Housing forecast: Dreary

The worst is yet to come.

That's a sure thing for the housing and mortgage markets this year, say analysts who expect a surge in foreclosures.

"We're just getting toward the eye of the storm," said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Md.

What is not clear is how much damage the housing sector will inflict on an already slowing overall economy. The latest blow was Friday's weaker-than-expected federal jobs report for December.

This week, Philadelphia-area residents have a chance to hear two high-profile outlooks on 2008.

Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, is scheduled to speak tomorrow to a Main Line Chamber of Commerce meeting at the Philadelphia Country Club in Gladwyne.

Plosser, known as an inflation hawk, takes a voting seat this year on the Fed's policy-setting Federal Open Market Committee, making his words all the more noteworthy. The struggle for Fed officials is whether further interest-rate cuts - urged by some to bolster the faltering economy - will spur inflation.

On Wednesday, Mark Zandi is scheduled to speak at the Philadelphia Chamber of Commerce's annual Economic Outlook breakfast at the Park Hyatt in Center City. Zandi, chief economist at Moody's Economy.com in West Chester, has said previously that he expected 2008 to be another tough year.

The housing market is expected to remain at the center of the economic storm this year as hundreds of billions of dollars worth of risky mortgages issued from 2005 through the middle of this year go through adjustments that make then unaffordable for borrowers.

"We're not even halfway through that," said Susan Wachter, a professor of real estate at the Wharton School.

Moody's Economy.com is forecasting a jump in the number of first-mortgage defaults in the United States to 1.67 million this year from 1.39 million last year and 892,750 in 2006. The average was 872,764 from 2000 through 2006.

More dramatic is the economic consulting firm's prediction for the number of houses that will be repossessed in the foreclosure process. That number will jump 42 percent this year, to 1.24 million from 869,557, Moody's said.

That's bad news for house prices.

"Foreclosures are adding to the inventory of unsold homes, and are worsening the housing outlook," said Patrick Newport, an economist with Global Insight Inc., an economic research firm in Waltham, Mass.

Foreclosures are concentrated in California, Arizona, Nevada, Arizona, Florida, Michigan and Ohio. Those states are going to face the most severe downturn in house prices - 20 percent to 30 percent in some areas.

Wachter said she expected average house prices in the Philadelphia region to fall anywhere from 3 percent to 5 percent. "To many people, it might not even be noticeable," she said.

Even if the market here is relatively calm, times will be difficult, compared with two years ago.

"Within the next six months, I'm expecting an explosion," said Scott Waterman, an attorney with Iannello, Waterman & Muir L.L.P. in Media. "If you thought 2007 was bad, buckle up, because 2008 is going to be worse."