Housing Continues Freefall

The U.S. housing collapse is still the blackhole sucking the financial system down to its ruin. I am waiting for government officials to come up with some idea here, perhaps starting with propping up housing prices, or forcing the restructuring of these loans, which in many cases, have been sold in larger packages that cannot be restructured.


The Commerce Dept. reported Dec. 23 that November new-home sales in the U.S. fell to their lowest level in 17 years, down 35.3% compared with November 2007. And the outlook is even bleaker. 2008 was the year that subprime borrowers and speculators got hurt by the real estate crisis. 2009 could be when everyone else gets hit. Until now, the nation's most serious home price declines have been in low-cost markets that were dominated by subprime mortgages, and in overbuilt markets such as Florida, California, and Las Vegas, where residential values are sliding fast toward pre-housing boom levels.

Credit Suisse forecast that more than 8 million homes will go into foreclosure over the next four years, or approximately 16% of all U.S. households with mortgages. That's because the big story in 2009 could be that, with the deepening recession and mounting job losses, serious housing troubles could infect wealthier communities and markets that were just beginning to stabilize this summer before the bankruptcy of Lehman Brothers on Sept. 15 sparked the most serious financial turmoil in decades.

In fact, according to online real estate research firm HousingPredictor.com, based in Destin, Fla., housing prices nationwide will fall 12.5% next year, compared with an estimated 11.1% this year. Housing and mortgage problems pushed the nation into a recession that could now amplify, draw out, and expand the reach of the housing declines.

"Nationally, we think this recession is going to be worse than anything we've seen in 40 years," said Marisa DiNatale, senior economist for Moody's Economy.com. "If the economy gets that bad, then you will start to see foreclosures in Manhattan as well."

On the other hand, the speculative Las Vegas, Arizona, California, and Florida markets, which have already seen annual home-price declines of up to 30%, could see slightly smaller declines simply because values have already fallen so much, according to Mike Colpitts, editor of HousingPredictor.com. Some Florida markets, including Naples, Orlando, and Tampa, are already seeing declines moderate a bit, but problems in other Florida markets, such as Miami, continue to get worse, Colpitts said.

Few areas across the country will likely escape the recession and the corresponding impact on the real estate market, housing experts say. Another wave of foreclosures could be triggered next year as a flood of Alt-A and option adjustable-rate mortgages, which were given to people with decent credit, begin to recast. Most of the option ARMs, which allow borrowers to make minimum payments that don't even cover the accrued interest, are concentrated in already battered California, Florida, and Las Vegas.

Option ARMs originating in 2006 make up about $140 billion of the $350 billion of outstanding option ARMs, and 45% to 50% of them are expected to default, according to an analysis this past summer by Lehman Brothers. The 2007 option ARMs, which were originated just as home prices began falling, were expected to perform similarly badly.

Problems in other states could have less to do with risky mortgages and more to do with job losses. The impact of unemployment on the real estate market and the larger economy are already on display in hard-hit manufacturing cities such as Gary, Ind., and Detroit. Alabama, Arkansas, Atlanta, Michigan, and Ohio could see problems next year, Colpitts said.

"We're in the middle of the game here," said Joseph Seneca, professor of economics at Rutgers University in New Jersey. "There's significant further unwinding to come . We're in a downward spiral with job losses that is reinforcing the weakness in the consumer markets, particularly in the largest investment the consumer makes, in his home."