Economic Impact of Forclosures and Declining Home Values
Study Warns of Decline
In Value of Homes
November 27, 2007 5:57 a.m.
WASHINGTON -- The property value of U.S. homes will fall by $1.2 trillion, and "at least" 1.4 million homeowners will lose their properties to foreclosure in 2008, according to a study released Tuesday by the U.S. Conference of Mayors and the Council for the New American City.
The study, prepared by forecasting firm Global Insight Inc., predicts a widespread and deep economic impact from ongoing housing market problems, which many expect to stretch through next year.
Global Insight predicted that the economy would grow at a 1.9% rate in 2008, "a full percentage point lower than would have been the case without the mortgage crisis." It also said U.S. gross domestic product growth would be $166 billion lower next year because of mortgage market problems, and that consumer spending would fall to 2% growth. The study also found that home price declines would average 7% in 2008, though it would be much higher -- 16% -- in California.
Local tax revenue is expected to be hit hard by falling home values. In California, property tax revenues are expected to have fallen by $2.96 billion last year, the study said. In Florida, property taxes revenues could fall by $589 million.
There have already been a record number of homeowners entering the foreclosure process this year, and many have warned the problems will continue through 2008. One major reason for this is subprime adjustable-rate mortgages, many of which began with low teaser rates but grow into much higher monthly requirements after several years. A high concentration of these loans are expected to become more expensive next year, and both the banking industry and government leaders are trying to find ways to address it.
The states where housing prices are expected to fall the most - such as California - are also the same places where housing prices jumped the most during the recent housing boom. Global Insight said the mortgage market's economic impact could be "significantly contained" if investors and loan servicers agree to new payment terms with borrowers struggling to afford monthly payments.
In its study, Global insight predicted the real estate crisis of 2007 and 2008 would "go down on the record books," but said it wouldn't ultimately "bring the economy grinding to a halt."
"Indeed, we expect job growth in 2008 to be 0.85% and GDP growth to be 1.9%," the study said. "In 2009, those figures will be 1.2% and 2.9%, respectively. In the end, the economy will not come off the rails, and we may actually have learned something."
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posted by Victor Lloyd Smith @ 7:49 AM
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