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numbers, dooming the finances of millions of buyers. Delinquencies and foreclosures began to mount. At the same time, the inventory of new and existing homes for sale escalated, putting further downward pressure on prices, and limiting the ability of those who needed to sell.

The final straw occurred in the summer of 2007, as institutional holders of mortgage-backed securities realized the risk in their portfolios. Credit dried up - for refinancing, for sub prime buyers, and also for jumbo mortgages which lacked the guarantees provided by Freddie Mac and Fannie Mae.

This report describes the economic implications of the recent mortgage credit crisis. The de- cline in home sales and in new home building started in 2006 and continued in 2007. Gross Domestic Product (GDP) growth was already slowed by the contraction in residential in- vestment. Forecasts for 2008 had anticipated continued sluggish homebuilding, and further stress on household wealth from declining home prices and from resetting adjustable rate mortgages. In this report we also focus on the ongoing negative impacts of the credit crisis that exploded in August due to skyrocketing foreclosure rates and sub-prime mortgage de- faults.

SUMMARY OF RESULTS

The foreclosure crisis will have profound economic effects in 2008. U.S. GDP will be $166 billion lower as a result, because new residential investment will be weaker, lowering spend- ing and income across the construction industries, and because consumer spending is cur- tailed as homeowners respond to decreased home equity wealth. Both of these spending impacts have multiplier effects across the economy as lower incomes decrease demand for other goods and services. As a result, there will be 524,000 fewer jobs created across the country in 2008.

Homeowners will also see property values decline by $1.2 trillion in 2008. The initial ad- justment of over-heated home prices to the combination of weaker market demand and large inventories of homes for sale would have reduced values by $676 billion in 2008. Now, due to the foreclosure and mortgage crisis, home values will decline further, by an addi- tional $519 billion. Foreclosures in 2008 will increase by at least 1.4 million. These homes represent a market value of $316 billion.

State and local government revenue sources will be impacted as well. Local government property tax revenue had also been bolstered by rapidly escalating market values and as- sessment, but not only is the growth of this budget source reduced by the current contrac- tion, there is also significant risk of downward pressure on taxable value when property values contract. In most states the growth of sales tax receipts will be significantly slowed by declines in construction-related purchases, by declines in the new furniture and fixtures spending usually coincident with home purchases, by the dearth of spending financed by home equity lines of credit, and by the pullback in general consumption by households who feel, and are made, less wealthy by the declines in homeowner equity, which represents the biggest part of most households’ savings portfolio. Meanwhile, many state budgets have benefited in recent years by the increased receipt of transfer taxes imposed on real estate

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