Economic outlook: bad to worse

An old saw has Rhode Island typically leading New England states into a recession and being the last to emerge. While the hard work of coming to terms with the $150 million deficit for this fiscal year and $450 million for the next remains to be done, a number of other factors threaten to make things worse.

The foreclosure crisis is hitting cities and towns, as John Castellucci reports today in the ProJo:

PAWTUCKET — Investors stuck with bad loans and people losing their homes because they have fallen behind on their mortgage payments aren’t the only victims of the subprime lending crisis, according to city officials.

The city, too, is being hurt by the wave of foreclosures that has developed because borrowers with bad credit or variable-rate mortgages are unable to keep up with the payments on their loans.

Tax revenues have plunged because banks that foreclose on delinquent borrowers don’t have to pay taxes on the foreclosed property until it is sold to another buyer, Finance Director Ronald L. Wunschel said in an interview.

By state law, Wunschel said, banks are exempt from paying property taxes until a deed is recorded indicating that the foreclosed property has been sold.

At that point, all back taxes are due and payable. But, until then, the city receives no revenue from foreclosed properties, Wunschel said. As a result, he said, the recent wave of foreclosures has created a serious cash crunch for the city, contributing heavily to the nearly $1 million deficit that Pawtucket is facing in the current fiscal year.

Meanwhile, the national economy remains gripped by uncertainty. From today's Times:

“There are even odds of a recession,” said Mark Zandi, chief economist at Moody’s “It literally could go either way.”

The year that just ended was not for the faint of heart. As mortgage debt became synonymous with toxic waste, banks got spooked and tightfisted. Job growth slowed. Inflation fears grew. Still, consumers kept spending, and unemployment stayed flat. American companies found enough sales abroad to compensate for weakness at home.

The bursting housing bubble remains a locus of concern. An era of free-flowing credit and speculation has led to a far-flung empire of vacant, unsold homes — 2.1 million, or about 2.6 percent of the nation’s housing stock, Mr. Zandi said. Even in the worst years of recessions in the early 1980s and 1990s, the share of vacant homes did not exceed 1.9 percent.

This assemblage of unsold properties will not be whittled down to normal levels, economists suggest, until national home prices fall by at least 15 percent from their peak, reached in the summer of 2006. So far, prices have dropped a little more than 5 percent, according to the Standard & Poor’s Case-Shiller home price index.

The glut could be exacerbated if an already alarming wave of foreclosures continues to broaden, claiming even those with supposedly good credit.

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