Published December 14, 2006

US housing slump seen continuing into next year
But commercial property is likely to remain strong, says top E&Y official

(NEW YORK) The US housing market is probably in for continuing hard times next year, as mortgage defaults prolong the pain, Gale Anne Reiss, Ernst & Young's global director of Real Estate, Hospitality and Construction, said on Tuesday.

Loan woes: With adjustable mortgages resetting soon to reflect today's higher mortgages, some borrowers could default on monthly payments and lose their homes

'I don't think we've seen all the slowdown there,' Ms Reiss told Reuters. But she is optimistic that commercial real estate - such as office buildings, apartment houses, warehouses and shopping - will remain strong.

During the recent housing boom that peaked last year, lenders were practically throwing money at borrowers, enabling people with questionable credit to buy homes and others to borrow beyond their means.

With adjustable mortgages resetting soon to reflect today's higher mortgages, those borrowers may find it hard to cover their monthly payments and could lose their homes.

'If you fogged a mirror, you could get a mortgage with no money down,' she said. 'Those people do not have the ability to sustain their debt coverage in this market.'

Adjustable-rate mortgages in the amount of US$1.1 trillion to US$1.5 trillion are expected to reset in 2007, according to the Mortgage Bankers Association.

There may be bad news on the way. The Mortgage Bankers Association was expected to release foreclosure-rate information yesterday. According to RealtyTrac, October saw more foreclosures than any other month this year.

Ms Reiss said both sellers and lenders must do whatever they can to move homes and troubled mortgages off the market as soon as possible if they want the market to recover sooner rather than later.

'Everything will clear,' she said of the existing inventory of homes for sale on the market. 'The question is at what price.'

For example, D.R. Horton Inc, the largest US home builder, has been slashing new home prices in order to sell off its existing inventory, she said.

On Tuesday, D.R. Horton said net sale orders in October fell 20 per cent compared with a year earlier, but moderated from the 25 per cent decline seen in the prior three months. Order cancellation rates soared to 40 per cent in October compared with 28 per cent in the fiscal year that ended in September.

D.R. Horton attributed the cancellation spike to the Arizona, California and Florida markets, where many prospective home buyers were unable to sell their existing homes.

With much of US mortgage debt placed in pools and chopped up into mortgage-backed securities, the job of selling off or working out bad loans will fall the servicer, who oversees the flow of repaid loans to the bond holders.

'If the servicers don't act with alacrity to take the product back and sell it off, that could be what could drag it (the downtown) out,' Ms Reiss said.

However, despite rapidly escalating prices in many commercial real estate markets, Ms Reiss said she does not see a bubble on the commercial side of real estate.

The key factor is that development has been relatively constrained in commercial, she said. But she warned that could change with all the flood of money chasing real estate.

'What worries me a little bit is there is a lot of debt and mezzanine money out there in addition to all the equity money available,' she said. 'At some point, when there's so much money coming out, new building starts again.' - Reuters