As reported by Bloomberg today U.S. Homebuilder Confidence Drops to 16-Year Low as Housing Slump Persists. This is all consistent with all the other indicators coming from the housing market showing that the housing recession is getting worse: falling home sales, falling starts and permits, rising cancellation rates, increased supply of unsold new and existing homes, falling home prices, rising defaults on mortgages.

Even the usually optimistic NAR has had to repeatedly revise downwards its forecasts for 2007 sales and is now expecting - as many others do - a year over year fall in home prices, the first time that such a fall has occurred since the Great Depression. At this point the issue is not whether home prices will fall this year. The only issue is how much they will fall.

There are at least four factors that will increase the excess supply of new and existing homes this year and next and lead to even lower home prices.

First, the credit crunch in the subprime market will reduce the demand of new homes by potential subprime borrowers. Goldman Sachs estimated this effect to be as large as 200k less new homes sold this year.

Second, about  $1.5 trillion of ARM will be reset this year and next: a rising fraction of these borrowers will be unable to afford the much higher rates on their mortgages and will be forced to sell their homes.

Third, it takes about six months or so for a subprime mortgage deliquency to lead to foreclosure, and the bank taking over the home and then putting it on sale in the market; once that occurs, the supply of homes in the market will increase. Some forebearance will occur but many homes will end up in foreclosure and then sold by the creditors adding to the housing supply glut.

Fourth, folks who bought homes in the last two years for speculative reasons with little equity (the condo flippers) will sell their homes as rapidly as possible as now falling home prices are wiping out the little equity they did have in these homes.

In summary, all four factors will increase the excess supply of unsold new and existing homes and will push further downward home prices. The housing carnage will get much worse before it gets any better.

And the financial fallout of this subprime - and now near prime - mortgage meltdown is only beginning to show its effects in financial markets: not just in the RMBSs, CDOs,  TABX and the ABX markets; but increasingly in commercial real estate and corporate risk spreads as the recent market performance of the CMBX, LCDX, CDX, ITRAXX indices shows. Certainly the contagion to the LBO loan financing market is already clear.

Here is the Bloomberg story on the falling NAHB confidence index: 

July 17 (Bloomberg) -- Confidence among U.S. homebuilders fell this month to the lowest level in 16 years, signaling the housing market continues to tumble.

The National Association of Home Builders/Wells Fargo sentiment index declined to 24 this month, the lowest since January 1991, from 28 in June, the Washington-based association said today. Readings less than 50 mean most respondents view conditions as poor.

Builders are pulling back on construction of new homes as inventories remain high as sales haven't recovered. Housing probably will be a drag on economic growth the rest of this year, economists said.

``We do not look for a recovery of any magnitude in sales and starts for quite some time,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York.

Economists forecast the index would drop to 27, according to the median of 38 projections in a Bloomberg News survey. Estimates ranged from 26 to 29.

Builders in the survey are asked whether sales are ``good,'' ``fair'' or ``poor'' and to gauge prospective buyers' traffic.

The group's measure of single-family home sales fell to 24, from 29. The index of traffic of prospective buyers dropped to 19, from 22. A gauge of expectations for the next six months declined to 34, from 39.

`Correction Process'

``The single-family housing market is still in a correction process,'' said David Seiders, chief economist of the builders' group, in a statement. ``Builders are actively trimming prices and offering buyer incentives to work down their inventories.''

The National Association of Realtors, on July 11, reduced its sales forecast for this year for a seventh straight month and projected that purchases of single-family homes will probably fall in 2008 to their lowest level since 1995.

The supply of new homes for sale at the current purchase pace reached the highest level in 16 years in March and has stayed elevated in recent months, according to figures from the Commerce Department. That has caused builders to cut prices, increase incentives and halt new projects.

D.R. Horton Inc., the second-largest U.S. homebuilder, said July 10 that it will report a third-quarter loss after orders plunged 40 percent. The company took 8,559 orders in the fiscal quarter, compared with 14,316 in the year earlier period, and the cancellation rate was 38 percent.

`Challenging' Environment

``We expect the housing environment to remain challenging,'' Chairman Donald Horton said in a statement.

While construction continues to decline in coming quarters, housing's negative impact on economic growth may wane, economists said. Federal Reserve Bank of San Francisco President Janet Yellen said on July 12 that ``as housing's negative effect eases up,'' the pace of economic growth may ``pick up a bit in 2007.''

Residential investment has subtracted from economic growth every quarter since the last three months of 2005. Spending on home-construction projects fell at a 15.8 percent annual rate last quarter and subtracted 0.9 percentage point from gross domestic product.