Fitch: Housing Market Downturn Affects Municipal Credit.

NEW YORK -- While the housing market has registered a limited economic effect on certain areas of the nation to date, delinquency and foreclosure levels and trends indicate an emerging pressure for several states, according to a recent report released by Fitch Ratings.

Fitch's report, entitled, "The Emerging Economic Effects of the Housing and Mortgage Market Downturn on Municipal Credit," focuses on the potential impact of the housing and mortgage market downturn on municipal credit quality. Including fourth-quarter 2006 data, it identifies those states and metropolitan statistical areas where housing price declines or decelerations are most apparent.

Delinquencies and foreclosures are worse in areas facing other economic challenges, such as Midwestern states confronting domestic auto and related manufacturing downsizing, specifically Ohio, Michigan and Indiana, and in those states still rebounding from Hurricane Katrina, including Louisiana and Mississippi.

Traditional economic factors, such as income and employment levels, are the primary reason for rising or high mortgage foreclosures. Delinquency and foreclosure rates, according to Fitch, are still relatively low in the formerly hot markets of Arizona, Florida, California and Nevada, where MSA housing price declines and decelerations, particularly in Florida and Arizona, were among the greatest in 2006.

However, the rate of growth in delinquencies and foreclosures is rising in these and other states and in turn could exert its own economic influence. Aside from increasing housing inventory, which can further suppress home prices and pressure an already weakening housing market, other influences could include reduced consumer and economic activity, which affect governmental tax revenue that is already sensitive to reduced residential construction activity.

Housing downturns have certainly occurred in the past and it is not surprising that it can have an economic impact. The effect of this downturn may be distinguished for two reasons. The first is the prior strong growth in residential prices over the first half of this decade, despite a national recession. The second reason is the ...