Sales of homes fell for the eighth continuous month in October 2007, as more properties came on the US housing market, driving the supply of homes up for sale to the highest level in 22 years, the National Association of Realtors (NAR) reported on Wednesday 28 November.

Consider the data:

•  Sales are down 20.7 per cent in the past year, and 31 per cent down from the peak of 7.21 million, two years ago.
•  The October 2007 sales pace was stronger than the 4.85 million expected by economists.
•  Notwithstanding this, the inventory of unsold homes rose by 1.9 per cent to 4.45 million, representing a 10.8-month supply, the highest in eight years.
•  For unsold single-family homes, the inventory of 10.5 months is the highest since July 1985.
•  The median sales price fell 5.1 per cent in the past year to $207,800. That''''s the largest year-over-year price decline ever recorded.

Seasonally adjusted sales dropped 1.2 per cent to an annualised pace of 4.97 million last month. The sales pace stands at the lowest seen since 1999, when the NAR began tracking combined sales of single-family homes and condominiums.

How much lower?
Bleak as the data is, the fundamentals of the market don''''t support a further decline in sales, says NAR chief economist Lawrence Yun. He feels low mortgage rates and job growth should keep sales from falling, since the sub-prime mortgage market has disappeared and the Federal Housing Administration is picking up its lending.

But that may just be wishful thinking. The NAR didn''''t anticipate the sales declines of the past two years, and it''''s been predicting a bottom nearly every month since early 2006. It''s the NAR''s considered view that if sales do continue to fall, it''s because of negative market psychology aided by ''sensationalised'' news reporting.

The group does admit, though, that it would be a ''''major concern'''' if home prices kept falling, and ''''would raise the risk of an economic recession''''. Analysts who take a more objective view feel that prices and sales of housing will hit bottom in mid-2008. The problem is that they also feel that between now and then, home sales may drop more than 10 per cent from the current abysmal levels.

Plunging numbers
October sales fell 4.4 per cent in the western US, where sales have plunged 33 per cent in the past year and are down 48 per cent from their peak. The seizure of the jumbo mortgage market was a major factor in the sales slump in the west.

Sales dropped 1.7 per cent in the Midwest and were virtually unchanged in the South and Northeast. Sales of single-family homes were flat in October at a 4.37 million pace, matching September for the lowest level since January 1998. Sales of condos fell 9.1 per cent to a 600,000 annual rate.

The median sales price for single-family homes is down a record 6.3 per cent in the past year to $205,700. The median sales price of condos, though, rose 4.9 per cent on a year-over-year basis to $223,500.

Write-off worries
How much more pain is to be revealed in the sub-prime crisis? What analysts are saying is that if Wells Fargo & Co - universally regarded as a prudent mortgage lender - had to take a $1.4 billion charge for home equity loans that comprise a minuscule percentage of its total loan portfolio, how will its more profligate rivals have to finally write off?

The Wells Fargo write-off, which covered $11.9 billion of home equity loans the bank thought were most at risk, shows how the US housing crisis has spread well beyond ''proper'' sub-prime mortgages to home loans that were once regarded as relatively safe.

It raises the spectre that much more pain is in store for lenders with significant home equity exposure, particularly on those loans that were meant to cover most or all of the property value.

These higher loan-to-value (LTV) loans now carry a much higher risk profile, say analysts. Borrowers are defaulting in large numbers and, because they had little of their own money invested, lenders are on the spot.

Financial companies have already announced some $50 billion of mortgage-related write-downs after the housing decline caused a summer freeze in global credit markets.

Third-quarter losses at federally insured banks and thrifts more than doubled from a year earlier to $16.6 billion, a 20-year high. This pushed overall profits down 25 per cent to $28.7 billion, the lowest since the fourth quarter of 2002.

Second thoughts on liens
Home equity loans are generally ''second liens'', which means that providers get paid after borrowers pay their primary lenders. These loans let people with good credit histories borrow against their homes to fund home repairs, or pay off higher-cost credit card debt. The typical rate on a $30,000 home equity loan is 8.39 per cent, compared with 13.42 per cent on a typical credit card.

Some home equity lines of credit let people borrow up to specified limits. But in recent years, closed-end ''piggyback'' loans allowed home buyers with first mortgages to finance up to 100 per cent of their home''s repaid value. This kind of easy credit conditions allowed home equity loan volumes to triple in the decade ending 2005, when they first topped $1 trillion ($1,000 billion).

Not surprisingly, most lenders are now sharply cutting back. Wells Fargo this week significantly curbed its home equity business conducted through brokers. Most large lenders will have significant high-risk exposure, because most made piggyback loans in the last three years, say analysts.

As the real estate market started declining, borrowers began to realise that it was a bad idea to take out second mortgages. But now, they are quickly learning that as long as they keep paying on their first mortgages, they''''ll keep their homes."

How deep?
Mortgage lenders Countrywide Financial Corporation and Washington Mutual have both admitted that they each had at least one-fourth of their loan books in home equity loans as of 30 September. Bank of America, Fifth Third Bancorp, First Horizon National, SunTrust Bank and TCF Financial are among the banks with more than 10 per cent of their loan portfolios in home equity.

Mortgage lenders need to generate cash flow for investors. But lots of them are holding many risky loans that they may have difficulty selling or that they may have to discount. The real crisis may come when middle-class borrowers start burning through other lines of credit (read: credit cards), but their home values still haven''''t rebounded. That may happen less than a year from now.

Days of delinquency
Wells Fargo''''s $1.4 billion write-down is despite the fact that risky home equity loans - most issued through mortgage brokers - comprise just 3 per cent of its loan book. It plans to liquidate this portfolio. The bank says it has $71.5 billion of other home equity loans that it considers safer.

Washington Mutual ended September with $59.1 billion of home equity loans, comprising around 25 per cent of its loan portfolio. The bank says it''s going to be a ''''painful'''' downturn that could last through 2008.

Countrywide had $32.7 billion of prime home equity loans as on 30 September, comprising 39 per cent of its portfolio. Last month, the bank announced that it has ''''a much better chance of success'''' than most of its mortgage rivals.

But late payments are already common on home equity loans. At Countrywide, the delinquency rate was 4.62 per cent as of 30 September, up from 2.10 per cent a year earlier. Countrywide''''s sub-prime delinquency rate rose to nearly 24 per cent, up from just under 17 per cent.

Despite falling prices, prospective home buyers too will feel the pain. Lenders now want borrowers to make substantial down payments before they sign on the dotted line, so that the buyers too have something at stake.