Freddie Mac vice president and chief economist, Frank Nothaft noted that home sales dropped 11 percent from the final quarter of 2005 to the final quarter of 2006. The declining home appreciation values correlate with the slowdown of sales. There was even a drop in 2006 for some areas, including Michigan homes, where the economy is weak and houses prices are disproportionately high. Additionally, home appreciation rates for 2007 are expected to be around 3%.

Despite these numbers Frank Nothaft notes that doomsday is not expected to arrive anytime soon.  Other factors such as rising family income and a resilient economy will overcome many current obstacles as affordability should spark sales and construction for the latter half of 2007.

This optimistic outlook is exercised with two main cautionary tales. First, the overstock of unsold homes and second is the plummeting subprime mortgage market.

The overstock of unsold homes has become apparent to many where the housing market was booming up until recently, such as new Florida homes, as subdivisions are filled with unsold homes. The oversupply of houses then trickles down to house prices. Boston mortgages and San Diego mortgages reflect this trend where prices have dropped 4.5% and 3.3% respectively. Condos with more than 10 units are the leader in vacancies at over 11%.

Recovery may also be stifled by the ravaged sub-prime mortgage market where foreclosures have reached an all-time high due to irresponsible lending practices.

These troubles have now spilled onto other markets, as delinquency rates on mortgages at commercial banks have reached its highest level in four years.  The Federal Reserve’s Senior Loan Officer Survey reports that 15% of banks are tightening mortgage loan standards.

Despite all of that, mortgage rates in the prime mortgage market are still very low and GSEs are providing liquidation, enabling reasonably priced mortgages for borrowers.

Prospects may not be as grim as some have feared. In the near future we can expect weak mortgage brokers to fall off the map, while the strong persevere.  Consider 2007 to represent Uncles Sam’s maid; cleaning house. First prepare her in letting her know that homes are expected to be built at an increased rate in 2007, so expect a huge mess.