Editor's Note

08/30/2007 12:00 am EST


Howard Gold

Founder & President, GoldenEgg Investing

August 30, 2007

For some time, the few bulls on housing-that is, those who were slightly less gloomy than the bears-have clung to the notion that the problems were confined to the low end of the market, where losers and deadbeats took on subprime mortgages they couldn't afford.

Now, the housing market's problems may be biting well-heeled buyers of more expensive homes.

The credit crunch that started with subprime mortgages has spread to debt of all kinds-from speculative buyout deals to good old mom-and-apple-pie conventional mortgages.

On Wednesday, the Associated Press reported that sales of homes costing more than $500,000 have fallen across the country because even highly qualified buyers have had trouble getting mortgages.

The financial panic in world credit markets has dried up borrowing of all kinds, because investors who would have bought any paper they could get their hands on six weeks ago are now hiding under their beds.

That's why so-called nonconforming mortgages-mortgages of more than $417,000-can't find buyers in the secondary market. (Anything up to that is covered by Fannie Mae and Freddie Mac, the two government-sponsored home-lending enterprises.)

Banks that make those loans would have to hold them in their portfolios-something they've been loath to do since the bad old days of the savings & loan crisis. For that privilege, they're charging buyers much higher rates-not exactly an incentive to go out and buy real estate.

And these "jumbo loans" aren't just for Park Avenue cooperatives or Beverly Hills mansions. In many markets, $600,000 will buy you a decent, move-up middle-class abode. "That's a nice home in a nice neighborhood in Atlanta, Dallas, Denver or Portland, Ore.," says Mark Zandi, chief economist of Moody's Economy.com.

Let's say you're a solid citizen who can plunk down the traditional 20% down payment-or $120,000. That leaves you with a $480,000 mortgage. Sorry, Ma'am: you don't qualify.

No wonder buyers have disappeared in what were once some of the hottest markets. Florida has been hit by a housing hurricane, as this jaw-dropping report by Jeff Yastine on Tuesday's NBR shows. And the transcript doesn't do it justice: The video showed page after page of ads on Craigslist of unoccupied Miami condos for rent by desperate owners.

But hey, don't take my word for it; check it out for yourself here.

By 11:15 AM Thursday, I counted more than 350 listings of apartments and houses for rent in the Miami area for August 30th alone! And the day was just getting started.

And in the first of what are sure to be many, a luxury Miami condo conversion project at the Savoy hotel in once-trendy South Beach is facing foreclosure, Even Manhattan isn't immune. The Big Apple's super-luxury market has floated above the rest of the housing economy like a cloud over a war zone. But superbroker Dolly Lenz, who is to top-of-the-line Manhattan real estate what Michael Ovitz used to be for Hollywood, frets that even potential buyers of $25-million-plus condos are "on hold."

"It's a confidence thing," she told the AP. "They somehow feel poorer, whether they are or not."

You and I should be so poor.

And across the pond, the Financial Times reported that even in London, the center of global hedge-fund and petrodollar wealth, people are starting to worry about that market as some deals fall through and sellers begin trimming prices.

No wonder median US housing prices are expected to fall this year for the first time since the government started keeping statistics in 1950.

1950! That's when Harry Truman was in the White House, Joe Stalin still ruled the Soviet Empire with an iron fist and a high-school sophomore named Elvis worked as an usher at the Loew's State theater in Memphis, Tenn.-and practiced his guitar in his spare time.

How much can housing prices fall? Mark Zandi is looking for a 10% drop nationwide and as much as a 25% decline from peak to trough in once-white-hot markets in California, Florida and the Northeast. He expects the market to bottom out in late 2008 or early 2009. (Uberbears like Gary Shilling expect it to get much worse.)

In fact, Zandi's getting worried that the housing crisis and credit crunch may badly weaken the overall economy.

"I think the economy is very fragile," he says. "There's a high probability of recession if the Fed doesn't cut rates."

He thinks it will cut the federal funds rate by at least 50 basis points at upcoming meetings. So do I, which is one reason why I'm still bullish, albeit a bit more nervous than before.

And although everyone is denying it, I wouldn't be surprised to see Fannie and Freddie raise their limits on conforming loans to open the credit spigot a bit wider. Nor would it shock me to see Democrats and Republicans in Washington extend some relief to borrowers whose adjustable-rate mortgages are about to reset a lot higher. 

I said last week that the cavalry came to the rescue when the Federal Reserve announced its cut in the discount rate a couple of weeks ago. It may be time for Ben Bernanke & Co. to bring in the heavy artillery and cut the fed funds rate, too. If they don't, as I've also warned, all bets are off.

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Howard R. Gold is editor-in-chief of MoneyShow.com. The opinions expressed here are his own and do not necessarily reflect the views of InterShow.

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