By Jeff Bater and Brian Blackstone

From The Wall Street Journal Online

Existing-home sales in the U.S. fell in December, capping a soft year that saw demand make its sharpest drop in 24 years.

Home resales fell to a 6.22 million annual rate, a 0.8% decrease from November's revised 6.27 million annual pace, the National Association of Realtors said Thursday. November's rate was originally estimated at 6.28 million.

Sales for all of 2006 dropped by 8.4% to 6.48 million from a record 7.08 million in 2005. The drop was the sharpest since 17.7% in 1982.

The median home price was $222,000 in December, compared with a revised $217,000 in November and an unrevised $222,000 in December 2005.

The decrease in resales interrupted back-to-back increases. Some analysts say declining prices and soft demand has discouraged some homeowners from selling.

The December resales level was below Wall Street expectations of a 6.25 million sales rate for previously owned homes.

The average 30-year mortgage rate was 6.14% last month, down from 6.24% in November, according to Freddie Mac. Inventories of homes fell 7.9% at the end of December to 3.51 million available for sale, which represented a 6.8-month supply at the current sales pace.

Jobless Claims Jump by 36,000

The number of U.S. workers filing new claims for unemployment benefits climbed in the latest week from surprisingly low levels earlier in the month, suggesting some slackening in labor markets, according to a government report. Still, claims levels appear consistent with moderate gains in monthly payrolls.

New claims for unemployment insurance jumped 36,000 to 325,000 in the week ended Jan. 20, the Labor Department said Thursday. Claims had been below the 300,000 level -- which economists consider a benchmark for very tight labor markets -- the previous two weeks.

The Jan. 13 reading was revised to 289,000 from a previously reported level of 290,000.

There were no special factors in the latest week, though claims data tend to be volatile in January following the holiday season. A Labor Department official said there was nothing in the state-level data to indicate that recent ice storms that struck the West and Midwest were a factor. The four-week average, which smooths out weekly fluctuations, rose by 1,500 to 309,250. Continuing claims for workers drawing unemployment benefits for more than a week decreased by 39,000 to 2,484,000 in the week ended Jan. 13, the latest week for which such data are available.

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By James R. Hagerty and Ruth Simon

From The Wall Street Journal Online

Amid a continuing glut of homes for sale in most of the country, buyers should have plenty of choices and lots of bargaining power in the spring selling season -- typically the busiest time of the year.

Many builders and real-estate brokers, for their part, hope the housing market will start recovering this year as buyers respond to price cuts and other sweeteners offered by increasingly nervous sellers. In some markets, agents say, buyer traffic has picked up in the last month or two.

But any recovery is likely to be gradual. Donald Tomnitz, chief executive officer of D.R. Horton Inc., a home builder, told investors this week that the market, which began slumping in 2005, may bottom out by mid-2007, but that "we don't see any rapid improvement thereafter."

Given all that, sellers should expect buyers to take their time and be tougher negotiators. David Lee, who recently moved to Wenham, Mass., to take up a post as an associate professor of physics at Gordon College, has rented a home for his family and says they plan to be "quite picky and choosy" as they look for a home to buy. Dr. Lee doesn't feel any pressure to decide quickly because he figures prices won't rise in the near term and could fall further.

A quarterly survey of housing conditions in 28 major metropolitan areas by The Wall Street Journal showed that the inventory of unsold homes at the end of 2006 was up substantially in nearly all of the markets from the already plentiful level of a year earlier. The biggest increases were in the metro areas of Miami-Fort Lauderdale, Orlando, Tampa and Jacksonville, Fla.; Phoenix; and Portland, Ore. (Unlike the other cities, Portland had a lean supply of homes a year before.)

The survey also includes recent pricing trends -- nearly all negative -- based on surveys of real-estate agents by Banc of America Securities in New York, a unit of Bank of America Corp., as well as data on late mortgage payments and job-creation prospects from Moody's Economy.com, a research firm in West Chester, Pa. Employment figures have a huge effect on housing demand.

Home-price trends vary greatly from one region to another and even within metro areas. For instance, housing demand remains weak in the Detroit area, sapped by auto-related job losses, while the chic urban zones of San Francisco and Manhattan -- where space for new construction is extremely limited -- generally have stayed firm, though price appreciation is far slower than a year or two ago.

The good news for home sellers is that unemployment remains low in most areas, wages are growing and energy prices have fallen from their recent peaks. What's more, mortgage interest rates are still low, allowing people with good credit records to obtain 30-year fixed-rate loans at around 6.2%.

But many lenders are growing more cautious about how much debt home buyers should be allowed to take on and more inclined to ask for proof of income. This tougher attitude will exclude some marginal buyers from the market, hurting demand, even as a rising number of foreclosures throws more supply on the market. DataQuick Information Systems, a research firm in La Jolla, Calif., said yesterday that mortgage lenders sent 37,273 default notices to California homeowners in the fourth quarter, up 145% from a year earlier and the highest in more than eight years.

Meanwhile, home builders still have lots of unsold homes that they will unload by further cutting prices and dangling such incentives as help with closing costs or kitchen upgrades. Discounts on new houses, in turn, will make it harder for some sellers of previously occupied homes to attract buyers.

Some of the biggest gluts of new homes are in Florida, Phoenix and the outer suburbs of Washington, D.C., says Ivy Zelman, a Cleveland-based housing analyst for Credit Suisse Group. Many of the gluts are due to frantic building of condominiums over the past few years. The supply of condos listed by real-estate agents is up 86% from a year earlier in the Las Vegas metro area, 43% in Washington, D.C., and 21% in the Northern Virginia suburbs of Washington. In Florida's Miami-Dade and Broward counties, the listed condo supply has more than doubled from a year earlier.

In Miami-Dade, the number of existing condos on the market is enough to last 27 months at the current sales rate, says Jack McCabe, a real-estate consultant in Deerfield Beach, Fla. The oversupply will grow, he says, as about 8,000 condos are expected to be completed this year and 12,000 in 2008.

"It's going to get bloody down here," Mr. McCabe says. He estimates that condo prices in Miami-Dade fell between 8% and 10% last year and will drop 20% in 2007. Eventually, he predicts, hedge funds and other investors will step in to buy surplus condos in bulk at huge discounts.

10,000 Condos for Sale

In California's San Diego County, developers have more than 10,000 condos available for sale in new buildings, projects under construction or properties being converted from rentals, says Peter Dennehy, a senior vice president at Sullivan Group Real Estate Advisors, a consulting firm based there. He says that supply is enough to last more than 20 months at the current sales rate. That number excludes several thousand condos being offered for resale by speculators and others.

Mr. Dennehy estimates that condo prices have fallen at least 15% to 20% in the county over the past year, though it's hard to measure price changes because sellers often give incentives such as free upgrades or help with closing costs that aren't reflected in the price.

In the Boston area, lower-priced homes in blue-chip neighborhoods are moving pretty quickly. But ones that are overpriced or located on main streets are languishing, says Sam Schneiderman, broker-owner of Greater Boston Home Team. "It's got to be a really good deal," he says. "An OK deal doesn't quite cut it. Buyers are holding out."

The glut in inventories is likely to increase in some markets as sellers try to take advantage of what they hope will be a stronger selling season. Some sellers pulled their homes off the market late last year, intending to relist them in the spring.

At the Coldwell Banker Residential Brokerage office in Scottsdale, Ariz., near Phoenix, listings are up roughly 30% since the end of December. The office expects listings to increase further in late February and early March as sellers who pulled their homes off the market before the holidays relist them.

Some of last year's strongest housing markets now are showing signs of cooling a bit. In the San Francisco Bay area, the median price paid for new and resale homes in December was $612,000, up just 0.5% from a year earlier, according to DataQuick. But prices fell in parts of the Bay Area; they were down 6.3% from a year earlier in Sonoma County and down 5.1% in Solano County, DataQuick says.

One of California's weakest markets last year was the Sacramento area. Anthony Graham, an analyst at Trendgraphix Inc., a provider of housing data, says sellers of previously occupied homes there have had trouble competing with the huge discounts and incentives offered by builders.

Mr. Graham expects average home prices in the Sacramento metro area to fall between 6% and 8% this year, but believes the market will begin to recover modestly by the fourth quarter, assuming that home builders continue to cut their production. Greg Paquin, president of Gregory Group in Folsom, Calif., which gathers data on new home construction throughout the state, also thinks Sacramento is stabilizing after last year's price cuts. "Buyers who were on the fence are starting to say, 'Hey, this is a pretty good deal,' " Mr. Paquin says.

California's Central Valley, which includes such cities as Bakersfield, Fresno, Merced and Stockton, may take longer to absorb excess new-home inventory and bring prices down to more affordable levels, Mr. Paquin said. He said that area may not bounce back until next year.

In Manhattan, big bonuses recently doled out by Wall Street firms will help support the market in this year's first half, says Jonathan Miller, chief executive officer of Miller Samuel Real Estate Appraisers in New York. But a rash of new condo developments will help moderate prices. He expects price increases this year to average 5% to 6% in Manhattan. On Long Island, he believes prices are likely to be flat to slightly higher this year.

In New Jersey, "I'm optimistic that home sales will begin to rebound in the spring," says Jeffrey Otteau, president of Otteau Valuation Group Inc., an appraisal and research firm in East Brunswick, N.J. "However, that would signal the end of the decline -- not a return to higher prices."

Mr. Otteau figures home prices fell an average of about 10% in New Jersey last year. For 2007, he believes homes costing less than about $600,000 are likely to rise modestly, around 3%, while homes above that level are about flat. In the luxury end of the market, prices may edge down again this year, Mr. Otteau says.

In the Chicago area, some homes that have sat on the market are finally moving, says Barbara O'Connor, an agent with Baird & Warner. But some sellers have had to accept far less than they had hoped for. Jody Andre, a restaurateur, put her three-story Victorian-style home in the Edgewater neighborhood on the market in August at $679,000. She later lowered the price to $634,900 but still got no offers. "This is a hot neighborhood and a lot of people couldn't understand why the house didn't sell," says Ms. Andre, who accepted a $605,000 offer last week. "I waited too long to put it on the market," she says.

Buyer Traffic Picks Up

The end of the year is normally a slow time, but in some parts of the country traffic has increased in the last month or two, helped by unseasonably warm weather. In Philadelphia's Center City, buyer traffic began to pick up in November and has continued to climb over the last two months, says Mike McCann, an associate broker with Prudential Fox & Roach, Realtors.

A recent open house for a three-bedroom home priced at $469,000 drew 17 parties, Mr. McCann reports. In the summer and early fall, he says, "we didn't want to do open houses because it was a wasted day." Sales are also increasing, but negotiations are taking longer and many offers are contingent on the buyers selling their current homes, Mr. McCann adds. Prudential Fox & Roach is also seeing more people asking to get pre-approved for a mortgage, a sign that they may be ready to buy.

In Atlanta, where the housing market began to soften in August, business started picking up again in December, says Lewis Glenn, president and chief executive of Harry Norman, Realtors. "There's more negotiation," and builders are cutting prices and offering concessions, such as buying down the borrower's mortgage rate, he says.

In Scottsdale, some sellers are cutting prices by 10% or more, says Dale Pavlicek, sales manager for the Coldwell Banker Residential office there. "There are a lot of vacant homes on the market," he says. Sellers who bought in the past year or two are barely breaking even or are coming to the closing table with money to pay off their mortgage and other costs, he adds.

Houston remains one of the nation's more buoyant housing markets, supported by job growth in the energy industry. Rob Cook, chairman of the Houston Association of Realtors, says the supply of homes on the market is enough to last about six months at the current sales rate -- what he calls a "balanced" market. Prices are rising only modestly, though, because Texas has plenty of room for new construction. "We just keep expanding out farther and farther," Mr. Cook says.

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By June Fletcher

From The Wall Street Journal Online

As the national housing market continues to weaken, prices of homes in the $1 million range are slumping in many parts of the country. In once-golden Sunbelt cities like Miami and Santa Barbara, Calif., as well as in major Midwestern cities like St. Louis and Chicago, prices fell in the fourth quarter of 2006 from a year earlier, in some places by as much as 7.2%. In other areas, prices rose slightly but appreciation was sluggish, with gains of 4.3% or less. Still, analysts say, the category is holding up better than the overall market, which declined 10% during the same period.

These are some of the results of an exclusive report done for The Wall Street Journal by the National Association of Home Builders. "The million-dollar market is slowing down," says NAHB's director of research, Gopal Ahluwalia, who conducted the analysis using information from First American Real Estate Solutions, a Santa Ana, Calif., data provider.

The report looked at sales of new and existing single-family homes costing between $750,000 and $1.25 million in the nation's top metro areas. In 2005's fourth quarter, 65 metro markets had 100 or more sales in that price range. A year later, that figure had dropped by more than half, to 32. And appreciation was generally lackluster. Nearly half of those 32 markets saw prices in this "starter luxury" market flatten or decline during the fourth quarter over the same period a year earlier, in some areas by as much as 7.2%. Overall, the median price of these 32 markets rose a modest 1.4%, to $890,000.

Nationally, median home prices during the same period fell 10%, to $225,000 from $250,000 the study showed. The National Association of Realtors, which tracks existing-home prices only and will release its fourth-quarter report Feb. 15, is projecting that overall median prices will drop just 3.9%, to $216,500, in the fourth quarter of 2006. (NAHB says its figures differ from those of NAR because they use different geographical boundaries for their metropolitan areas and include data from both new and existing homes.)

Analysts say that the million-dollar market is doing better than the overall market because it wasn't quite as overrun with investors during the boom. "There were more buyers trying to move up rather than make a killing," Mr. Ahluwalia says. Because investors make their money by reselling properties quickly, they're more likely to cut their losses -- and their prices -- as soon as they detect a market slowdown.

The Thrill Is Gone

To be sure, a million dollars today doesn't go as far as it did even a few years ago, before residential real estate in many cities experienced double-digit price increases during the boom. Michael Patterson, a Sotheby's real-estate broker in Santa Barbara, Calif., says that as recently as 2001, $1 million would get you an oceanfront estate. Now it will get you a remodeled two-bedroom house built more than a half-century ago. In Dallas, meanwhile, it will buy a brand-new, four-bedroom lakefront home.

It used to seem like a lot of money, Mr. Patterson says, the entry point to luxury. "It doesn't have the mystique that it used to," he says.

Nor are today's million-dollar-home customers the same as those of five or six years ago. Then, they tended to be cash-rich buyers who were mostly immune to mortgage-interest-rate fluctuations. But during the run-up, as more ordinary homes were pushed into the million-dollar range, those wealthy buyers moved up too, to the "super-luxury" level of $3 million and above. They were replaced by middle-income buyers, some of whom were hoping to cash in on the boom and who stretched to trade up using creative financing like option adjustable rate mortgages -- which allow borrowers to decide how much they're going to pay each month -- and interest-only loans. Now, many are "stuck" with homes whose prices are flat or declining, according to University of Maryland business professor Peter Morici.

The Sunbelt cities that attracted droves of buyers and builders during the boom have fared poorly. Overheated and overbuilt markets finally slowed down by the end of 2006: prices fell 4.2%, to $876,250, in Miami and flattened in Phoenix at $887,660 and in Charleston, S.C., at $937,500. Some Midwestern markets also performed badly. Prices were down 3.3% in Chicago, due in part to the loss of manufacturing jobs there. Things were even worse in St. Louis, which lost 3,300 jobs in the year ending November, second nationally only to Detroit. Prices in St. Louis were down 7.2%, the largest decline in the survey.

Starter luxury homes are doing best in coastal cities where strong local economies support the incomes needed to buy them. The study's highest price increase, 4.3%, was in the Santa Ana-Anaheim-Irvine area of California, which has seen a steady rise in employment over the past year, particularly in the professional- and financial-services sectors, and the highest wage increases in three years. On the East Coast, fat year-end bonuses at many Wall Street firms fed a buying spree in the suburbs of New York, where prices increased almost as much, to 4.2%.

Overall, the survey showed a return to a buyer's market in the million-dollar range. But in some places, like San Francisco, where prices have remained high for years -- the overall median is $740,000, compared with the median price of $870,000 in the city's "million-dollar" category -- buyers aren't rushing in. Fatigued by years of fruitless house-hunting, they "can't quite believe" that the market has finally turned in their favor, according to broker Linda Harrison.

Vienna, Va., housing economist Tom Lawler says buyer hesitation is also being fueled by the change in mentality from a speculative market to one based more on need. During the boom, many buyers bought the biggest house that they could because they saw that as a way to increase their investment in real estate without buying rental property. But now that the market is softening, that strategy no longer makes much sense. Lawyer Beth Joffe and her husband, a physician, recently sold their three-bedroom Chicago home for $760,000 and have moved to a much smaller two-bedroom condo in Madison, Wis., that they bought for $300,000. Though both are far from retirement age, neither wants the hassle or added expense of a bigger place. "We don't need that any more," Ms. Joffe says.

Reverse Psychology

Agents say that in many cities, the shifting psychology is causing sellers to reverse their tactics. During the run-up, sellers usually priced their homes slightly above the market knowing that someone would buy them, even if the price tag later had to be lowered somewhat. Now sellers are trying to undercut the market to sell while their listings are still fresh.

That's especially true in relatively new "semi-custom" subdivisions, where many homes, though chock-full of amenities like built-in wine racks and tumbled-stoned backsplashes, tend to look alike. In St. Louis, Steve Shadrach has just listed his five-bedroom, brick-and-stone-front home with a swimming pool, which he bought more than two years ago for $770,000, for $949,000. If he finds a buyer at that price, he'll make a substantial profit. But his asking price is nearly $50,000 less than a nearby neighbor is asking for a nearly identical property, and about $100,000 less than what his builder is charging to build the same house. "I'd like to price it higher, but I have to compete with them," says Mr. Shadrach, a plastics salesman who wants to move closer to his grandchildren.

Indeed, a surfeit of new homes in central New Jersey is partly responsible for the significant price declines in Edison, where prices of starter luxury houses fell 6.7% in the fourth quarter from the year earlier. Coldwell Banker has a $949,900 listing of a "new" five-bedroom brick house that was actually built in 2005, but interested buyers are few. "People are going for less house," says Joe Thomas, an agent with Coldwell Banker. "They're not stretching any more."

Stretched Out

In many parts of Southern California, prices are still on the upswing, although analysts such as Celia Chen, director of housing economics at Moody's Economy.com, says the area is at "high risk" for a fall. Although the local economy is strong, incomes haven't kept pace with the sizzling double-digit price increases these markets experienced from 2001 to 2005. And with federal regulators pressuring lenders to cut back on creative financing, fewer buyers are able to stretch their incomes to buy million-dollar homes.

That's what banker David Jaffe discovered when he put his five-bedroom stucco home in Ventura, Calif., on the market 2½ months ago for $979,900. Ventura's prices are still rising -- they increased 4% from 2005 to 2006, the study showed -- and Mr. Jaffe attracted an offer close to his asking price soon after he listed it. But the deal fell apart in escrow when the buyer couldn't qualify for the loan.

Mr. Jaffe bought the place in April 2005 for $935,000 in a bidding war, and still hopes to find someone who will meet his asking price. But he doesn't expect to see lines forming at his door, especially since homes in his price range are affordable to fewer people and no longer have quite the cachet that they once did. "The market is changing," he says. "It's definitely a buyer's market now."








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By Jeff Bater

From The Wall Street Journal Online

New-home sales finished 2006 on a positive note, rising a second straight month in December, but demand for the whole year took its biggest tumble since 1990.

Separately, durable-goods orders climbed last month, boosted by a sharp jump in orders for commercial aircraft, though demand rose across the board. Business-equipment spending rebounded.

In the home-sales report, sales of single-family homes increased by 4.8% to a seasonally adjusted annual rate of 1.120 million, the Commerce Department said Friday. November sales rose 7.4% to 1.069 million, revised from a previously estimated 3.4% advance to 1.047 million.

Economists had expected a 1.2% increase to an annual rate of 1.060 million last month.

On a not seasonally adjusted basis, new-home sales fell 17.3% in 2006 to an estimated level of 1.061 million, the largest drop since 17.8% in 1990. The housing sector has restrained economic growth, which slowed in the third quarter to a 2.0% pace. The housing component of gross domestic product plummeted by 18.7%, which was the sharpest drop in 15 years and robbed GDP of 1.20 percentage points.

Surging demand in certain markets across the U.S. during the housing boom sent prices skyward and builders breaking ground. Sales peaked in 2005 and began receding, while inventories climbed, which slowed builders down.

New-home inventories fell in December, a sign builders are getting supply under control. There were an estimated 537,000 homes for sale at the end of the month -- the lowest level since 522,000 in January 2006, the government data showed. That represented a 5.9 months' supply at the current sales rate. An estimated 542,000 homes were for sale at the end of November, a 6.1 months' inventory. In December 2005, the supply was 4.8 months.

Prices were down a bit. The average price of a new home decreased to $290,100 from $290,800 in November and below $290,200 in December 2005. The median price rose to $235,000 last month from $232,200 in November but was lower than the year-earlier level of $238,600.

Financing costs drifted down in December. The average rate on a 30-year mortgage was 6.14%, lower than 6.24% a month earlier and 6.27% in December 2005.

By region, new-home sales last month rose 26.6% in the Midwest, 27.3% in the Northeast, and 0.3% in the South. Demand fell 4.4% in the West. Based on figures unadjusted for seasonal factors, an estimated 76,000 homes were actually sold last month in the U.S., up from 75,000 in November.

Spending on Durable Goods Climbs

Orders for durable goods, big-ticket items such as cars and appliances meant to last three years or more, advanced 3.1% last month to a seasonally adjusted $221.87 billion, the Commerce Department said Friday. Durables rose 2.2% in November, revised from a previously estimated 1.6% increase. For all of 2006, durables rose at a not seasonally adjusted 7.0%, after rising 8.6% during 2005.

Orders for commercial planes increased 26.5% last month, while military aircraft orders rose 20.5%. Overall, transportation orders were up 4.8%, after rising 10.2% in November. However, a key barometer of business-equipment spending -- orders for nondefense capital goods excluding aircraft -- increased by 2.4%, after falling 1.0% in November.

While demand was up across the board, the overall 3.1% rise in durable-goods orders fell short of the 3.9% economists had expected, according to a survey by Dow Jones Newswires.

Motor vehicles and parts orders increased by 6.8% last month; for the year, on a not seasonally adjusted basis, motor vehicle bookings were 2.2% lower. Orders for all durables except transportation goods increased 2.3%, after falling 1.0% in November. Demand increased 2.5% for fabricated metals, 4.5% for primary metals, 5.0% for machinery, and 1.0% for computers and electronics. Demand decreased 1.4% for electrical equipment.

Capital-goods orders rose by 5.5% last month. Nondefense capital goods -- items meant to last 10 years or longer -- increased 9.0%. Defense-related capital goods orders fell 17.5%. Inventories rose 0.4%. Unfilled orders, a sign of future demand, rose 2.3%.

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By Ruth Simon

From The Wall Street Journal Online

As the number of borrowers falling behind on their mortgage payments climbs to the highest level in five years, the mortgage industry is trying new strategies to help bail them out.

Much of the attention is on homeowners who in recent years took out adjustable-rate mortgages, a popular way to finance a home when interest rates were low. Now, with rates having moved up, many of these borrowers have recently seen, or soon will see, their mortgage rates adjust higher for the first time.

To head off problems, mortgage companies are reaching out to borrowers earlier. Bank of America Corp. is allowing some borrowers with ARMs to refinance into a different loan at no cost. Citigroup Inc.'s CitiMortgage unit is focusing extra attention on parts of California, Florida and New York where home prices have moved up sharply. It is also contacting delinquent borrowers within days after a missed payment, if it doesn't fit their normal bill-paying habits.

The rise in bad loans also is leading to a pick up in so-called short sales, in which a lender allows the property to be sold for less than the total amount due and often forgives the remaining debt. For the lender, the process can be shorter and less costly than foreclosing, especially in a declining market. For borrowers, it is a way to avoid having a foreclosure on their credit report.

Sheldon Klain, a manager in Dallas, wound up saddled with loans on two homes last year and now is trying to arrange a short sale of one of them. Mr. Klain got into trouble after he moved to Dallas from Las Vegas to take a new job. He bought a home in Dallas, thinking he had found a buyer willing to pay $475,000 for his Las Vegas home. The sale fell through at the last minute and Mr. Klain found himself stuck with two homes and behind on payments on the Las Vegas house.

Mr. Klain says his Las Vegas house, which is in a gated community and has a swimming pool, is valued at $419,000, according to a recent bank appraisal, well below the $440,000 he owes on the property. "The dump in the market put us behind the eight ball," he says.

For some borrowers, efforts to work out bad loans can be complicated by the fact that many mortgages no longer are held by the banks that made the loans. Instead, roughly two-thirds of mortgages are packaged into mortgage-backed securities and sold to investors. How much leeway a borrower is given can vary, depending in part on the rules spelled out at the time the securities are created. Some agreements, for instance, don't permit loan modifications or limit the circumstances under which a loan can be modified. Others put a cap on how many loans can be restructured.

Some 2.51% of mortgages were delinquent in the fourth quarter, according to new data from Equifax Inc. and Moody's Economy.com Inc. That is up from 2.33% in the third quarter and the highest level since a recent peak of 2.53% in the first quarter of 2002.

The increase in bad loans is broad based, with delinquencies rising in the past year in roughly 80% of the 250 local areas analyzed by Moody's Economy.com. Some of the biggest increases have come in California, where high prices have made it hard to afford a home, and in other once-hot markets such as Las Vegas and Port St. Lucie, Fla. Among the handful of major metropolitan areas where delinquencies have fallen: Salt Lake City, San Antonio and Albuquerque, N.M.

The rise in delinquencies is unusual because it comes at a time when the economy is relatively strong. Even though job growth remains healthy, "the total mortgage delinquency rate is the highest that it's been since the depths of the [2001] recession," says Mark Zandi, chief economist at Moody's Economy.com. He attributes the increase in part to the weaker housing market and the widespread use of adjustable-rate mortgages, many of which now are resetting at higher rates.

What is more, as demand for loans softened, mortgage lenders loosened their standards and made riskier loans, Mr. Zandi says. He expects that nationwide delinquency rates could rise by as much as a full percentage point from current levels in the next year, but he doesn't expect the trend will have a significant impact on the overall economy.

Until recently, mortgage delinquencies were low by historical standards, which Mr. Zandi pegs at about 2%, based on the dollar value of loans that are at least 30 days past due. One reason: Rising home prices made it easy for borrowers who missed payments to refinance or sell their home. That changed as home prices flattened or fell in many areas.

Adding to the pain are higher short-term interest rates, which mean bigger monthly payments for borrowers with adjustable-rate mortgages or home-equity lines of credit. In addition, many mortgages were taken out in the past few years and now are approaching the point in their life when delinquencies typically pick up. An increase in mortgage fraud in parts of the country also has contributed to bad loans, lenders say.

"Keep in mind that 2004 and 2005 were aberrations," with low delinquencies and rapid home-price growth, says Michael Fratantoni, an economist with the Mortgage Bankers Association. He says the biggest increase in delinquencies has been among borrowers with scuffed credit records who took out adjustable-rate mortgages.

To head off potential problems, CitiMortgage contacts borrowers with adjustable-rate mortgages by phone and by mail monthly, beginning months before the rate on their loan resets, to alert them to the upcoming payment increase and explain their options, says CitiMortgage President Bill Beckmann.

Bank of America is using computer models to predict which borrowers may run into trouble -- even before they miss a payment. "We're calling earlier and more often" because it increases the chances that a borrower's problems can be worked out, says Bob Caruso, Bank of America's national servicing executive.

Among the bank's options: Borrowers who miss a payment because of illness or job loss may be allowed to add the unpaid debt to their loan balance, Mr. Caruso says. Other kinds of loan modifications also are becoming more common. These include arrangements that allow a troubled borrower to refinance into a less costly loan or that lower the interest rate on the mortgage for several years to make the payments more affordable.

Mortgage companies also are looking for additional ways to reach financially stretched borrowers. In some of the Midwestern markets where it has bank branch offices, National City Corp. is working with local clergy, United Way organizations, social workers and housing counseling agencies to help borrowers reluctant to talk with their lender. The bank's Web site explains workout options and allows borrowers to apply online for assistance. National City is one of a dozen major lenders behind a national advertising campaign that will, beginning this spring, promote a toll-free number (888-995-HOPE) borrowers can call for homeownership counseling and referrals.

Bank of America says it has seen short sales of homes increase 25% from last year, albeit coming off of relatively low levels. And in San Diego, the number of entries in the local multiple-listing service that include the words "short sale" has climbed to 98 from about 50 a year ago, according to Sandicor Inc., the local multiple-listing service. A short sale can be less of a black mark than a foreclosure on a borrower's credit record, because it indicates the borrower was working with the lender.

There can be downsides for borrowers to short sales. Under certain circumstances, the debt forgiven by the bank may be taxable to the borrower. What is more, convincing a lender to go along with a short sale can be difficult, and borrowers who have a mortgage and a home-equity loan may have to negotiate with two lenders or two departments of the same bank.

"There are all sorts of log jams," says John Izzo, the agent handling the sale of Mr. Klain's Las Vegas house. Mr. Izzo says he is currently working on 19 short sales, but figures just "one in five might be successful."







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