Real Estate: How Far Will It Fall in 2008?

There is one big question looming for homeowners and commercial real-estate investors this year: How much worse will it get?
The past year was the most painful in decades for residential real estate, as defaults on loans to less-creditworthy borrowers created a broader credit squeeze. House prices fell, home ownership dropped, foreclosures soared, and the housing market emerged as the soft underbelly of the economy.
Commercial real estate hit its peak early in 2007, when private-equity firm Blackstone Group LP paid $23 billion for office giant Equity Office Properties Trust, and then did an about-face. As credit tightened throughout the economy, commercial-property values tilted downward for the first time in several years.
Housing prices are likely to slide further this year, as credit remains tight and interest rates on many mortgages are set to rise, or "reset," and could trigger more defaults.
The commercial real-estate market, which includes properties such as offices, apartment buildings and shopping centers, could continue to soften as slower economic expansion causes rents to rise more slowly than in the past.
Residential Blues
Relief from the housing woes is unlikely anytime soon. "It will be another very bleak year with the worst of it occurring in the first half," predicts Mark Zandi, chief economist at economic-research site Moody's Economy.com. "Inventory is only growing and needs to be worked off before the market finds some stability," he said.
Through the third quarter of 2007, slightly more than 2.5% of all houses, or more than two million, were for sale and vacant, according to the U.S. Census Bureau. Since the first records were kept in 1965, that figure had never been higher than 2%, until the fourth quarter of 2005.
Demand is likely to stay depressed, keeping prices low, as high-risk borrowers who in the past would have qualified for subprime loans find themselves locked out of the market. Borrowers with little, if any, money for a down payment and those who don't want to document their finances also are likely to find the going tough.
House prices have fallen 6.5% as of October, since peaking in June 2006, according to the S&P/Case-Shiller Home Price index, which measures home values in 20 cities. Daniel Mudd, chief executive of government-sponsored mortgage investor Fannie Mae, expects prices to decline another 4% to 5% in 2008....more