Property values are expected to fall 7 percent next year as 1.4 million U.S. homes fall into foreclosure, according to a report released today by the U.S. Conference of Mayors.
The report, prepared by economic consulting firm Global Insight, forecasts a $1.2 trillion drop in property values in 2008, with nearly half of those losses coming from California, where home prices are expected to drop as much as 16 percent.
As a result, falling property taxes in California are expected to cost the state $3 billion, forcing it to look elsewhere for funding.
The report said falling home prices will account for about $676 billion of the losses, and another $519 billion will be tied to foreclosed properties.
“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,” Trenton, New Jersey Mayor Douglas Palmer said in a statement.
Unfortunately, foreclosures mark down the property values of neighboring homes, exacerbating an already critical situation.
“The wave of foreclosures that has rippled across the U.S. has already battered some of our largest financial institutions, created ghost towns of once vibrant neighborhoods — and it’s not over yet,” the report said.
The mayors hope the release of the report will motivate mortgage lenders, who have recently been criticized for not doing enough to rescue homeowners, to issue more loan modifications to stem the anticipated rise in foreclosures.
“The report demonstrates that it’s very important for the investors who own these loans to step up to the plate and work out modifications where it makes sense. If they don’t, the economic impact is only going to get worse,” said David Gatton, a senior adviser at the U.S. Conference of Mayors.
“Every time you have a foreclosed property, it drags down the value of properties around it.”
The group expects the housing market to wreak havoc on the rest of the economy, with consumer spending expected to increase by a meager 2 percent, and gross domestic product contracting by $166 billion.
New York is expected to lose $10.4 billion in economic activity in 2008, followed by Los Angeles with $8.3 billion, Dallas and Washington with $4 billion each, and Chicago with $3.9 billion.
Economic growth will fall by more than 25 percent in 143 U.S. metropolitan areas next year and by more than a third in 65 metro communities.
The organization also predicts that new home construction will sink to its lowest level since 1993.
The report, titled “The Mortgage Crisis: Economic and Fiscal Implications for Metro Areas,” was released by the United States Conference of Mayors, which represents more than 1,100 U.S. cities.