Housing Prices Heading Lower

John Maudlin, the investor and newsletter writer, has a good post on the woes in the sub-prime mortgage market at www.frontlinethoughts.com/index.asp. He has a link to a fascinating in-depth study of the current housing downturn and mortgage problems by equity research analysts at Credit Suisse. The 67 page report is bearish, and rightly so. It's worth reading at www.billcara.com/CS%20Mar%2012%202007%20Mortgage%20and%20Housing.pdf

One aspect of their analysis I'd like to highlight: At a time when much of the focus is on the subprime market implosion and the overall tightening of credit standards, rising foreclosures and delinquencies will have impact the supply side of the market. The analysts "are of the opinion that there is a real threat of 'pent-up supply' that will hit the market in the next six-to-twelve months as a result of the lax underwriting standards of recent years."

For instance, they estimate that there are approximately 565,000 homes in foreclosure process around the country, and 135,000 that are already listed or on the verge of being listed as must-sells. To put those figures in perspective, they note that the National Association of Realtors reported existing inventory of 3.55 million units in January, implying that total inventory may be 20% understated when taking foreclosures into account. Ouch.

Housing prices are heading lower, much lower. So far, the price drops in major metropolitan areas has been muted, with Detroit and Boston showing the biggest prices declines, over 5% each. But that's only a taste of what will unfold in coming months.