Politics & Government

Foreclosures will hurt metro economies, mayors warn

A house is auctioned in Seattle in September 2007.
A house is auctioned in Seattle in September 2007. Tish Wells / MCT

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 new forecast for the U.S. Conference of Mayors.

The new 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 Tuesday.

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

While 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.

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.

A number of metro areas aren't projected to lose growth because of the crisis; they tend to be areas that didn't experience the housing boom, including 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 massive 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'll 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 being restructured right now.

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 another $519 billion in lost home value, the report says.

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

The slowdown in housing 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, titled "The Mortgage Crisis: Economic and Fiscal Implications for Metro Areas."

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

How the housing crisis affects particular metro areas:

In alphabetical order: http://media.mcclatchydc.com/smedia/2007/11/26/15/Hall-GMP-table.source.prod_affiliate.91.xls

By percentage: http://media.mcclatchydc.com/smedia/2007/11/26/15/Hall-GMP-losses.source.prod_affiliate.91.xls

The complete mayors' report: http://media.mcclatchydc.com/smedia/2007/11/26/16/Hall-USCMmortgagereportfinal.source.prod_affiliate.91.pdf

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