October 25, 2007
Reports Suggest Broader Losses From Mortgages
By VIKAS BAJAJ and EDMUND L. ANDREWS
Every time economists and Wall Street executives think they have
acknowledged the full extent of the losses from the meltdown in real
estate mortgages, more bad news turns up.
Merrill Lynch said yesterday that it would take a charge for
mortgage-related securities on its books that is $3 billion more than
the $5 billion it expected just two weeks ago. And a report from the
National Association of Realtors showed that sales of existing homes
in September fell twice as much as economists had expected, to their
lowest level in nearly 10 years.
Stocks fell sharply early yesterday on the news, with the Standard &
Poor's 500-stock index falling 1.8 percent before recovering in the
afternoon. Investors also bid up Treasuries as they sought the safety
of government-backed debt.
At this juncture, economists say the troubles in the mortgage market
could, all told, cost financial firms and investors up to $400 billion.
That is far more than the roughly $240 billion cost, adjusted for
inflation, of the savings and loan crisis of the early 1990s,
according to estimates of the combined financial toll of that crisis
on both the federal government and private sector. The loss in total
real estate wealth is expected to range from $2 trillion to $4
trillion, depending on how far home prices fall, according to several
economists.
That would be significantly less than the losses suffered by investors
in the stock market collapse earlier this decade, which erased more
than $7 trillion, or about 40 percent, of market value.
Experts caution that these estimates are preliminary and the total
costs could get bigger still. They also note that the loss of real
estate wealth could prove more damaging for the general public than
falling stock values because more American families own homes than own
stock.
In recent years, the rise in real estate values has helped propel
consumer spending, as homeowners refinanced mortgages and took out
home equity loans.
"There weren't a lot of people living off their capital gains from
stocks," said Jane Caron, chief economic strategist at Dwight Asset
Management. "There were a lot people using their home as a piggy bank."
Of course, many people who bought their houses several years ago are
still ahead financially, because the sharp run-up in home values is
still far greater than the expected decline. Those who bought close to
the peak stand to lose the most if they have to sell in the near future.
In a new report to be issued today, the Joint Economic Committee of
Congress predicts about two million foreclosures by the end of next
year on homes purchased with subprime mortgages. That estimate is far
higher than the Bush administration's prediction in September of
500,000 foreclosures, which in itself would be a tidal wave compared
with recent years. Congressional aides provided details of the report
yesterday to The New York Times.
The Joint Economic Committee estimates that the lost of real estate
wealth just from foreclosures on subprime loans will be about $71
billion. An additional $32 billion would be lost because foreclosed
homes tend to drive down the prices of other houses in the neighborhood.
Those figures would cause a decline of $917 million in lost property
tax revenue to state and local governments, which will also have to
spend more on policing neighborhoods with vacant homes. The states
most likely to be hard hit fall into two categories: those where
prices had been rising fastest, like California and Florida, and
Midwest states with weak economies, like Michigan and Ohio, where
people with low or moderate incomes made heavy use of subprime loans
to become homeowners and consolidate debts.
"State by state, the economic costs from the subprime debacle are
shockingly high," said Senator Charles E. Schumer, Democrat of New
York and the chairman of the Joint Economic Committee. "From New York
to California, we are headed for billions in lost wealth, property
values and tax revenues."
Still, subprime mortgages make up a relatively small share of the
total housing market about $1 trillion of the $10 trillion in
outstanding mortgages.
The much bigger losses will be in declining real estate prices.
Household real estate currently totals about $21 trillion, according
to the Federal Reserve.
Global Insight, a research firm, predicts that the national average
for housing prices will drop 5 percent over the next year and 10
percent before mid-2009, for a total of about $2 trillion. Economists
at Goldman Sachs have predicted prices will drop by 15 percent,
meaning an overall decline of more than $3 trillion; other forecasters
have said the decline could be 20 percent or more.
House prices decline slowly, because many potential sellers simply
stay in their current homes when they think prices are too low. But
that becomes more difficult as people have to move either because of
job changes or, increasingly, because their monthly payments are
rising sharply. In the next 18 months, interest rates on more than two
million homes loans will reset to higher adjustable rates.
Inventories of unsold existing homes rose last month to their highest
level in almost 20 years.
Economists continue to update their predictions on how the loss of
housing wealth might affect the overall economy. Nigel Gault, chief
domestic economist at Global Insight, said he assumes that consumers
reduce their spending by about 6 cents for every dollar of lost wealth.
If prices drop 5 percent next year, that would mean a decline of $60
billion in spending, all else being equal. That would be a noticeable
slowdown, but not enough to cause a recession.
In the last several years, Americans have increased spending faster
than their incomes by borrowing against the rising value of their
homes. Economists estimate that such mortgage-equity withdrawals may
have added one-quarter of a percentage point to consumer spending
growth a boost that could now disappear.
Thus far, spending has climbed more than 3 percent over the last year,
and the most recent data on chain-store sales suggests sluggish growth
but nothing near levels consistent with a recession.
The housing bust has also led to job losses. From the start of 2003 to
March 2006, housing-related businesses like mortgage companies, home
builders and contractors added 1.3 million jobs, or about 23 percent
of all new jobs created in that period, according to an analysis by
Mark Zandi, chief economist at Moody's Economy.com.
Since then, the housing business has shed 383,000 jobs, while the rest
of the economy has added nearly three million jobs.
Jan Hatzius, chief United States economist at Goldman Sachs, said the
small decline in housing employment thus far is surprising and
suggests more layoffs are ahead.
"You still have a million jobs that aren't really needed anymore due
to the downturn in housing," he said.
D. Ritch Workman, president of the Florida Mortgage Brokers
Association, believes he has an explanation. Many of the brokers and
loan officers he knows are still working in the industry, even though
they have taken on second jobs to make ends meet.
The home-loan company he owns with his brother in Melbourne, Fla., has
seen revenue fall by half, to $500,000, and he has laid off two of its
three salaried employees. But the firm has added several loan
officers, who are paid on commission only, and it now has 18 people
making loans.
"I am surprised they have hung in there," Mr. Workman said. "But it's
a scary thing when that's all you know. If for 15 years you have been
a relatively successful broker and you have lived through the highs
and lows, what are you going to do? Most of them are holding on for
dear life and hoping things get better."
On Wall Street, which fueled the housing boom by lending to mortgage
companies and packaging and selling home loans, banks are writing off
billions of dollars in bad loans and are setting aside billions more
for the expected surge in defaults. Late yesterday afternoon, Bank of
America said it would lay off 3,000 people across the company and has
replaced the head of its investment banking division.
Yahoo! Groups Links
<*> To visit your group on the web, go to:
http://groups.yahoo.com/group/AsburyPark/
<*> Your email settings:
Individual Email | Traditional
<*> To change settings online go to:
http://groups.yahoo.com/group/AsburyPark/join
(Yahoo! ID required)
<*> To change settings via email:
mailto:[EMAIL PROTECTED]
mailto:[EMAIL PROTECTED]
<*> To unsubscribe from this group, send an email to:
[EMAIL PROTECTED]
<*> Your use of Yahoo! Groups is subject to:
http://docs.yahoo.com/info/terms/
