An escalating mortgage crisis will push another 1.4 million U.S. homes into foreclosure and drive nationwide property values lower by 7 percent next year, according to a report released on Tuesday by a group representing city mayors.
The report, released by the U.S. Conference of Mayors, predicts states and cities will be left scrambling to make up for lost property tax revenue, particularly in markets such as California and Florida where home values had soared.
The forecast, prepared by the economic consulting firm Global Insight, was released as the non-partisan mayors group began a special meeting in Detroit intended to address the foreclosure crisis and its connection to problems such as neighborhood blight and crime.
"Not that long ago economists said housing was the backbone of our economy," Trenton, New Jersey Mayor Douglas Palmer said in a statement.
"Today the foreclosure crisis has the potential to break the back of our economy, as well as the backs of millions of American families, if we don't do something soon," said Palmer, a Democrat, who serves as president of the mayors group.
Property Values to Fall
The Global Insight report forecast U.S. homeowners would see property values fall by $1.2 trillion in 2008, with almost half of those overall losses coming in California.
California property values are expected to drop by 16 percent in 2008, the report said, costing the most populous state almost $3 billion in property taxes.
The report said the weakening U.S. property market would have knocked some $676 billion from home values, but another $519 billion in losses could be tied directly to the financial problems facing borrowers unable to meet escalating monthly mortgage payments.
During the property boom of 2004 and 2005, thousands of borrowers with riskier, or subprime, credit took out adjustable rate mortgages that had very low "teaser" interest rates for the initial two years before resetting at much higher rates.
As those interest rates have started to reset, home foreclosure rates have jumped, especially in once-hot real estate markets like Nevada, California and Florida.
Economic Growth to Be Hit
In Detroit, home to the depressed U.S. auto industry and the venue of Tuesday's conference, residential foreclosure rates have been running at almost five times the national average.
That has further depressed property values in an already poverty-torn city that has lost more than half its population in the past 30 years, leaving whole blocks abandoned.
As similar problems spread, the report forecast that the U.S. economy would grow by just 1.9 percent in 2008 with hiring and consumer spending both curtailed.
At a news conference scheduled for Tuesday, representatives of the Conference of Mayors were expected to join calls for mortgage investors and loan servicing companies to make a collective effort to work out new payment terms with borrowers to try to contain the number of foreclosures.
The mayors group, which got its start lobbying for federal relief during the Depression of the 1930s, represents more than 1,100 U.S. cities with a population of 30,000 or more.