The New Money Pit

Americans who were living high by taking out home-equity loans during the boom have watched their equity drop, and are now faint of heart when it comes to big-ticket discretionary purchases. The National Marine Manufacturers Association said it expects pleasure-boat sales, down 6 percent in 2006, to fall 10 percent more in 2007, largely due to the housing woes. Boatarama in Ft. Lauderdale, Fla., had to consolidate from four locations to one, and it now sells only used boats. Brunswick Corp., which makes Sea Ray boats, said in July that it was slashing production due to the housing situation “in Florida and California, which are two of the nation’s largest boating markets.”

The nation’s biggest retailing sector—automobiles—is likewise feeling the effects. In July, auto sales were down 12 percent from the year before. When CNW Research asked consumers who were putting off plans to buy new cars why they were doing so, 17.6 percent cited housing issues like falling home equity or rising mortgage payments. That compares with just 2.3 percent in 2005. John Crane, general sales manager at Ron Smith Buick Pontiac GMC Jeep in Merced, Calif., a farming community of 80,000 that has experienced an influx of Bay Area refugees, has seen a tremendous slowdown in the past six to eight months. “People don’t have the money to look at cars,” he says. “They’re having a hard time paying house payments. Now their second mortgages and 1 percent loans are coming up.”

Which brings up another problem. Roughly $370 billion in adjustable-rate mortgages will reset this year, according to First American CoreLogic, and millions of Americans will have to pay significantly more per month just to stay in the same home. Mark Zandi, chief economist for Moody’s Economy.com, says that in the peak month of October 2007, some $50 billion worth of mortgages will reset at higher rates. Meanwhile, new mortgages are getting harder to come by, and not just for borrowers with subprime credit. Freaked-out lenders are ratcheting up requirements for minimum-credit scores and down payments. Kim Dicce, a Realtor in Tampa, where housing inventory is piling up, notes that lenders now seem to be requiring buyers in her area to put 15 to 20 percent down and have a credit score above 700. “Now we only have one third of the eligible buyers that we had before, and five times as many houses.” Higher-income earners with good credit haven’t been spared, as chastened lenders focus on making loans that they can quickly sell to Fannie Mae and Freddie Mac, which buy mortgages only up to $417,000. Rates on 30-year fixed jumbo loans have risen in the past month from 6.625 percent to about 7.5 percent, says Michael Daversa, president of Atlantic National Mortgage, a mortgage broker in Westport, Conn. On a $500,000 mortgage, that’s an extra $4,375 per year in interest—a 13 percent increase.

It’s difficult to project where all this will lead. As was the case in the tech boom, seers and prognosticators have been proved wrong time and again. Some markets are holding up just fine, especially in so-called superstar cities like New York and San Francisco. But unlike stocks, which can fall 20 percent in a day, housing markets take longer to correct. Shiller notes that after the 1980s housing boom, housing prices fell in real terms (i.e., adjusted for inflation) by 20 percent from 1989 to 1996. “This time I think it could be worse, because it was a bigger boom,” he says. “And look at the apparent confidence problem that we’re seeing right now.”

Confidence is indeed in short supply. Robert Toll, founder and CEO of Horsham, Pa.-based home builder Toll Brothers, was one of the avatars of the boom. In 2005, Toll, whose company specializes in building high-end homes in the suburbs, prophesied in a New York Times Magazine cover story of a day when middle managers might pay $4 million for a home in the distant New Jersey burbs of Philadelphia or New York. But on a conference call with investors last week, Toll glumly declined to call a bottom. “This past week was the worst week for traffic in our history,” he said.

All of which means those houses outside Las Vegas—and those auto showrooms in Merced—could stay empty for a while. That’s probably not what the developers in Henderson had in mind when they named the street Solitude Point Avenue.