprime mortgage industry and the tools with which it uses to assess credit-worthiness in an April 2005 speech:

Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country … With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. … Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s. ["Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country … With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. The widespread adoption of these models has reduced the costs of evaluating the creditworthiness of borrowers, and in competitive markets cost reductions tend to be passed through to borrowers. Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s." cite news |title=Remarks by Chairman Alan Greenspan, Consumer Finance At the Federal Reserve System’s Fourth Annual Community Affairs Research Conference, Washington, D.C. | author=Alan Greenspan | publisher=Federal Reserve Board |date=4 April 2005 | url=http://www.federalreserve.gov/BoardDocs/speeches/2005/20050408/default.htm ]
Because of these remarks, along with his encouragement for the use of adjustable-rate mortgages, Greenspan has been criticized for his role in the rise of the housing bubble and the subsequent problems in the mortgage industry. ["In early 2004, he urged homeowners to shift from fixed to floating rate mortgages, and in early 2005, he extolled the virtues of sub-prime borrowing—the extension of credit to unworthy borrowers. Far from the heartless central banker that is supposed to “take the punchbowl away just when the party is getting good,” Alan Greenspan turned into an unabashed cheerleader for the excesses of an increasingly asset-dependent U.S. economy. I fear history will not judge the Maestro's legacy kindly." cite news |title=The Great Unraveling | author=Stephen Roach | publisher=Morgan Stanley |date=16 March 2007 | url=http://www.morganstanley.com/views/gef/archive/2007/20070316-Fri.html ] ["Greenspan allowed the tech bubble to fester by first warning about irrational exuberance and then doing nothing about via either monetary policy or, better, proper regulation of the financial system while at the same time becoming the “cheerleader of the new economy”. And Greenspan/Bernanke allowed the housing bubble to develop in three ways of increasing importance: first, easy Fed Funds policy (but this was a minor role); second, being asleep at the wheel (together with all the banking regulators) in regulating housing lending; third, by becoming the cheerleaders of the monstrosities that were going under the name of “financial innovations” of housing finance. Specifically, Greenspan explicitly supported in public speeches the development and growth of the risky option ARMs and other exotic mortgage innovations that allowed the subprime and near-prime toxic waste to mushroom." cite news |title=Who is to Blame for the Mortgage Carnage and Coming Financial Disaster? Unregulated Free Market Fundamentalism Zealotry | author=Nouriel Roubini | publisher=RGE Monitor |date=19 March 2007 | url=http://www.rgemonitor.com/blog/roubini/184125 ]

Alt-A mortgage problems

Subprime and Alt-A (including "stated income" or "liar's loans" which are basically loans made to home buyers without the verification of borrowers' incomes; home buyers tend to overstate their incomes in order to get the loan amounts they desire to purchase their dream homes, thus called the "liar's loans") loans account for about 21 percent of loans outstanding and 39 percent of mortgages made in 2006.cite news | title=Defaults Rise in Next Level of Mortgages|date=10 April 2007|publisher=New York Times | url=http://www.nytimes.com/2007/04/10/business/10lend.html?_r=2&oref=slogin&ref=business&pagewanted=print ] In April 2007, financial problems similar to the subprime mortgages began to appear with Alt-A loans made to homeowners who were thought to be less risky. American Home Mortgage said that it would earn less and pay out a smaller dividend to its shareholders because it was being asked to buy back and write down the value of Alt-A loans made to borrowers with decent credit; causing company stocks to tumble 15.2 percent. The delinquency rate for Alt-A mortgages has been rising in 2007. In June 2007, Standard & Poor's warned that U.S. homeowners with good credit are increasingly falling behind on mortgage payments, an indication that lenders have been offering higher risk loans outside the subprime market; they said that rising late payments and defaults on Alt-A mortgages made in 2006 are "disconcerting" and delinquent borrowers appear to be "finding it increasingly difficult to refinance" or catch up on their payments.cite news | title=Alt A Loans `Disconcerting,' Jumbos Weaker, S&P Says|date=27 June 2007|publisher=Bloomberg | url=http://www.bloomberg.com/apps/news?pid=20601009&sid=aXDYv12DZNcc ] Late payments of at least 90 days and defaults on 2006 Alt-A mortgages have increased to 4.21 percent, up from 1.59 percent for 2005 mortgages and 0.81 percent for 2004, indicating that "subprime carnage is now spreading to near prime mortgages."

Foreclosure rates increase

The 30-year mortgage rates increased by more than a half a percentage point to 6.74 percent during May–June 2007 [ [http://money.cnn.com/2007/06/14/real_estate/mortgage_rates/index.htm Mortgage rates take biggest jump in nearly 4 years - Jun. 14, 2007 ] ] , affecting 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 NAR reported that supply of unsold homes is at a record 4.2 million. Goldman Sachs and Bear Stearns, respectively the world's largest securities firm and largest underwriter of mortgage-backed securities in 2006, said in June 2007 that rising foreclosures reduced their earnings and the loss of billions from bad investments in the subprime market imperiled the solvency of several hedge funds. Mark Kiesel, executive vice president of a California-based Pacific Investment Management Co. said,

It's a blood bath. … 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.cite news | title=Rate Rise Pushes Housing, Economy to `Blood Bath'|date=20 June 2007|publisher=Bloomberg | url=http://www.bloomberg.com/apps/news?pid=newsarchive&sid=adDRCBB5fqZQ ]
According to Donald Burnette of Knight Mortgage Company in Florida, one of the states hit hardest by the bursting housing bubble, the corresponding loss in equity from the drop in housing values has caused new problems. "It is keeping even borrowers with good credit and solid resourses from refinancing to better terms. Even with tighter restrictions on ALT A and the disappearance of most subprime programs, there are many borrowers who would qualify as "A" borrowers who can't qualify to refinance as they no longer have the equity in their homes that they had in 2005 or 2006. They will have to wait for the market to recover to refinance to the terms they deserve." It is foreseen, especially in California, that this process could take until 2014 or later.

Further reading

*cite book | author=Muolo, Paul; Padilla, Matthew | title=Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis | publisher=John Wiley and Sons | location=Hoboken, NJ | year=2008 | id=ISBN 978-0-470-29277-8

ee also

*Subprime mortgage crisis
*Economic crisis of 2008
*Subprime lending
*Mortgage loan
*Real estate bubble
*List of entities involved in 2007-2008 financial crises
*Economic bubble
*dot-com bubble
*Real estate pricing
*Real estate appraisal
*Real estate economics
*Real estate trends
*Creative Real Estate Investing
*Deed in lieu of foreclosure
*Foreclosure consultant
*The world housing bubble
**British property bubble
**Chinese property bubble
**Indian property bubble
**Irish property bubble
**Japanese asset price bubble
**Russian property bubble
**Spanish property bubble

References and notes

Note: Sources that are blank here can be found [http://en.wikipedia.org/w/index.php?title=United_States_housing_bubble&oldid=141765536 here] . This is a problem that is not yet fixed.

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