Subprime, rates to delay home rebound

By Julie Haviv

NEW YORK (Reuters) - Stress in the subprime mortgage market and sharply higher mortgage rates have thrown a wrench into any budding recovery in the U.S. housing market, Moody's Economy.com's chief economist said on Monday.

"Affordability instead of improving is now eroding because of higher rates and more restrictive lending standards," Mark Zandi said at the Reuters Real Estate Summit in New York. The summit is also being held in London and Singapore concurrently.

Zandi, over the course of just a few weeks, has become more pessimistic about housing finding its footing any time soon.

"We are a bit more negative given the run-up in mortgage rates and I do expect home prices to keep declining until about this time next year," he said. "Sales will bottom out in the second and third quarter, but that assumes sellers are cutting prices."

Long-term Treasury yields, which are linked to mortgage rates, have risen sharply this month on concerns that central banks around the world may keep raising interest rates. Yields move inversely to price.

Mortgage finance company Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) said interest rates on U.S. 30-year mortgages fell to 6.69 percent for the week ended June 21, ending an upward gallop that began May 17. Rates, however, were significantly higher than in May, when they averaged 6.26 percent.

Zandi has postponed his expectation of a bottom in construction until early next year, instead of the second half of this year, a forecast he made just last month in the company's Single-Family Housing Market Monitor research publication.

"Builders are a bit slower to respond than I expected, so we should see declines through early 2008," he said.  Continued...