Wealthier neighborhoods that avoided subprime borrowing will be hurt in the new year as the downturn weakens even healthy markets
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.
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. The same day, Credit Suisse (CS) 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.
Manhattan Hit, Too
Take Manhattan, for example, where condo and co-op prices soared years after housing bubbles in most other major cities popped. New York City's real estate market was bolstered by residents who were still earning sky-high Wall Street bonuses and by a weak dollar that attracted overseas bargain hunters.
Now that the dollar has strengthened, the economic woes have spread to potential New York home buyers across the globe, and thousands of New York financial professionals are collecting severance. Manhattan apartment prices, as a result, have dropped as much as 20% since the summer, said Jonathan Miller, president and chief executive officer of real estate appraisal firm Miller Samuel. Miller's analysis is based on contracts signed in recent months, rather than actual closings.
"Mid-september was a milestone," Miller said. "That's where you saw a pronounced slowdown in transaction volume."
HousingPredictor.com is projecting a 19.4% decline in Manhattan home prices in 2009. And Moody's Economy.com is predicting that condo prices in New York City, Northern New Jersey, and Westchester County will fall 29% by the fourth quarter of next year.
"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."
Seneca said the government's aggressive policies to stabilize housing by injecting liquidity in banks, lowering interest rates, tax stimulus packages, and other efforts will help. But the downward cycle will end only when prices fall far enough that they attract large numbers of buyers.
The nation's energy-producing states, such as North Dakota, South Dakota, Oklahoma, Alaska, and Montana, could be economic bright spots next year. Despite falling oil and natural gas prices, those industries remain robust.
The economy in Texas, however, is beginning to get hit as unemployment rises and consumer spending drops, Colpitts said. He added that the Houston market, which has been remarkably stable, could drop about 8.5% next year. Five of the six supermajor energy companies maintain large operating bases in Houston, including ConocoPhillips (COP), ExxonMobil (XOM), Royal Dutch Shell (RDS), and BP (BP). The overbuilt San Antonio market could see a 10.2% drop. Austin, which is a high-tech center, could also be hurt as the technology sector gets damaged by weak consumer spending, he said.
And Charlotte, N.C., a major banking center that had been one of the nation's strongest real estate markets, could have its own housing troubles. Charlotte-based Bank of America (BAC) just this month announced that it would cut up to 35,000 jobs over the next few years.
But a few places are poised for a potential recovery.
The housing market in and around Washington, D.C., which suffered greatly in the wake of the housing bust, could begin to recover, largely because the nation's capital has so many recession-proof government and defense contracting jobs, said DiNatale of Moody's Economy.com.
Other areas, such as the Boston area, San Diego, and Orange County, Calif., are getting close to affordability levels seen before the housing boom and could begin to level off, said DiNatale.
She added: "A lot of this depends on the economy over the next few months, help from the federal government, and whether buyers come back to the market."
Click here to see the markets that were hurt the most by the real estate downturn in 2008.