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transactions, which have now also declined sharply. impacts for selected states.

We illustrate the magnitude of these


The continued downturn in the residential real estate market will further limit the resale op- portunities of homeowners facing payment difficulties. Sales will continue to be negatively affected by the lack of credit available to prospective buyers. Home price declines will mean that the price they could get for the home is less than their outstanding mortgage balance. Homes already foreclosed on adversely affect sellers as well, adding to the inventory of homes competing for buyers, and their presence in neighborhoods negatively affects the perceived value of other homes nearby. Lastly, the credit markets have become less hospi- table to re-financing. Adding to this stress will be reduced job opportunities as economic growth slows in late 2007 and into 2008. Such a lack of jobs and income historically leads directly to greater mortgage payment delinquency and subsequent foreclosure.

The peak years for the issuance of sub-prime and other adjustable rate mortgages were 2004 and 2005, and under the most common two-year reset terms, 2006 through 2008 will see the peak number of borrowers pushed into payment difficulty. Unless institutional ar- rangements are made to bring mortgage holders together with buyers, 2007 will see fore- closure activity accelerate. We forecast that home price declines across the U.S. will average 7% in 2008, ranging as high as 16% in California. There is a large risk of greater price declines. But even under our conservative forecast, foreclosure activity rises to 1.4 million homes, representing a property value of $315.9 billion. Appendix Table A1 catalogs the distribution of this activity across the states.

Nearly all states have been affected in some way by the loosening of credit standards and the prevalence of adjustable rate mortgage (ARM) lending that occurred over the last sev- eral years. Those that have seen the largest increase in the number of both prime and sub- prime loans going into foreclosure are the areas that posted some of the highest growth during the boom years - Nevada, Arizona, California, and Florida - as well as those that have seen sluggish economic growth, Michigan being one example. During the boom the high growth states were the beneficiaries of significant population and economic growth. However, they were also the target for large numbers of investors and speculators, who were looking to make money from the rapidly appreciating value of homes. For instance, we estimate that in Arizona the number of loans in foreclosure (both prime and sub-prime) will increase by more than 60,500 in 2008, with the value of housing represented by those foreclosures measuring at least $13.7 billion. Arizona will see an estimated decline in the total value of its housing of more than $30 billion due to the fallout from the rise in fore- closed properties and the deceleration in the residential real estate market.


New home building has already contracted sharply from its peak levels in 2005 and 2006, but there is no end yet in sight. In September this building activity sunk to its lowest level since 1993. We project that declines will continue until the second quarter of 2008, when the annual rate housing starts will be just 800,000, a drop of almost 20% from current lev- els. Starts will reach just 1.02 million units for the year, following levels of 1.81 million in

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