Cagan says his forecast is "based on conservative
recession conditions. I'm trying to do the most intellectually honest, go-ahead-and-get-the-magnifying-glass-out
way of doing it." The problem might not turn out as bad as he predicts, or
it might be worse. Under his model, every 1 percent drop in the national average
home price would lead to 70,000 more foreclosures over several years.
Shakeout seen in Vegas, Florida
Dean Baker, an economist who has had a bearish view of housing for years, says Cagan's analysis is fundamentally sound. "The main point I would emphasize is that he's basically looking at scenarios of flat or modest falls in prices," Baker says. That's important, because "we aren't going to have the same situation everywhere, but the markets with the sharpest price declines are precisely the places where you had a high concentration of these exotic mortgages."
Baker said he thinks places such
as Florida's Gulf Coast and Las Vegas, where prices
zoomed a couple of years ago, could see price
declines of 30 percent to 40 percent over the
next several years. Such markets will get caught
in a vicious circle where prices fall, houses
go into foreclosure, and prices fall even more
because of the glut of foreclosed houses on the
market, causing more foreclosures, and on and
The counterargument goes like this: The economy will weaken and interest
rates will fall, boosting demand for housing. Immigrants and retiring
baby boomers will sustain demand for housing. "I can't say I
find these arguments very compelling," Baker says.
There are other estimates of the impact of problems in the subprime sector, and foreclosures that might result:
- Stricter subprime loan standards
could cause total home sales to fall by 100,000
to 250,000 units a year nationally, the National
Association of Realtors says. The decrease in
sales, the NAR says, won't be a huge problem:
"Many of these households will probably,
over time, purchase a home when they have attained
the financial capacity to do so by saving for
a down payment or growing their income,"
the trade group says in a news release.
- Richard DeKaser, chief economist
for National City Corp., says he believes a
vicious circle of declining home prices and
foreclosures will affect "a fraction of
the housing market." He writes that "frothy
markets vulnerable to price corrections account
for only 16 percent of all single-family housing
units and their share of the total U.S. market
has been declining since the middle of last
- According to Bloomberg.com,
an economist for Merrill Lynch & Co. wrote
in a note to investors that U.S. home prices
could fall 10 percent unless the Fed cuts short-term
- New home sales could fall 20
percent from December's seasonally adjusted
rate of 1.1 million units, and housing starts
could plunge 35 percent to 45 percent, says
Ivy Zelman, an analyst for Credit Suisse.