CEOs see falling home prices and mounting foreclosures
The chief executives of a major home builder and the country’s leading mortgage lender offered bleak assessments Monday of their industries and the economy, saying falling home prices would force more homeowners into foreclosure.
Housing prices in California could fall 10% to 15% in the next 18 months, said CEO Jeffrey Mezger of Los Angeles-based KB Home, who appeared on a panel at a Milken Institute conference about California’s economic prospects.
The other members of the panel agreed that prices would fall, a trend that one panelist -- Angelo Mozilo, chief executive of home-loan giant Countrywide Financial Corp. -- said would drive foreclosures to record levels for the entire mortgage industry.
Job loss, divorce and health problems are the main reasons people stop making mortgage payments, Mozilo said.
When home prices are rising, such jolts prompt many homeowners to sell their properties, repay their loans, keep whatever money is left “and then get on with their lives,” he said.
But recent declines in home values, together with the low-down-payment loans commonly available earlier this decade, have left many homeowners without that option because they owe more than their house is worth, Mozilo said.
Asked whether the worst of the mortgage debacle was over, Mozilo replied: “No, I don’t think so. . . . Not as long as you’re eating up people’s home equity.”
Countrywide reported a $1.2-billion loss Friday, the latest in a series of financial firms to record huge losses related to the collapsed sub-prime mortgage market for borrowers who are too risky to get traditional bank loans.
In reporting the results, Mozilo said its third-quarter results -- which in effect accounted for past and foreseeable losses in one fell swoop -- would position Countrywide to return to profitability in the current quarter and 2008.
Also appearing on the panel were California Treasurer Bill Lockyer and Ross DeVol, director of regional economics for the Milken Institute.
DeVol said a 10% decline in home prices, coupled with rising oil prices and the credit crunch that began with the sub-prime meltdown, would shave 3.2% off California’s gross domestic product, canceling out growth elsewhere in the economy.
If that occurs, “You’re right on the razor’s edge of recession,” he said. “If anything else goes wrong, we’re probably in a recession.”
Lockyer disagreed, saying he believed that economic growth from sources such as emerging alternative energy technologies would buoy California.
“It just seems to me that our West Coast economy is so diverse” that recession is unlikely, he said.
After the discussion, Lockyer told Reuters that everyone on the panel expected declines in California home prices of 10% or more. Mezger, who anticipated the drop could be as much as 15%, said urban areas would not see as much price pressure as suburban ones because areas with jobs would be stronger, the news agency reported.
Audience members at the Beverly Hilton Hotel, mainly business and financial executives, were asked to vote on the most likely scenario for home prices over the next 18 months.
The largest segment -- about 35% of the audience -- said a 5% decline in home prices was the most likely scenario while 28% voted for a 10% decline and 24% for a fall of 15% or more.
Ten percent of the audience said prices would slip 2% while just 3% predicted prices would remain about the same.