Saturday, December 15, 2007

U.S. Housing Crash Deepens in 2008 After Record Drop (Update2)

By Daniel Taub

Dec. 14 (Bloomberg) -- For U.S. 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 percent and existing home prices will fall 4.5 percent, Washington-based Fannie Mae says. Lehman analysts estimate almost 1 million 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 U.S. economist at New York-based Lehman, the fourth- biggest U.S. 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 U.S. 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 U.S. residential brokerage, according to Franchise Times. ``It's not going to turn real strong next year.'' Gillespie said he doesn't make housing market forecasts.

`Let the House Go'

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 percent from their peak. And U.S. Treasury Secretary Henry Paulson's plan to slow foreclosures won't help those who already are facing the loss of their homes, like C.W. 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 percent to $2,700. The couple can't afford it.

``It looks like we're going to have to let the house go,'' said C.W. 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.

Lender, Homebuilder Woes

``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 $2.5 billion under management and holds shares of mortgage lender Countrywide Financial Corp. and homebuilder Ryland Group Inc.

The five biggest U.S. homebuilders by revenue, led by Miami- based Lennar Corp., recorded writedowns and charges totaling about $7.5 billion 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 U.S. 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.

O'Neal, Prince Fall

Bank and brokerage writedowns and losses related to subprime loans totaled more than $80 billion. Citigroup Inc., the biggest U.S. bank by assets, last month said it would write down the value of subprime mortgages and collateralized debt obligations -- securities backed by bonds and loans -- by $8 billion to $11 billion. At Merrill Lynch & Co., writedowns on mortgage-related investments and corporate loans have cost the world's biggest brokerage $8.4 billion. 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 O. ``Chuck'' Prince III. 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.''

U.K., Canada

Fallout from the subprime crisis in the U.S. has crimped economic expansions in the U.K., Canada and Germany.

Investment in U.K. commercial real estate may slump 60 percent 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 Dec. 10.

Spending on British commercial real estate, Europe's largest investment market, may decline in the final three months of the year to 5 billion pounds ($10.2 billion) from 18.6 billion pounds a year earlier, Jones Lang said in a statement. Investment for all of 2007 may fall 24 percent to about 48 billion pounds.

Falling prices are already hurting U.K. property funds. New Star Asset Management Group Ltd., the fund company founded by John Duffield, said earlier this week that value of its U.K. commercial property mutual fund was cut by 8.2 percent after the value of its buildings dropped 18 percent 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.

Anxiety Continues

``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 $11 billion in real estate stocks. ``There will continue to be volatility in the marketplace.''

Some economists and real estate executives say the industry may be on the verge of turning around. Lawrence Yun, chief economist at the National Association of Realtors, said ``we are touching the bottom'' for existing-home sales. Coldwell Banker's Gillespie said demographic and economic changes, such as rising immigration and employment, will help boost home sales.

``People buy for lifestyle, and there's a lot of pent-up demand out there,'' Gillespie said.

Offices, Apartments

U.S. office sales fell 70 percent in October from a year ago, industrial sales declined 24 percent, 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 percent in the two years ended Feb. 8, the day before New York-based Blackstone Group LP bought Equity Office Properties Trust for $39 billion, including debt, in the real estate industry's biggest leveraged buyout. The index has dropped 26 percent 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 privatizations we've seen over the last couple of years. I can't even think of one major privatization that has been announced since the credit crunch.''

Mission West Properties Inc., owner of almost 8 million square feet 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.

Sales Delayed

Highwoods Properties Inc., the owner of almost 34 million square feet of commercial space, said last month that it no longer expects to sell properties in Winston-Salem, North Carolina, totaling 1.6 million square feet. 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.''

To contact the reporter on this story: Daniel Taub in Los Angeles at dtaub@bloomberg.net

Last Updated: December 14, 2007 17:28 EST

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