2009 Real Estate Forecast: Troubles Spread

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Most of the option ARMs, which allow borrowers to make minimum payments that don't even cover the accrued interest, are concentrated in already battered California, Florida, and Las Vegas.

Option ARMs originating in 2006 make up about $140 billion of the $350 billion of outstanding option ARMs, and 45% to 50% of them are expected to default, according to an analysis this past summer by Lehman Brothers. The 2007 option ARMs, which were originated just as home prices began falling, were expected to perform similarly badly.

Lost Jobs

Problems in other states could have less to do with risky mortgages and more to do with job losses. The impact of unemployment on the real estate market and the larger economy are already on display in hard-hit manufacturing cities such as Gary, Ind., and Detroit. Alabama, Arkansas, Atlanta, Michigan, and Ohio could see problems next year, Colpitts said.

"We're in the middle of the game here," said Joseph Seneca, professor of economics at Rutgers University in New Jersey. "There's significant further unwinding to come…. We're in a downward spiral with job losses that is reinforcing the weakness in the consumer markets, particularly in the largest investment the consumer makes, in his home."

Seneca said the government's aggressive policies to stabilize housing by injecting liquidity in banks, lowering interest rates, tax stimulus packages, and other efforts will help. But the downward cycle will end only when prices fall far enough that they attract large numbers of buyers.

The nation's energy-producing states, such as North Dakota, South Dakota, Oklahoma, Alaska, and Montana, could be economic bright spots next year. Despite falling oil and natural gas prices, those industries remain robust.

Texas Troubles

The economy in Texas, however, is beginning to get hit as unemployment rises and consumer spending drops, Colpitts said. He added that the Houston market, which has been remarkably stable, could drop about 8.5% next year. Five of the six supermajor energy companies maintain large operating bases in Houston, including ConocoPhillips (COP), ExxonMobil (XOM), Royal Dutch Shell (RDS), and BP (BP). The overbuilt San Antonio market could see a 10.2% drop. Austin, which is a high-tech center, could also be hurt as the technology sector gets damaged by weak consumer spending, he said.

And Charlotte, N.C., a major banking center that had been one of the nation's strongest real estate markets, could have its own housing troubles. Charlotte-based Bank of America (BAC) just this month announced that it would cut up to 35,000 jobs over the next few years.

But a few places are poised for a potential recovery.

The housing market in and around Washington, D.C., which suffered greatly in the wake of the housing bust, could begin to recover, largely because the nation's capital has so many recession-proof government and defense contracting jobs, said DiNatale of Moody's Economy.com.

Other areas, such as the Boston area, San Diego, and Orange County, Calif., are getting close to affordability levels seen before the housing boom and could begin to level off, said DiNatale.

She added: "A lot of this depends on the economy over the next few months, help from the federal government, and whether buyers come back to the market."

Click here to see the markets that were hurt the most by the real estate downturn in 2008.

Gopal writes about real estate for BusinessWeek.com in New York.