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Letter to the editor

Crystal gazing at home sales

One believes homes prices will plummet, plunging Florida into a recession. The other, though, believes those forecasting drops in housing market are way off-base and the slide, which should end in about a year, will not lead to a recession.

By James Thorner, Times Staff Writer
Published June 8, 2007

ADVERTISEMENT Sean Snaith says people will still retire here and most of state's economic sectors will grow. Jan Hatzius doesn't think tourism will offset the state's housing slump to hold off recession.

No one denies the Tampa Bay area housing market is flatter since the frothy sales and prices of 2004 and 2005. Prices have plunged from their peaks as too few buyers chase too many homes. But few agree how deep or prolonged the price declines will be and how they will affect the rest of the economy. The Times talked to two nationally known economists whose opinions mostly clash on this issue.

The bear: Jan Hatzius
Senior economist, Goldman, Sachs & Co.
The German-born Hatzius trained at the London School of Economics. From his New York office, he does much of the firm's economic research that's distributed to clients. Hatzius believes Florida's record home price appreciation since 2000 now makes the state "the epicenter of the U.S. housing bust."
His take: Homes prices will decline deeply for a couple of years, and Florida will fall into a full-blown recession.

The bull: Sean Snaith
Director of the University of Central Florida's Institute for Economic Competitiveness
Snaith specializes in economic forecasting. He's a member of advisory panels with the Federal Reserve Bank of Philadelphia and USA Today. A critic of the "housing bubble" school, Snaith prefers the term "housing souffle." Real ingredients, not just speculation, fed Florida's boom. But now the souffle has partly deflated.
His take: Forecasted price drops are excessive. The worst of it will be over by mid-2008. Recession? Doubtful.

Here are their edited answers to four questions:

How long will home price declines in the Tampa Bay area continue and how deep will those declines be?
Hatzius: Forty percent is the current level of overvalue in Florida. I would guess the area will have 10 percent or 15 percent price declines for a couple of years. Beyond that, my crystal ball doesn't go. Incomes do go up over time. If people make more, they can afford more expensive homes, so it's possible prices won't fall as much.
Snaith: I think 40 percent is probably excessive. The worst of the situation will be over by the middle of 2008. A 10- to 15-percent price decline is the worst- case scenario. We've got a lot of long-term drivers in place that will support housing: Baby boomers retiring, 40-year-low mortgage rates, strong personal income, low unemployment.

How likely is it that the housing slump will throw Florida into a full blown recession?
Hatzius: I think it's likely. The drag on Florida growth from housing looks twice as large as in the country as a whole. The rest of the country gets an offset from the strength of manufacturing. Florida has less manufacturing, about 5 percent of its economy. Some of the housing slump may be offset by tourism but I don't think it will be large enough.
Snaith: I don't put a high probability on that transpiring. I think the worst problem in Florida is focused in the condo market. We really saw much more speculative behavior there. We had people gambling, effectively hoping to flip it before the condo was constructed. The rest of the economy is able to pick up and absorb the housing troubles. There's plenty of growth in other sectors.

What shape is West Florida in compared to the rest of the state?
Hatzius: You're already seeing quite a bit more price weakness in the Tampa Bay market, compared to the Miami market. At least in the single-family market, the biggest drops are likely to occur on the west coast of Florida where the excesses have been most pronounced. I'm no expert on the area, being in New York, but that's how its looks from 36,000 feet.
Snaith: I think South Florida in general has to deal with the condo issue to a greater extent. But there will be pockets of pain throughout coastal areas of the state. Anywhere there was a rush to buy these condos it's going to take some time. But remember, the baby boomers aren't retiring to North Dakota. They're coming to Florida, Arizona and Nevada.

How serious have the subprime mortgage loan troubles been for Florida housing?
Hatzius: The subprime market developed during a period of excess in the market. And now that the excess is coming to an end, the financially vulnerable borrowers are getting hurt. But it's not that the subprime market collapsed and is causing the housing weakness. That mixes cause and effect.
Snaith: Subprime borrowers, by definition, are people who have poorer credit and therefore have higher defaults. A lot of people were trying to make this into something more apocalyptic, like it was a contagion that would spread to the rest of the market. I don't think that's been true. But it adds to the malaise in the housing sector. It adds to the inventory of houses in foreclosure.

[Last modified June 8, 2007, 10:31:33]