Housing to slow growth in 2008

A report warns of 20 percent hit on Triangle economy; U.S. growth may slow 25 percent

WASHINGTON -- The deepening housing crisis will cut economic growth by more than 25 percent in 143 U.S. metropolitan areas next year and by more than a third in 65 metro communities, according to a forecast for the U.S. Conference of Mayors.

The report, prepared for the mayors by financial forecaster Global Insight, warns of cascading problems caused by falling home prices, an expected 1.4 million foreclosures and the pending reset of millions of adjustable-rate mortgages. The mayors are to release the report today.

"The foreclosure crisis will have profound economic effects in 2008," the report warns. It's to be made public as mayors from across the nation begin meeting in Detroit to discuss the growing problems arising from the national housing slowdown.

Though the thrust of the report's findings already was known, the mayors put a fresh statistical face on them by detailing the metropolitan areas that are expected to see their gross metropolitan products slip the most as housing problems deepen.

In the Raleigh-Cary area -- which had been sheltered from the national slump but now is seeing home sales drop -- economic growth is expected to decline by more than 20 percent next year, the report states.

The cities with the biggest-percentage losses are Myrtle Beach, S.C., the California cities of Merced, Madera and Napa; and Sarasota-Bradenton, Fla. In total dollar terms, New York, Los Angeles and metropolitan Dallas are expected to see the largest lost growth.

Many metropolitan areas aren't projected to lose growth because of the crisis. They tend to be areas that didn't experience the housing boom, such as Akron, Ohio; Baton Rouge, La.; and Charleston, W.Va.

Mayors hope that their report will put additional pressure on lenders to rework problem loans and head off major foreclosures, which would further delay recovery in the housing sector.

"The report demonstrates that it's very important for the investors who own these loans to step up to the plate and work out modifications where it makes sense. If they don't, the economic impact is only going to get worse," said David Gatton, a senior adviser at the U.S. Conference of Mayors. "Every time you have a foreclosed property, it drags down the value of properties around it."

Federal Reserve Chairman Ben Bernanke has called on lenders to seek an industrywide approach to problem loans. Federal Deposit Insurance Corp.

Chairman Sheila Bair, who regulates many national banks, more recently has called on lenders to freeze low teaser rates on adjustable-rate mortgages before they adjust to much higher rates.

"Our chairman had been frustrated with the pace ... but it's starting to get legs," FDIC spokesman David Barr said, pointing to recent lender promises in California and elsewhere that they will redo loans. "It's starting to take root, but the pace had been slow, at least initially."

Industry estimates point to only 1 percent or fewer of problem loans having been restructured.

Weak market demand and the large inventory of homes for sale nationally would have reduced home values by $676 billion next year, but rising foreclosures and difficulties in reworking mortgages that are scheduled to reset to higher interest rates are expected to drive prices down even more and result in an additional $519 billion in lost home value, the report says.

The mayors expect a 7 percent drop nationwide in home prices next year, with some parts of California experiencing declines as high as 16 percent.

The housing slowdown will hurt local tax collection, the report says.

"In most states, the growth of sales tax receipts will be significantly slowed by declines in construction-related purchases, by declines in the new-furniture and fixtures spending usually coincident with home purchases, by the dearth of spending finance by home equity lines of credit and by the pullback in general consumption by households who feel, and are made, less wealthy by declines in homeowner equity," says the report, "The Mortgage Crisis: Economic and Fiscal Implications for Metro Areas."

Translation: State and local governments probably will be forced to choose between raising taxes to maintain services or cutting services to balance their budgets.