Unknowns

What we know: Delinquencies and foreclosures in subprime loans are rattling Wall Street this week.
What we don't know: What does that mean for housing markets?

What we know: Houses have become unaffordable in many markets.
What we don't know: Do housing prices have to fall before sales pick up, or if interest rates stay low and incomes rise, will buyers be able to continue to use ARM loans and other "affordability" loans to get their foot in the door?

What we know: Inventories remain high.
What we don't know: Is this mostly a psychological thing, where buyers are just waiting for the market to bottom out? If that's the case (as NAR would have it) there's pent up demand being created as we speak. Or are things even worse than they look, because many people aren't even bothering to list second homes and investment properties right now, and foreclosures are likely to push inventories up further?

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What we know: Delinquencies and foreclosures in subprime loans are rattling Wall Street this week.
What we don't know: What does that mean for housing markets?

Standard & Poor's, Fitch Ratings and Moody's Investors Service all downgraded or warned they will soon downgrade billions in mortgage-backed securities backed by subprime loans. Although the securities only represent about 1 percent of those rated by the agencies, this could just be the first of a wave of downgrades.

In his latest Inman News column, mortgage broker Lou Barnes says "the outcome for the other 99 percent is sure as sunrise." Ratings downgrades will force institutional investors to recognize their losses in these investments and sell them, depressing their values further.

If that's the case, lenders -- who have already tightened up underwriting standards for subprime loans -- may no longer be able to get money to make loans like these at any price.

Barnes doesn't see a disastrous impact on prices in "Bubble Zones" where prices appreciated most rapidly, but says flat prices will produce "vastly more" foreclosures in those areas than previously thought. Expect  will "increase for at least the next three years," he predicts, adding that "announcements of bottom in 2008 are fantasy-based."

What we know: Houses have become unaffordable in many markets.
What we don't know: Do housing prices have to fall before people can afford them and sales pick up, or if interest rates stay low while incomes rise, will buyers be able to continue to use ARM loans and other "affordability" loans to get their foot in the door?

In a conference call this week, Standard & Poor's chief economist David Weiss noted that home prices have hit record levels -- both in absolute terms, and relative to income. "The average home reached 3.4 times average household income in 2006," Weiss said. "That's affordable at a 5 percent mortgage. It's not clear that it's affordable at a 7 percent mortgage. We expect that ratio to return more to normal, which is 2.6. That implies continued drop in home prices. Assuming we get a continued rise in average incomes, that should get us back to a reasonably normal ratio over the course of the next two years." Listen to conference call here until Aug. 7.

What we know: Inventories are up.
What we don't know: Is this mostly a psychological thing, where buyers are just waiting for the market to bottom out? If that's the case (as NAR would have it) there's pent up demand being created as we speak. Or are things even worse than they look, because many people aren't even bothering to list second homes and investment properties right now, and foreclosures are likely to push inventories up further?

In their latest report on new-home construction and the home-building industry, analysts at Fitch Ratings say that negative psychology "seems to have become pervasive. The expectation or fear is that home prices have peaked and buying now would be a
mistake. The psychology applies to most types of buyers but especially
applies to trade-up and second home buyers. "

But excess supply "continues to be the most troubling issue" Fitch analysts say. And there's been some discussion as to whether the situation might be even more troublesome than statistics suggest.

When you consider the homes that builders are stuck with because of sales cancellations, and the fact that there are a lot more vacant (existing) homes for sale, the Census Bureau's inventory numbers may be understated, Fitch analysts believe.

Record single-family rental vacancy rates may indicate investors are biding their time
before putting single-family homes back on the market. It's hard to forecast how many single-family rental units will end up for sale, "but they will have an impact on the market," Fitch warns. And don't forget about competition from multifamily condos, where the number of vacant for-sale units is up even more dramatically.

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