Thanksgiving may have kicked off the time for holiday cheer, but the news on the nation's housing front has been anything but cheery.
Report after report released in the past two weeks forecast bleak times ahead with more foreclosures, lower home values, dampening consumer spending and make credit even harder to come by for a long time. Some suggest that a complete recession is unavoidable.
The Federal Reserve Bank of Dallas said that the housing market's adjustment to tighter lending standards is likely to be prolonged, according to the November issue of the Economic Letter.
"The muted outlook for home-price appreciation, coupled with the resetting of many nonprime interest rates, suggests foreclosures will increase for some time," economics writer Danielle DiMartino and vice president and senior policy advisor John V. Duca wrote in a Fed report.
The sharp downturn in home-price appreciation may also dampen consumer spending growth, an effect that may worsen if the pullback in mortgage availability limits people's ability to borrow against their homes, the authors state.
The slump in global credit markets will force banks, brokerages and hedge funds to cut lending by $2 trillion, triggering the risk of a "substantial recession" in the U.S., according to Goldman Sachs Group Inc.
The losses related to record U.S. home foreclosures may be as high as $400 billion for financial companies, wrote Jan Hatzius, chief economist at Goldman in New York. The effects may be amplified tenfold as companies that borrowed to finance their investments scale back lending, the report said.
"The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized," Hatzius wrote. "It is easy to see how such a shock could produce a substantial recession"' or "a long period of very sluggish growth."
With home prices declining, consumer credit deterioration is not far off, Goldman analyst said. The downturn in housing is spilling over into employment in some states and is leading to high consumer losses.
Adding to the problem is the fact that another $500 billion of adjustable-rate mortgages (ARMs) are scheduled to reset during the next two years. According to Laurie Goodman, managing director and global co-head of fixed-income research at UBS AG, the glut of ARMs is sparking a cycle that will likely drive U.S. home prices down farther in 2008.
"It's a sort of vicious cycle that we will muddle through, but it will be painful," Goodman said.
Foreclosure Impact Widespread
According to a report prepared by Global Insight, Inc. for the U.S. Conference of Mayors and The Council for the New American City, the foreclosure crisis will have profound economic effects in 2008.
U.S. GDP will be $166 billion lower as a result, because new residential investment will be weaker, lowering spending and income across the construction industries, and because consumer spending is curtailed as homeowners respond to decreased home equity wealth.
Both of these spending impacts have multiplier effects across the economy as lower incomes decrease demand for other goods and services. As a result, there will be 524,000 fewer jobs created across the country in 2008.
Homeowners will also see property values decline by $1.2 trillion in 2008 due to three factors.
The initial adjustment of over-heated home prices to the combination of weaker market demand and large inventories of homes for sale would have reduced values by $676 billion in 2008. Now, due to the foreclosure and mortgage crisis, home values will decline further, by an additional $519 billion. Foreclosures in 2008 will increase by at least 1.4 million. These homes represent a market value of $316 billion.
State and local government revenue sources will be impacted as well. Local government property tax revenue had also been bolstered by rapidly escalating market values and assessment, but not only is the growth of this budget source reduced by the current contraction, there is also significant risk of downward pressure on taxable value when property values contract.
Latest Housing Valuations Lowest in a Decade
Data through September 2007, released by Standard & Poor's for its S&P/Case-Shiller Home Price Indices, shows continued negative annual returns.
"The declines in the national figure are notable for two reasons," said Robert J. Shiller, chief economist at MacroMarkets LLC. "First, the third quarter decline, at 1.7%, was the largest quarterly decline in the index's 21-year history. And, second, the year-over-year decline posted its second consecutive record low at -4.5%."
"Consistent with prior 2007 reports, there is no real positive news," Shiller said. "Most of the metro areas continue to show declining or decelerating returns on both an annual and monthly basis."
"All 20 o[f the indexes] metro areas were in decline in September over August. Even the five metro areas that still have positive annual growth rates -- Atlanta, Charlotte, Dallas, Portland and Seattle -- show continued deceleration in returns," he said.
For many homeowners who bought during the last two years when most local markets reached their peak, subsequent declines in value have left them with negative home equity, owing more than the home's current market value, according to Zillow's third quarter home value report.
As of September 30, nearly 16% of homeowners nationwide who bought in the last year and 17.5% of those who purchased two years ago have current home values that are less than the original mortgage amount.
By comparison, less than 2% (1.8%) of those who purchased a home five years ago have seen their equity slide into the negative.
Not surprisingly, markets with the greatest proportion of homes with negative equity were those hit hardest by declining values. For example, people who purchased homes in California's Central Valley, parts of Florida and Las Vegas during the past year have seen double-digit depreciation and negative equity rates reach up to five times the national median.
"The decline in home values picked up steam in the third quarter, posting the largest nationwide year-over-year drop in more than a decade," said Stan Humphries, Zillow's vice president of data and analytics. "Continuing depreciation coupled with the downward trend in the size of mortgage down payments has left many new home owners 'upside down' on their mortgage, meaning they owe more than the current value of their home."
"The run-up in home values we saw over the last several years had many home buyers counting on continued housing appreciation to drive home equity growth, but the market has proven that this strategy is no longer a safe short-term bet," Humphries added.
This report is excerpted from Watch List, a weekly column of distressed commercial properties, mortgages and corporate news.