New york/ Los Angeles: For US homeowners, builders, bankers and realtors, the crash of 2007 will only get worse in 2008.
Everyone from mortgage-finance company Fannie Mae to Lehman Brothers Holdings Inc expects declines next year.
Existing home sales will drop 12% and existing home prices will fall 4.5%, Washington-based Fannie Mae says. Lehman analysts estimate almost 1mn mortgage loans will default in 2008, up from about 300,000 this year.
“We’re only halfway through the housing shock,” said Ethan Harris, chief US economist at New York-based Lehman, the fourth-biggest US securities firm by market value. “It’s just a matter of time before the weakness spreads to the rest of the economy.”
The housing market collapse has been anything but the “soft landing” that Federal Reserve Bank of San Francisco President Janet Yellen and David Lereah, former chief economist at the National Association of Realtors in Chicago, predicted for real estate at the start of 2007.
Median home prices declined in the US this year, the first annual drop since the Great Depression, according to forecasts from the National Association of Realtors. “I’m not going to sit here and tell you it’s going to turn real strong next year,” said Jim Gillespie, chief executive officer of Coldwell Banker Real Estate LLC, the largest US residential brokerage, according to Franchise Times. “It’s not going to turn real strong next year.”
Analysts at New York-based CreditSights Inc predict housing won’t rebound until “2009, at best.”
Moody’s Economy.com Inc, the economic forecasting unit of Moody’s Corp in New York, says home sales will hit bottom next year, declining 40% from their peak. And US Treasury Secretary Henry Paulson’s plan to slow foreclosures won’t help those who already are facing the loss of their homes, like CW and Sandy Hicks of Las Vegas.
The Hickses refinanced the mortgage on their four-bedroom, 1,300-square foot home two years ago. Their $237,000 adjustable-rate loan resets every month, and now their monthly payment has jumped 50% to $2,700. The couple can’t afford it.
“It looks like we’re going to have to let the house go,” said CW Hicks, 65, a long-haul truck driver who has kept working past retirement age to help pay medical bills for his wife Sandy, 59, who has heart problems. “I guess we’ll try to rent a house or something.”
The Hickses aren’t the only ones grappling with the consequences of this year’s housing market. The number of Americans behind on their mortgage payments rose to a 20-year high in the third quarter, the Washington-based Mortgage Bankers Association said earlier this month.
“The whole thing has deteriorated faster and further than we or anyone else had anticipated,” said Ron Muhlenkamp, president of Wexford, Pennsylvania-based Muhlenkamp & Co, which has about $2.5bn under management and holds shares of mortgage lender Countrywide Financial Corp and homebuilder Ryland Group Inc.
The five biggest US homebuilders by revenue, led by Miami-based Lennar Corp, recorded writedowns and charges totaling about $7.5bn this year for land that plunged in value.
Mortgage companies, including Irvine, California-based New Century Financial Corp, the second-largest subprime lender in 2006, have filed for bankruptcy protection after borrowers unable to repay their loans defaulted.
H&R Block Inc of Kansas City, Missouri, shut Option One this month after plans to sell the subprime home-lending unit fell apart, and US regulators ordered Santa Monica, California-based Fremont General Corp to stop selling subprime mortgages, loans given to people with poor or limited credit histories or high debt levels.
Bank and brokerage writedowns and losses related to subprime loans totaled more than $80bn.
Citigroup Inc, the biggest US bank by assets, last month said it would write down the value of subprime mortgages and collateralised debt obligations - securities backed by bonds and loans - by $8bn to $11bn.
At Merrill Lynch & Co, writedowns on mortgage-related investments and corporate loans have cost the world’s biggest brokerage $8.4bn. Both companies are based in New York.
The losses led to the ouster of Merrill chief executive Officer Stan O’Neal and the resignation of Citigroup CEO Charles Prince
O’Neal’s exit came after he said as late as July that “not even a sharp downturn in one market today necessarily portends financial disaster in another, and we’re seeing this play out today in the subprime market.”
Fallout from the subprime crisis in the US has crimped economic expansions in the UK, Canada and Germany.
Investment in UK commercial real estate may slump 60% in the fourth quarter as buyers shun large acquisitions of shops and offices, Chicago-based Jones Lang Lasalle Inc, the world’s second-largest property brokerage, said on December 10.
Spending on British commercial real estate, Europe’s largest investment market, may decline in the final three months of the year to £5bn ($10.2bn) from £18.6bn a year earlier, Jones Lang said in a statement. Investment for all of 2007 may fall 24% to about £48bn.
Falling prices are already hurting UK property funds. New Star Asset Management Group, the fund company founded by John Duffield, said earlier this week that value of its UK commercial property mutual fund was cut by 8.2% after the value of its buildings dropped 18% since July.
Market lending rates rose worldwide in the past month as writedowns linked to subprime defaults heightened concerns about the strength of financial institutions.
“Until the public is convinced that the subprime credit exposure has been identified, quantified and dealt with, there will continue to be anxiety,” said Todd Canter, international director at LaSalle Investment Management in Baltimore, where he helps manage about $11bn in real estate stocks. “There will continue to be volatility in the marketplace.”
US office sales fell 70% in October from a year ago, industrial sales declined 24%, and retail and apartment sales dropped 50, according to New York-based research firm Real Capital Analytics Inc.
The declines are the biggest since the company began keeping records in 2001. The 128-member Bloomberg REIT Index rose 62% in the two years ended February 8, the day before New York-based Blackstone Group LP bought Equity Office Properties Trust for $39bn, including debt, in the real estate industry’s biggest leveraged buyout.
The index has dropped 26% since then.
“You’re not seeing the Equity Office transactions anymore,” said Dan Fasulo, Real Capital’s managing director for research. “It’s extremely difficult right now to finance the large portfolio transaction and privatisations we’ve seen over the last couple of years. I can’t even think of one major privatisation that has been announced since the credit crunch.”
Mission West Properties Inc, owner of almost 8mn sq ft of Silicon Valley commercial buildings, disclosed talks in July with a private equity firm about being acquired.
The Cupertino, California-based company said a month later the sale might fail after a bank withdrew funding. Mission West then said in October that there remained three potential bidders. A transaction hasn’t yet been announced.
Highwoods Properties Inc, the owner of almost 34mn sq ft of commercial space, said last month that it no longer expects to sell properties in Winston-Salem, North Carolina, totaling 1.6mn sq ft. The company cited “volatility of the capital markets” as the reason the sale didn’t go through.
“I know we weren’t predicting things would get this bad,” said Frank Liantonio, executive vice president for global capital markets at New York-based Cushman & Wakefield Inc, the largest closely held real estate services provider. “There were some signs there, but I don’t think anyone anticipated the level of dislocation that was actually created.” – Bloomberg