Dropping Housing Prices and Rising Foreclosures Could Confirm Our Worst Fears

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By Jason Simpkins
Staff Writer

In an interview that conveyed a deep sense of economic gloom last week, former Federal Reserve Chairman Alan Greenspan told Bloomberg News that the odds of a U.S. recession remain "somewhat more" than one in three. Home prices will likely drop further, disrupting consumer spending and undermining investor confidence, Greenspan said during the interview.

Market data appears to support Greenspan's prognostication. Indeed, according to real-estate market researcher RealtyTrac Inc., the number of Americans in danger of losing their homes to foreclosure has more than doubled just from last year. According to the company, lenders sent notices of default to 108,716 homeowners in August, more than two-and-a-half times the level of a year ago.

Adjustable-rate mortgages to subprime borrowers accounted for 7.3% of all home loans and 44% of all new foreclosures, according to the Mortgage Bankers Association. An estimated 2 million to 2.5 million adjustable-rate mortgages (ARMs) are scheduled to reset this year and next, jumping from low 'teaser' rates, to much steeper rates that in some cases could cost borrowers their homes.

Also, according to RealtyTrac, the total number of foreclosure filings rose 115% to 243,947 in August from a year earlier. That figure includes defaults, scheduled auctions, and bank repossessions.

As CNN reported, in the next few years more than 75% of the nation's housing markets will suffer an overall pricing decline – some by double-digit amounts. Economy.com said that home prices would drop more than 10% in 86 of the 379 largest markets.

The metropolitan areas hardest hit will be Stockton, Calif., where prices could fall as much as 25%, and the Palm Bay-Melbourne-Titusville and the Sarasota-Bradenton-Venice regions of Florida. Those two areas will likely see declines of 24.9% and 24.8%, respectively. Currently, the average home is down 7.7% in value. That means values are continuing go decline, since they were down only 6.6% in June.

If home prices as much as experts have projected, U.S. households could lose $3 trillion in wealth, a leading housing economist and former mortgage bank president said in written testimony to U.S. lawmakers last Wednesday.

Peter Orszag, director of the Congressional Budget Office (CBO), told a Senate panel that a reduction in consumer spending could be the direct result of a decline in household wealth.

The upcoming reset of billions of dollars worth of ARMs – and the likelihood that home prices will continue to plummet – does not bode well for an economy struggling to emerge from a credit crunch and a commercial paper slump. In terms of the "resets," which begin in a wholesale fashion next month, was one of the reasons Federal Reserve policymakers cut interest rates by half a percentage point last Tuesday.

Last week, the U.S. dollar sank below the Canadian dollar in value for the first time in more than 30 years. It has repeatedly bottomed out against the euro as well. The U.S. dollar has now dropped 6.6% against the euro on the year. The Fed's rate cut will only make it weaker and inflation is beginning to again rear its ugly head.

So will higher energy costs. Oil prices have surged above $82 a barrel in recent days, and now many analysts are predicting $85 oil isn't far off.

In a new economic forecast, Fannie Mae Chief Economist David Berson, predicted U.S. economic growth would slow to 2.3% this year from 2.6% in 2006. The median price of an existing home will probably fall 2.1% this year and 3.1% in 2008, he said.

"Economic growth is likely to slow in response to the problems in the housing and mortgage markets," Berson said in the forecast. "Whether that slowdown will turn into a recession is unknown."

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