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Tuesday, 12 June, 2001, 20:20 GMT 21:20 UK
Worrying times for US homeowners
House in the US
Americans, who have opted recently for larger homes, now face having to pay for them in a slowing economy.
By BBC News Online's North America Business Reporter, David Schepp

A recent drop in mortgage delinquencies in the US may be a small blip in an otherwise worrying trend that shows more Americans falling behind on housing payments.

A strong economy in the late 1990s caused home ownership rates to rise to a record 67.5% at the beginning of 2000, up from 64.7% in 1995, according to the Department of Housing and Urban Development (HUD).

With the rise, more first-time homeowners are now facing the possibility of not making their mortgage payments as a cooling US economy causes layoffs and reduces overtime pay for some workers.

Over the past year, a growing number of homeowners are failing to keep up with on-time payments to their mortgage lenders, a report in Tuesday editions of the New York Times suggests.

Energy prices subsided

That article comes on the heels of a report released on Monday by the Mortgage Bankers Association of America (MBAA), an industry trade group, showing delinquency rates fell for the first time in a year during the first three months of 2001.

"In the first quarter, we see some levelling off of delinquencies as energy prices have subsided and low interest rates have sparked a mortgage origination and refinance wave," said Douglas G Duncan, the MBAA's chief economist.

The MBAA's latest National Delinquency Survey shows the delinquency rate for loans for certain residential properties fell to 4.4% in the first quarter.

The drop in delinquencies was the first decrease in four quarters, the Washington, DC-based firm said in a press release.

Rising rates

But the rate is still far higher than it was for the year-ago period, which stood at 3.7%. And while the survey suggests delinquencies are falling, the opposite is true for foreclosures, which rose to nearly 1% of all home loans.

The rate was even higher for those backed by the Federal Housing Association (FHA), a agency of the federal government that backs home loans to low- and moderate-income as well as first-time homebuyers.

What has housing analysts more concerned, however, is rising numbers of moderate-income homeowners whose loan payments have been more than 30 days late.

That rate rose to more than 10% in the last three months of 2000 for homebuyers in a popular government-backed mortgage programme.

Economists warn that the massive levels of debt Americans have taken on in recent years, along with falling savings rates, could spell doom for the US economy should it actually enter recession.

As the effects of a worsening economy affect more Americans in the form of layoffs or other cutbacks, more and more homeowners could find themselves unable to pay not just mortgage loans, but car loans and credit card bills, too.

Waning housing market

The nation's housing market remained strong for the first three months of 2001 - one of the few bright spots in an otherwise flagging economy.

In recent months, however, it has shown signs of weakening, too. Sales of existing homes fell 4.2% in April, suggesting housing activity may have peaked in March, according to David Lereah, chief economist at the National Association of Realtors.

And the government reported that new-home sales fell 9.5% in April, the sharpest slowing in four years.

"The housing and home sales numbers slipped in April but from unsustainable paces," said David Berson, chief economist at Fannie Mae, a quasi-government agency that buys mortgages from other lenders.

The US central bank, the Federal Reserve, in recent months has drastically dropped interest rates in the hopes of spurring demand for big-ticket items, such as cars and houses.

Some analysts say, however, that dropping interest rates may not be enough to lure homebuyers during a weakening economy, which will give consumers pause before taking on big debts.

"We expect income growth to remain sluggish because the economy is slowing," says Jay Bryson, global economist at First Union. "So people are going to forego buying that new house."

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08 Jun 01 | Americas
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