Scary math: More homes, fewer buyers

NEW YORK (CNNMoney.com) -- Subprime lenders are already getting crushed, but the impact rising mortgage delinquencies will have on home prices overall is still an open question.

At a minimum, it means financing is drying up for those with less-than-perfect credit and that spells fewer home buyers.

And foreclosed properties will add supply to a housing market that already has too much.

"It's going to be a really big deal," says Dean Baker, co-director of the Center for Economic and Policy Research.

"[National] inventory is 20 percent higher than last year, vacancy rates have soared and prices are down about 3 percent," he says. "Now, with the tightening of credit, I don't see how prices don't fall another 5, 6 or 7 percent."

The tightening of credit could take as many as one million buyers out of the market, says Baker, citing Bear Stearns research. "Even if you cut that in half, say to 400,000 or 500,000, that's huge."

Mark Zandi, chief economist for Moody's Economy.com, is also concerned. "I think the subprime problems will take housing activity to a whole other level," he says.

Zandi is projecting a doubling of subprime defaults this year to 800,000. "Those homes will go on the market at a discount and will weigh on the market," he says. He also believes that 500,000 fewer Americans will be able to obtain financing because of the tighter standards.

All that has led Zandi to alter his projection of a 3 percent decline in housing prices this year to a mid-single digit decline. The hardest hit areas, which he thinks will be Arizona, Nevada, parts of California and Florida, will absorb high single digit or even double-digit punches.

Not everyone paints as bleak a picture. "We don't know how many subprime mortgage holders will actually default," says Christopher Mayer, an economist at Columbia University. "Banks are working with borrowers [so they can keep their homes]. Plus, there's plenty of liquidity around for people looking for mortgage loans."

That's not to say he sees everything as hunkey-dorey. Mayer thinks values in speculative markets had gotten way ahead of fundamentals and that weak local economies in the Midwest will depress values there.

The extent of the subprime delinquency problem is disputed. According to a report from the Center for Responsible Lending (CRL), about 1 in 5 of the subprime loans written in the past two years will go into default, costing 1.1 million their homes and unleashing a flood of foreclosed homes on the market.

But Doug Duncan, chief economist of the Mortgage Bankers Association, thinks CRL is overly pessimistic, noting that defaults for subprime mortgages have never exceeded 10 percent in any given year.

And he argues that most of the loans written before mid-2005 are unlikely to fail because they are already out of the danger zone - they've either reset with their borrowers continuing to pay them off or the increased housing values that accompanied the boom have boosted home equity enough so that owners have comfortable cushions.

More significant than defaults may be the impact of credit tightening.

"Banks have become much more cautious. Lenders are tightening, not just subprimes, but Alt-As (not quite prime) loans and primes as well," says Ellen Bitton, founder of the Park Avenue Mortgage Group.

Lawrence Yun, an economist with the National Association of Realtors, which tends to have an optimistic view of home markets, is projecting the number of potential homebuyers unable to obtain financing because of the subprime crisis will average about 20,000 a quarter.

Defaults, he believes, will come to perhaps one-half of one percent of mortgage holders, perhaps 200,000 homeowners. NAR's position is that the impact on prices will be only slight.

"Unlike the last housing crisis in the early 1990s, the economy is very sound; people are getting jobs, not losing jobs," says Yun.

Baker, perhaps the most pessimistic of the prognosticators (he is someone who sold his Washington, D.C. home a couple of years ago in anticipation of it falling in value), saves most of his concern for the markets that had the most speculation - Las Vegas, Arizona and parts of Florida. Meanwhile New York, Boston, and coastal California, and even D.C. should hold up OK, he says. Latest home prices

Is this the subprime apocalypse? (Or is it just a scary story?)

Subprime: The risk to Wall Street