Haunted housing

With each passing month, it's looking more and more like the housing market may go the way of the stock market earlier this decade. It just may take longer.

The Commerce Department reported last week that housing starts in April fell 7.4 percent, the third straight monthly decline after a record high in January. Housing permits also fell, suggesting that the downward trend in housing starts will continue.

Even more alarming are reports in some parts of the country that default notices are on the rise, an indication that higher interest rates are catching up to homebuyers who took out adjustable-rate mortgages (ARMs) over the past few years. A default notice goes out to anyone who misses a mortgage payment and is generally the first step toward foreclosure.

DataQuick Information Systems, a real-estate research firm, reports that default notices in California were up 29 percent over the first quarter last year. In San Diego, where over two-thirds of mortgages have adjustable rates, they were up 60 percent. The overall numbers of default notices are still relatively small-18,668 in California-but some analysts expect them, along with foreclosures, to continue rising over the next two years, as home loans worth about $2 trillion are scheduled to have their interest rates increase.

Brian Bartlett of RE/MAX Southeast said homebuyers with popular interest-only ARMs (see "ARMs have legs," Nov. 26, 2005) were playing "mortgage roulette." Whether they realized it or not, they were making a massive gamble that interest rates would remain at historic lows for years to come. "Either buyers were not informed by the mortgage broker," he told the Rocky Mountain News, "or all they chose to hear was the answer to the following question: What is my initial monthly payment?"

If the latest housing reports have any silver lining, it's that the slowdown appears to be regional, with housing starts actually increasing last month in the Midwest and the Northeast. This would seem to confirm former Federal Reserve chairman Alan Greenspan's comment that the housing market has "froth": local bubbles in certain areas but no large national bubble.

It also looks like the overall economy may be healthy enough to withstand some cooling in the housing market, as long as the cooling does not turn into a freeze. Capital investment is increasing rapidly, and the economy grew at a robust annual rate of 4.8 percent during the first quarter. "The economy is strong and has been strong for the last several years," Mark Vitner, senior economist at Wachovia Corp., told MSNBC. "It's hard for me to see an overall slowdown."