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http://usmayors.org/uscm/news/press_...ort_112707.pdf
For The United States Conference of Mayors and The Council for the New American City
The Mortgage Crisis: Economic And Fiscal Implications For Metro Areas
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.
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CONCLUSION
The real estate crisis of 2007 and 2008 will go down in the record books. In recent years, millions of Americans were introduced to a new breed of mortgage – a flexible loan with rate resets in what at the time seemed like the far off and rosy future. Instead, they now face a marketplace where home prices have cooled, home values are shaky, and their flexible loans have become financially unfeasible. The wave of foreclosures that has rippled across the U.S. has already battered some of our largest financial institutions, created ghost towns of once vibrant neighborhoods – and it’s not over yet.
Global Insight expects that 2008 will bring more foreclosures, slower growth of U.S. GDP, stresses for state and local government budgets, and curtailed consumer spending.The good news is twofold. Federal, state, and local governments along with mortgage lenders have quickly recognized the fallacies inherent in much of the subprime lending situation. And the mortgage crisis is not going to bring the economy grinding to a halt. Indeed, we expect job growth in 2008 to be 0.85% and GDP growth to be 1.9%. In 2009, those figures will be 1.2% and 2.9%, respectively. In the end, the economy will not come off the rails, and we may actually have learned something.
The negative economic impacts cited in this report could also be significantly contained if mortgage holders, including holders of mortgage backed securities, and loan servicers could agree to new payment terms with families who have the ability to pay, but were placed in inappropriate mortgage products. Such actions will help to lessen the number of foreclosures thereby avoiding the further negative effects on local housing markets and on the broader economy.
Homeowners will also see property values decline by $1.2 trillion in 2008. 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. 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 financed byhome equity lines of credit, and by the pullback in general consumption by households who feel, and are made, less wealthy by the declines in homeowner equity, which represents the biggest part of most households’ savings portfolio. Meanwhile, many state budgets have benefited in recent years by the increased receipt of transfer taxes imposed on real estate transactions, which have now also declined sharply. We illustrate the magnitude of these impacts for selected states.
The Mortgage Crisis: Economic And Fiscal Implications For Metro Areas
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.
...
CONCLUSION
The real estate crisis of 2007 and 2008 will go down in the record books. In recent years, millions of Americans were introduced to a new breed of mortgage – a flexible loan with rate resets in what at the time seemed like the far off and rosy future. Instead, they now face a marketplace where home prices have cooled, home values are shaky, and their flexible loans have become financially unfeasible. The wave of foreclosures that has rippled across the U.S. has already battered some of our largest financial institutions, created ghost towns of once vibrant neighborhoods – and it’s not over yet.
Global Insight expects that 2008 will bring more foreclosures, slower growth of U.S. GDP, stresses for state and local government budgets, and curtailed consumer spending.The good news is twofold. Federal, state, and local governments along with mortgage lenders have quickly recognized the fallacies inherent in much of the subprime lending situation. And the mortgage crisis is not going to bring the economy grinding to a halt. Indeed, we expect job growth in 2008 to be 0.85% and GDP growth to be 1.9%. In 2009, those figures will be 1.2% and 2.9%, respectively. In the end, the economy will not come off the rails, and we may actually have learned something.
The negative economic impacts cited in this report could also be significantly contained if mortgage holders, including holders of mortgage backed securities, and loan servicers could agree to new payment terms with families who have the ability to pay, but were placed in inappropriate mortgage products. Such actions will help to lessen the number of foreclosures thereby avoiding the further negative effects on local housing markets and on the broader economy.
Homeowners will also see property values decline by $1.2 trillion in 2008. 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. 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 financed byhome equity lines of credit, and by the pullback in general consumption by households who feel, and are made, less wealthy by the declines in homeowner equity, which represents the biggest part of most households’ savings portfolio. Meanwhile, many state budgets have benefited in recent years by the increased receipt of transfer taxes imposed on real estate transactions, which have now also declined sharply. We illustrate the magnitude of these impacts for selected states.
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