Subprime Shakeout Will Erode New Home Sales - Analyst

According to a research report released yesterday by Credit Suisse analyst Ivy Zelman, the rapid decline of the subprime mortgage industry will lead to yet another drop in new home sales in 2007. Zelman says the current trend of credit tightening for risky borrowers will make it harder for many buyers to get financing, leading to a 20% drop in sales to about 890,000. While entry-level buyers make up the bulk of subprime loan candidates, Zelman says credit tightening will affect "the entire housing food chain," because a lack of entry-level buyers makes it harder for second-tier buyers to upgrade their homes. Zelman, whose research comes largely from surveys with homebuilders and mortgage originators, expects rising mortgage delinquencies to further flood the market with houses as current owners lose their homes, adding as much as 20% to existing inventory. "We are more confident that expectations for a 2007 rebound in demand are premature," Zelman wrote. Homebuilder stocks fell 4.1% yesterday, their biggest decline since Aug. 2006.

Sources: Wall Street Journal, Bloomberg
Commentary: Toll : Housing Slump Almost Done; Horton : Not So Fast • January New Home Sales Plummet 16.6% • Why There's No Such Thing As a Housing Bubble
Stocks/ETFs to watch: Lennar Corp. (LEN), D.R. Horton Inc. (DHI), Centex Corp. (CTX), KB Home (KBH), Hovnanian Enterprises Inc. (HOV), Toll Brothers Inc. (TOL). ETFs: streetTRACKS SPDR Homebuilders ETF (XHB), iShares Dow Jones US Home Construction (ITB)

Seeking Alpha's news briefs are combined into a pre-market summary called Wall Street Breakfast. Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.