Condo, HE Markets Could Be Vulnerable.(home-equity lending)

New York -- Two areas of significant growth for mortgage lenders, condominium sales and home-equity lending, could be heading for credit challenges, according to two recent reports.

Housing sales are slowing in "bellwether markets" including Miami-Dade County, Las Vegas and Orange County Calif., with the condominium market showing the earliest signs of weakness, according to a residential real estate expert from Ernst & Young.

One intriguing sign of potential weakening in these key housing markets is an uptick in the cancellation rate for purchases of new homes, according to Steve Friedman, national director of housing for Ernst & Young. He also sees an increase in the number of cases where appraisal valuations are coming in lower than sales contract prices. In addition, houses are staying on the market longer before selling and an increasing number of sellers are offering incentives to buyers. More real estate agents are also suggesting that sellers reduce their initial asking price.

"The leading housing indicators are flashing yellow in a growing number of markets including Phoenix, Boston and Washington," Mr. Friedman said in remarks at a National Association of Realtors conference in San Francisco.

But he does not believe there is a national housing bubble, and in fact doesn't like the use of the word bubble to characterize overheated housing markets, as he said in an interview with Mortgage Servicing News recently.

A "bubble" suggests that all the air could go out of the market at once, but this is unlikely in the case of housing, he said. As the market slows, prospective sellers will take property off the market, restricting supply and helping to cushion any fall in prices.

But a huge inflow of condominium development in hot markets like Southeast Florida and Las Vegas could pose a problem, he said. Particularly in South Florida, the market's ability to absorb all the new construction is in question.