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Foreclosures to have profound impact { November 27 2007 } Original Source Link: (May no longer be active)
http://www.usatoday.com/money/economy/housing/2007-11-27-foreclosures_N.htmhttp://www.usatoday.com/money/economy/housing/2007-11-27-foreclosures_N.htm
Foreclosures to have 'profound' impact, report warns
By Sue Kirchhoff, USA TODAY
November 27, 2007
WASHINGTON — Mounting home foreclosures will have "profound" effects on the economy next year, reducing job growth, bleeding billions of dollars in tax revenues and hitting consumer spending — but shouldn't push the country into a recession, according to a report Tuesday.
Financial analysis firm Global Insight, in an study for the National Conference of Mayors, predicted at least 1.4 million homes will enter foreclosure next year. That will worsen the already sharp housing downturn, with ripple effects on hiring and spending.
Overall, businesses will create 524,000 fewer jobs next year. Tax receipts will fall by $6.6 billion in ten select states, the report predicts. Nearly 130 cities around the country will face sluggish growth, as economic activity expansion is reduced by more than a third in 65 metro areas alone.
The housing downturn will shave a full percentage point off growth, with the economy expanding at a tepid 1.9% annual rate, the report says. Property values will drop by $1.2 trillion, as foreclosures mount and the housing market remains in the doldrums. Home prices will fall by an average of 7%, but price declines could range as high as 16% in California, the report says
"Everyone has some culpability but we have to fix the problems," says Mayor Douglas Palmer of Trenton, N.J., president of the U.S. Conference of Mayors. "We can't afford not to do anything. We're losing tax revenues, have to maintain foreclosed property and we're going to see more and more homeless families."
Federal, state and local lawmakers have struggled to respond to a growing wave of foreclosures among borrowers with higher-cost subprime mortgages. Nearly 17% of subprime adjustable rate mortgages are delinquent, a number that looks to rise as adjustable rate loans reset in coming months, often to sharply higher interest rates.
Federal Reserve Chairman Ben Bernnanke in testimony to Congress earlier this month noted that, on average, nearly 450,000 subprime mortgages will reset every calendar quarter from now until the end of 2008.
"Avoiding the payment shock of an interest rate reset by refinancing the mortgage will be much more difficult, as home prices have flattened out or declined, thereby reducing homeowners' equity, and lending terms have tightened," Bernanke noted. He said rising foreclosures could reduce property values, weaken struggling housing markets and the economy.
The House has passed legislation to give federal housing agencies more freedom to lend to borrowers who would otherwise turn to the subprime market, while setting tighter standards for future mortgage lending. The Senate has yet to act on the bill. Federal and state banking regulators are trying to help loan servicing firms find ways to quickly restructure large groups of loans, instead of considering each mortgage on a case-by-case basis.
Palmer says the mayors are looking at ways to modify existing loans, strengthen counseling services and other steps in line with what Congress is debating. The mayors will also be meeting with lenders to assess the situation.
The Global Insight report says the housing market financial fallout will be widespread. New York City is forecast to lose more than $10 billion in 2008, followed by Los Angeles at $8.3 billion, Dallas at $4 billion; Washington at $4 billion, and Chicago at $3.9 billion.
In percentage terms, Myrtle Beach, S.C., could suffer the biggest hit, growing 1.7 percentage points less than it would have. California will suffer the most distress.
In other findings the report predicts that job growth will average 75,000 per month during the next six months. That's more than 100,000 fewer new jobs per month than the 2006 average. Consumer spending will expand by just 2% in 2008, buffered by falling home prices. And new home construction will fall through the spring of 2008, declining about 20% from current levels.
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