What's different about the real estate market now vs. 2002

I wrote Tuesday that the latest market-wide numbers on mortgage foreclosures and delinquencies showed them to be at lower levels than in 2002.

But there is a crucial difference between now and then. In 2002, the foreclosures and delinquencies were the product of an economic downturn and this time around they might turn out to be the cause of one. That is, the foreclosures and delinquencies are happening because an out-of-control subprime lending industry shoved iffy mortgages out the door so fast in 2005 and 2006 that lots of them were never going to be paid off, no matter what the economy did. Now that the big banks and brokerages who extend the credit that makes subprime lending possible have wised up, there will be far fewer mortages extended to people with troubled credit histories over the next couple of years.

This had to happen, but it probably means hundreds of thousands or maybe millions of people who could buy homes last year won't be able to get financing now. That reduced demand will surely hit home prices. Merrill Lynch economist David A. Rosenberg--who, I should point out, is always a bit gloomy--wrote in a report Tuesday that a 10% decline in home prices this year is "not inconceivable." That, in turn, would cut GDP growth by about 0.5%, sending the economy into what Rosenberg calls a "growth recession" (that is, still growing, but not by much).

It's worth noting, though, that research by real estate scholars has found subprime lending to be concentrated in low-income and minority neighborhoods. So while the subprime crackdown may devastate the housing market in those areas, its impact elsewhere could be limited.