Report: Subprime woes to drag housing in ’07

updated 12:18 p.m. ET April 2, 2007

LOS ANGELES - The subprime mortgage implosion will take even more steam out of the already slowing real estate market this year and beyond, according to a new economic report.

More than two dozen subprime lenders have shut down in recent months and others are scrambling to stay in business as a spike in defaults caused by borrowers unable to make payments has rocked the mortgage industry.

Now, as lenders tighten credit standards, the housing market will likely see further declines in price and output, senior economist David Shulman wrote in the quarterly Anderson Report to be released Monday by the University of California, Los Angeles.

“We suspect the problem in the subprime area is just the tip of the iceberg for the mortgage market as a whole,” Shulman wrote. “For all practical purposes, the subprime market is in the process of shutting down.”

A tougher credit environment will limit the number of first-time home buyers entering the market and make it tougher for others to refinance their subprime loans before they face a default or foreclosure.

Shulman expects housing starts to hit 1.33 million units this year, down from a previous forecast of 1.48 million units.

“For a housing market that has already witnessed housing starts decline by 36 percent, this is not good news,” he wrote.

Still, he does not forecast a recession but only a softening of the economy.

He expects growth in the nation’s gross domestic product to range from 1.7 percent to 2.5 percent through the first nine months of the year, and to average 3.25 percent next year.

The nation’s unemployment rate will tick up from February’s 4.5 percent to 5 percent by the third quarter before beginning a gradual decline, Shulman wrote.

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