PHILADELPHIA — We have yet to see the bottom of the current housing downturn, and the recovery will be slow and steady and heavily dependant on local economic conditions, affordability factors and level of exposure to poorly performing subprime loans, economists told a group of real estate reporters last week.

The recovery will take longer than first anticipated, said Bernard Markstein, vice president of forecasting and analysis for the National Association of Home Builders. Many analysts and observers previously were expecting housing markets to perk up later this year, he said, but then the subprime market began showing signs of weakness in early 2007.

“We’re not going back to a party, but rather a nice simple diet of bread and some chicken broth,” he said.

Markstein and others expect the market to reach bottom some time this fall.

Unlike past downturns, mortgage rates are not the problem, he said. Average rates on 30-year fixed-rate mortgages are around 6.4 percent, which is only about 1 percent above last year’s rates. That compares to double-digit interest rates during the downturn of 1991.

Markstein said rates aren’t expected to rise dramatically over the next few years.

Overbuilding and affordability problems have caused much of the downward fall, according to Markstein, who noted that housing starts were rising as the NAHB’s index gauging builder confidence was falling.

“We were concerned about that and thinking, ‘Is this index correct?’ Well, it was correct with a vengeance,” he said.

Cancellation rates at home-building companies have doubled in the past year — from about 4 percent to nearly 9 percent — and remain high, Markstein said. Cancellations often occur because of a death in the family, job loss or divorce, and the analyst said the spike may have been caused by a tightening in lending standards associated with the subprime market fallout.

“When (buyers) signed that contract, they went through the preapproval process,” he said. But that may have been several months ago and lending standards have changed for many lenders since then, and “people who thought they qualified no longer qualify,” he said.

“Fallout from the subprime market is a huge concern,” Markstein said, and the NAHB is for tightening lending in that end of the market. However, tightened lending has seeped into the prime market where there was no problem with loans, he said, and that is affecting demand.

Doug Duncan, chief economist for the Mortgage Bankers Association trade group, pointed to past lending cycles to look at what’s happening in today’s market. He noted that adjustable-rate mortgage booms generally always come before refinance booms, and the pattern follows. What was different about the most recent cycle, he said, was the availability of global capital from foreign investors.

The adjustable-rate mortgage share of loan applications started falling in mid-2006, Duncan said, and plummeted in the first quarter of 2007. That was expected, given the situation in the subprime market, he said, though the ARM share includes prime mortgages as well.

Duncan noted that ARM shares are higher in Pacific coastal states than in the Midwest and Northeast because housing affordability is more of an issue in those states.

The interest-only mortgage share of loan applications also fell significantly in March from January at the national level, he said.

The economist expects a 30 percent reduction in subprime origination volume this year as investors tighten standards for buying mortgages in the secondary market. Duncan also discussed an overall trend in lenders tightening credit availability on all loans this year, with the majority focusing on subprime. The MBA conducted a survey of lenders and found that 58 percent of those surveyed said they plan to tighten credit on subprime loans; 45 percent said they plan to tighten credit on nontraditional loan products; and 15 percent said they will tighten credit on prime loans.

To put the subprime situation into context, Duncan noted that of the 65 percent of homeowners who have a mortgage, 5.1 percent have a subprime adjustable loan. With roughly 70 million homeowners in the United States, that would mean that about 2.49 million people have a subprime adjustable loan.

Frank Nothaft, chief economist for mortgage finance giant Freddie Mac, said that 55 percent of the homes that entered foreclosure in the second half of 2006 had subprime mortgages. Nothaft showed a chart of the explosive growth in subprime loans over the last five years, with subprime accounting for about 8 percent of total single-family loan originations in 2001 and quadrupling to about one-third of originations by 2006.

Much of the subprime lending was concentrated in high-cost markets, he said.

Nothaft agreed with other economists that the market has not hit bottom yet. “I think we’re a good six months away from truly being at the trough,” he said, adding that home starts and sales nationwide will likely bottom out and then gradually increase. “They’re not going to bolt up though. We’re in for a gradual recovery.”

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