Where is the real estate marketplace headed in 2008?

Each year we look at our crystal ball to see if we can penetrate the fine mists of the future. Last year at this time we suggested that home sales would fall, prices would drop and that interest rates would rise. Why? Huge numbers of toxic loans were scheduled to re-set. Higher monthly payments would force many owners to sell and many more to be foreclosed. The result was largely as predicted: Sales slowed significantly, prices across the country were down but interest rates remained curiously stable and steady.

It would be wonderful to suggest that the year ahead will be filled with cheer and good news on the home front, but the sobering events of 2007 are likely to be repeated in the coming 12 months.

As folks have begun to figure out, we are now faced with a full-blown financial crisis. The government's efforts to organize a $100 billion "SIV" bailout for big banks failed just before Christmas. Fannie Mae and Freddie Mac have each sought additional capital while hundreds of lenders have contracted or gone out of business.

The failure to regulate mortgage lending at the federal level is increasingly seen as the root cause of the financial crisis. Even so, at New Year's the best the President could propose was a voluntary loan modification program that lenders were free to ignore. In December HUD claimed that the much-hyped FHASecure program had helped 33,000 borrowers nationwide while the actual number of delinquent homeowners saved from foreclosure turned out to be just a few hundred.

Look for more the same in 2008. Another two million or so foreclosures, no meaningful federal relief for distressed toxic loan borrowers, huge efforts to scuttle meaningful lender reform bills that have passed in the House and the Senate, declining home values, and reduced state and local revenues because of falling real estate prices. And if interest rates do rise, watch out. The economic impact will be worse than anything seen since Herbert Hoover sleep serenely at the White House.

Published: January 2, 2008

Use of this article without permission is a violation of federal copyright laws.