Weakest U.S. Housing Markets

Weakest U.S. Housing Markets
By Matt Woolsey, Forbes.com
Oct. 5, 2007

How much longer can real estate in already depressed areas decline in value?

At least another year.

In fact, it's reasonable to expect 8 percent to 9 percent median home-sale price decreases through 2008 in Detroit, Riverside, Calif., and Las Vegas, currently the three least stable real estate markets in the country, according to data compiled by Moody's Economy.com, a Westchester, P.A.-based research firm.

In Pictures: Weakest U.S. Housing Markets

To arrive at these findings, Moody's ran projection models based on a number of supply and demand drivers: the state of the local economy, job growth, new construction contracts, construction costs, unsold housing inventory and housing affordability; researchers also looked at figures projecting housing turnover and housing sales rates. The third model took into account the state of local credit markets, and foreclosure and delinquency projections.

Overall rankings were a weighted average of the three models, slightly favoring factors contributing to supply and demand. Data were supplied by the U.S. Census Bureau, National Association of Realtors, Equifax, a credit market tracking firm, and Moody's Economy.com.

Falling Figures
Economists generally agree that a market requires around a 2 percent annual price growth to stay neutral. That means an 8 percent or 9 percent drop in price can cause chaos. That's what those living in California, Arizona, Florida, Detroit and Las Vegas can expect. These markets are projected to post the biggest price drops in the coming year. Except for Detroit, all experienced impressive price growth during the boom, which in turn spurred a great deal of construction. When the housing market fell apart, it hurt these markets in two ways. First, they were left with high amounts of unsold inventory, which depresses prices. Second, when construction stopped so did all the housing-related job growth that came with it.

"It's very clear that in Florida, California and Nevada, many of the jobs were housing related," says Mark Zandi, chief economist at Moody's Economy.com, noting that job creation is a key component of recovery and that for these markets to address their inventory problems, "builders are going to have to slash construction, which hurts job growth."

High foreclosure rates don't help, either. Detroit, Riverside and Las Vegas are expected to lead the nation in delinquencies and foreclosures in 2008.

Las Vegas does have something of a silver lining: Its sales rate is the second fastest in the nation, according to Moody's, a sign that sellers are slashing prices to move inventory and thus tightening the unsold housing supply.

In a real bind is California, which gets hit by lending and credit problems on both the top and bottom end of the market. Riverside, Sacramento and Los Angeles all have high ARM shares and loads of sub-prime mortgages, but also have such expensive housing stock that the securitization freeze is hitting those buying in the middle of the market. In a market like Los Angeles, where the median home price is $593,000, it's increasingly difficult for buyers to get loans.

On Sept. 18, Congress voted through a bill to raise the securitization limit of government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac (who currently securitize loans below $417,000) as a way to help offset the credit problems hampering many of the aforementioned markets.

Still, don't expect the legislation to bail out speculators.

"There's a need to increase the [securitization] limit on a regional basis, but you need to keep in mind that the GSEs were created for low- and middle-income home buyers," says Rep. Lincoln Davis, D-Tenn., who sits on the House Finance Committee. "[Securitization] should continue for modest houses, but the government shouldn't be involved in luxury home buying and lending with federal money."