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Fitch: Decline May Last to '09

The managing director and lead homebuilding analyst at Fitch Ratings, Robert Curran, said during a housing teleconference that few positive signs are showing up in the housing market, which is experiencing a steep cyclical decline, and it appears the contraction will extend itself through 2008 and perhaps into 2009.

The market is seeing a modest recession, he said, resulting in tighter mortgage lending standards. There are record-levels of homes for sale and more people are experiencing foreclosure and walking away from their homes. Homebuilders are seeing above-average cancellation rates and single-family starts have dropped.

"They can't sell an existing home and borrowers can't qualify for a mortgage," said Mr. Curran. "But mortgage rates are still low at just over 6%."

The 14 years leading up to 2005 were positive years for the housing industry, he described. The declines through 2007 were similar to what happened in the late 1980s and early 1990s.

Issues such as affordability, excess supply and poor buyer psychology continue to plague today's current market. If there is a major recession, it would result in a bigger downturn, he said, even though Fitch is forecasting that things will pick up in the second half of 2008, especially with 1.7% in GED growth.

The most pressing problem is excess supply. In the past four months inventories have dropped to around 460,000. Unfortunately, he said, the amount of homes sold continues to be slim. And the amount of new homes for sale is in excess of 500,000. Home prices could fall 5%-8% in 2008.

"Lower mortgage rates and tighter lending standards are a counterbalance for new homebuyers," said Mr. Curran. "There are growing default-related losses. Fannie Mae and Freddie Mac have tightened their standards, as well as the FHA. As delinquencies and defaults rise, it could be a problem for 2008 and 2009.

The housing market saw a 32% drop in profits and revenue last year, and pressure continued in the first quarter of 2008. Late this year, Fitch expects new home sales will bottom and flatten out year-over-year. Homebuilder revenue continues to fall in 2007 and profits could drop up to 50%.

Homebuilders show quite a bit of cash and liquidity on their balance sheets, said Mr. Curran during the question-and-answer portion of the teleconference. "The cash total could increase, but we're still very much in uncertain times in the housing sector. Management is not feeling confident about where the bottom may lie. There may be additional debt that needs to be raised, which is challenging. If the bottom is in the not so distant future, they could be saddling up debt, using up liquidity, and those homebuilders wouldn't be able to fully participate in the early stages of recovery." Many U.S. REITs continue to turn to the bank term loan and mortgage markets as attractive refinancing vehicles for debt obligations despite the slowdown in the unsecured bond and CMBS markets, according to Fitch.

"Low leverage and high existing coupons contributed to many REITs' ability to refinance loans in a more restrictive lending environment," said managing director and REIT group head Steven Marks.

In his outlook, during the teleconference, he said the REIT outlook remains stable. Strong trends have begun to moderate. He said there is a slowing economy on multifamily fundamentals. Vacancies increased in the last 12 months driven by the decline in demand, which was outpaced by new supply. There is also a slowing in rental income and growth.

Homeowners are becoming renters again with a large movement back into the rental pool. Fitch expects vacancies to be at 7% near the end of 2009. Growth in the labor force is an integral part of demand in this environment, Mr. Marks said. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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