A good reason for markets to be nervous

Forget about China or the pronouncements of Alan Greenspan: The new home sales numbers are the real economic story of the day.

Published February 28, 2007 7:50PM (EST)

Where is David Lereah? The always-look-on-the-bright-side chief economist of the National Association of Realtors got a fair amount of media play yesterday, when he used a mild monthly bump-up in existing home sales to declare that the bottom of the housing market had been reached last September. But today, with new home sales going off the cliff (in the West, new home sales in January were 50 percent lower than a year ago!), he's nowhere to be seen.

One reason is that the existing home sales data was released by Lereah's trade group, while the new home sales numbers come straight from the Commerce Department. But if I were him, I wouldn't be taking calls today, because any way you cut it, today's new home sales numbers, in conjunction with last week's housing start figures, are bad news for those looking for a rebound. If it weren't for Tuesday's stock market plunge, the 16.6 percent monthly drop in new home sales would likely be the lead economic story. Not least because the numbers add fuel to the already blazing debate about whether troubles in the subprime lending industry are going to move into broader territory.

So while the Dow Jones Industrial Average hovers about 55 points above its close on Tuesday (as of about 12 noon PST), let's take a closer look at the housing story. Some analysts, like Bloomberg's Caroline Baum, are already suggesting that risky business is set to spread from the subprime sector (where, by definition, we expect defaults to happen) to more reputable corners of the lending industry. In her column today, Baum writes that stress is spreading from subprime loans to what are known as "Alt-A" loans -- mortgage loans made to borrowers who have good credit ratings but don't want to provide complete documentation on their income and assets.

Baum reports:

It should come as no surprise that the distress is spreading beyond the subprime market to "Alt-A'' loans, according to Andy Laperriere, managing director at the ISI Group in Washington.

"The risky characteristics of Alt-A loans are eerily similar to subprime loans and are likely to experience larger-than-expected losses,'' Laperriere writes in a Feb. 26 report to clients...

Data from First AmericanLoanPerformance, a mortgage research firm in San Francisco, bear out Laperriere's suspicions. The more recent Alt-A adjustable rate mortgages -- those originated in the 12 months through December -- are performing worse than loans of similar age in recent years. The 3.1 percent delinquency rate for the 12 months ended December is the worst since 2000, according to Mark Carrington, director of analytical sales and support at the company.

Similarly, wide play is being given on the housing beat to a quote from Charles Sorrentino, mortgage analyst at Merrill Lynch, who told the Financial Times earlier this week that "The delinquency numbers for the 2006 Alt-A originations are materially worse than a lot of people would have expected."

So, loans made to home buyers who are technically considered to have good credit (but are shy about proving it) are now getting into trouble. Who's next? Homeowners who can prove their credit worthiness, and have had no problem paying down their mortgages for years? Are they in line for foreclosure?

The consensus view of most economists is that they aren't, yet, although there are some voluble pessimists, notably RGE Monitor's Nouriel Roubini.

But today's housing numbers must be encouraging at least a few observers to question previous assumptions, and might be preventing the Dow from bouncing back more vigorously. A serious plunge in new home sales means there will be significant pressure on home prices for some time to come. At the very least, it will be harder for homeowners to refinance.

So while we wait to see where the markets are headed, let's not forget to keep a close eye on mortgage default rates. If you're looking for reasons to be nervous, that's your No. 1 option.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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