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conditions for the remainder of the term. Therefore, according to its report, 2006 through 2008 will see a peak number of
borrowers encountering payment problems as their interest rates reset at much higher levels. This in turn will drive home
prices further down.
"We forecast that home price declines across the U.S. will average 7 percent in 2008, ranging as
high as 16 percent in California," the report says.
Global Insight says that despite the fact that new home building has
already reduced sharply from its peak levels in 2005 and 2006, it will get worse before it gets better. The report states
that September 2007 saw new home starts sink to their lowest level since 1993.
"We project that declines will continue
until the second quarter of 2008, when the annual rate of housing starts will be just 800,000, a drop of almost 20 percent
from current levels," the report states. "Starts will reach just 1.02 million units for the year, following levels of 1.81
million in 2006 and 1.35 million in 2007. Sales of existing homes will also continue to fall by another 10 percent in 2008."
Global Insight says that the mortgage market bust is also making employers more cautious about hiring, which in turn will
have an impact on consumer spending. The report predicts that employment growth will slip to an average of 75,000 per month
over the next six months. That is more than 100,000 fewer per month than the average gain in 2006. In 2008, it expects
consumer spending to drop sharply and auto sales to have their worst year since 1998.
All of this means less growth in
Gross Domestic Product for the nation as a whole, according to the report. Global Insight projects the U.S. GDP to grow by
just 1.9 percent in 2008, a full percentage point lower than would have been anticipated without the mortgage crisis. The
report goes further, examining local impacts for a lengthy list of metropolitan areas and making predictions about the
amount of growth metropolitan areas can expect in 2008 versus normal levels. These areas' Gross Metropolitan Product - the
value of all goods and services produced within a metro area - is expected to be dramatically lower in the coming year.
In the St. Louis metropolitan area, which includes six counties on the Missouri side and six counties on the Illinois side,
the GMP is expected to increase by just $1.8 billion in 2008, more than $1 billion less than what would have been expected
under normal conditions.
The report predicts that new residential investment will continue to decline, lowering spending
and income across the construction industries, and consumer spending will take a tumble as well.
"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," the report says.
Global Insight predicts that state and local governments will eventually take a hit as well. Hot real estate markets have
driven up property tax, transfer tax and sales tax revenues for many governmental bodies and these will all fall back to
earth.
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"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," the report
states.
While the Global Insight report analyzes the impacts of the subprime mortgage bust on national and metropolitan
area scales, local analysts insist that there are sub-markets within markets and the impacts will be much less in
Southwestern Illinois than in some other places in the U.S.
"I think we've always been fortunate in this area in that we
don't ride the wide swings up or down that they see on the West Coast and the East Coast and certainly in Florida," said
Dennis Terry, president and chief executive officer of First Clover Leaf Bank. "I think there probably has been a little bit
of value erosion in this area, but I don't think it's really cause for alarm."
Larry Ziglar, president and chief
executive officer of First National Bank in Staunton, says he is concerned about a trickle down effect on community banks.
He says banks like his weren't involved in the subprime mortgage business, but that activity spurred higher values across
the board. Even following prudent lending standards, loans were made on those inflated values. With home prices falling back
to earth, current values may not line up very well with standard loan to value ratios anymore.
"That's what concerns me," Ziglar said.
Frank Spreng, professor of economics and director of the MBA program at McKendree University, agrees with
the Global Insight report that the residential construction industry and all related industries are slumping, but he takes a
more philosophical view. He points out that the same businesses that are now taking a hit were enjoying a boom period for
several years. Just a few years ago, he says, the media was running stories about scarce building materials and escalating
prices. Nothing booms forever, says Spreng.
"When that boom was going on, none of them said, 'Gee let's slow this down
and let's not build so much. Let's not sell so much, so that we protect our market in the future,'" said Spreng. "They were
all in the business to do as much as they could, and that's understandable, but that can't go on forever."
Global Impact
predicts that the real estate crisis of 2007 and 2008 will go down in the record books.
"In recent years, millions of
Americans were introduced to a new breed of mortgage - a flexible loan with rate resets in what at the time seemed like the
far off and rosy future," says the report. "Instead, they now face a marketplace where home prices have cooled, home values
are shaky and their flexible loans have become financially unfeasible. 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. Global Insight expects that 2008 will bring more foreclosures, slower growth of U.S. GDP, stresses
for state and local government budgets and curtailed consumer spending.
"The good news is twofold," the report continues.
"Federal, state and local governments - along with mortgage lenders - have quickly recognized the fallacies inherent in much
of the subprime lending situation. And the mortgage crisis is not going to bring the economy grinding to a halt. Indeed, we
expect job growth in 2008 to be 0.85 percent and GDP growth to be 1.9 percent. In 2009, those figures will be 1.2 percent
and 2.9 percent, respectively. In the end, the economy will not come off the rails, and we may actually have learned
something."
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