Foreclosures Like To Surge Next Year, Analysts Say

By Glenn Roberts Jr. Inman News
While part of the real estate downturn is behind us now, the buyer's market will likely continue for at least two more years, foreclosures are likely to surge and "we're heading into a year with some more price declines," a real estate consultant told an audience of building-industry professionals on Thursday.

John Burns, a consultant who presented a housing market outlook during the annual Pacific Coast Builders Conference in San Francisco, said that a combination of factors, including low interest rates and unconventional mortgage products, dug deep into the pool of future home buyers during the prolonged real estate boom. And the market is still adjusting, he said.

"I know with a very high level of confidence that the number of foreclosures is going to surge," he said, as a high volume of subprime loans and other adjustable-rate loans are headed for a major reset in rates.

"It's really going to occur -- most of it -- next year, so we're going to see some foreclosures and just be prepared for that." The subprime market accounted for 18 percent of all mortgage purchases in 2005 and 25 percent of all home purchases in California, he also noted.

Other economists and building-industry representatives also offered their views on the future of the housing market, and provided statistics on projected housing starts, sales and demographic trends.

Builders have dropped home prices to motivate buyers in the slowing sales environment -- up to 21 percent in some markets -- and "any new home you're selling is a screaming deal compared to any resale deal a consumer is looking at" because the resale market has not been as quick to adjust pricing, Burns said, adding that resale pricing may catch up with new-home pricing.

Meanwhile, National Association of Home Builders president Brian Catalde, who met with reporters at the conference, downplayed the problems in the subprime mortgage market. "Economists generally agree that the downturn in housing will not push the nation into a recession, and the situation in the subprime mortgage (market) is not likely to dramatically affect the economy."

He added, "In fact, we've heard a lot about the subprime mortgages -- there's no reason to push the panic button. The subprime sector is an important but relatively small slice of the overall mortgage market. The market is self-correcting. The investors have pulled back, the underwriting standards have tightened, abuses have been curbed and the bad guys have gone out of business."

He said that the association expects the housing market to begin to climb out of its slump early next year, though "the first stages of the return will be sluggish."

The association expects a 21 percent drop in total housing starts and 18 percent drop in new-home sales this year compared to 2006 -- the association's projection is 1.45 million housing starts in 2007, including 1.1 million for single-family home starts.

Raphael W. Bostic, associate director of the University of Southern California's Lusk Center for Real Estate, said the word that best characterizes the state of the national economy is "uncertainty," with mixed statistics on job creation and a decline in the growth of U.S. gross domestic product. Energy costs have risen dramatically and food costs have also been on the rise, particularly in the West, he said.

"We're in a very uncertain time and what this has translated to is a tremendous amount of uncertainty and nervousness and anxiety on the part of the American consumer. Nearly 70 percent of the U.S. economy is driven by consumer consumption so if households are not consuming the economy is not going to grow and we are all going to feel a considerable amount of pain," Bostic said.

Also, the nation's economy is increasingly tied to international decisions, he said. "As the world gets more integrated, we face continued and increasing exposure to things that happen overseas," such as investments from China and the Middle East, he said.

Bostic noted that Western states continue to dominate the list of U.S. states with the fastest home-price appreciation, though former leaders such as California, Nevada and Arizona have been bumped out by states such as Utah, Wyoming, Idaho, Washington and Oregon.

San Diego and Miami are among the "poster children for wild rides in the market," with significant swings in real estate prices, Bostic said. Some common elements for markets with declining prices are a high degree of speculation and a significant spurt of building, he also said.

Delores A. Conway, director for the Casden Real Estate Economics Forecast produced by the USC Lusk Center, said that economic problems -- such as major job losses in cities like Detroit -- can contribute to home-price declines.

Conway said home-price appreciation has slowed in all major California cities, with home-price appreciation slowing from 23 percent year-over-year at one point to a recent level of about 1 percent year-over-year in the San Bernardino, Calif., area, for example, owing in part to over-building.

Dowell Myers of USC, who presented a report on demographic trends with immigration and baby boomers, said there is a looming "generational housing bubble" in California as home-price affordability becomes a major hurdle for the next generation of buyers.

Myers noted that home prices in California were 150 percent higher than those in Texas in 2000 and have since escalated to 350 percent higher.

Alan Nevin, chief economist for the California Building Industry Association, said during a Thursday conference call that the association has lowered its expectations for building permits this year.

The association expects 90,000 to 100,000 total single-family building permits this year and 45,000 to 55,000 permits for multifamily projects, for a total of 135,000-155,000 permits, which compares with an earlier forecast of 155,000 to 175,000 permits for 2007 in California.