ALAN CLAYTON-MATTHEWS
State exposed to ‘implosion’
Weak employment and moderate income growth, along with a rise in foreclosures and mortgage loan delinquencies, will put downward pressure on home prices in Massachusetts throughout the year and the beginning of 2008, according to a new economic forecast.
The housing slump is a drag on the state’s economy, but there is strong demand for Bay State products and services both nationally and worldwide, which is a positive force for the economy, according to Alan Clayton-Matthews, a forecast manager for the New England Economic Partnership. Clayton-Matthews, a professor at the John W. McCormack Graduate School of Policy Studies at the University of Massachusetts at Boston, presented the state forecast at NEEP’s spring conference last Thursday.
Bay State median home prices are projected to be about 14 percent lower in the second quarter of 2008 than peak prices seen in the third quarter of 2003, according to forecasters. Ross Gitell, NEEP vice president, noted that Massachusetts will experience a steeper price decline than the other New England states. Median home prices across the New England region are expected to be 12 percent lower for the same period, compared to an 8 percent decline nationwide.
Last week’s conference focused on the subprime mortgage market and its effect on the housing market and overall economy.
Delinquency rates for subprime loans have shot up in Massachusetts. In the Boston, Cambridge and Worcester metropolitan areas – three of the largest metro areas in the state – delinquency rates were substantially higher than the average for all metro areas across the country, explained Clayton-Matthews. Twenty-nine percent of subprime loans in the Boston area were past due in this year’s first quarter, and 27 percent were in Cambridge.
In comparison, delinquency rates on conventional mortgage loans, which have also risen, varied from 1.4 percent in the Cambridge area to 2.4 percent in Worcester.
“Massachusetts is about as exposed to the subprime implosion as elsewhere,” said Clayton-Matthews.
About 20 percent of all loans made in Massachusetts in 2005 were subprime, which is similar to the nation’s share, noted Clayton-Matthews.
The biggest unknown in the state’s economy is the depth and duration of the housing slump, he added, saying that if the housing market fares even worse than expected, it could hurt construction, consumer wealth and spending.
‘Stunning’ Erosion
Employment, wages and income growth are expected be steady but moderate this year. Massachusetts will continue to be a high-income and high-earnings state. The average wage and salary in the third quarter of last year were 22 percent higher than the nation’s. By the end of 2011, wages and salaries are expected to be 16 percent more than the nation’s.
Job sectors – including education and health services, and leisure and hospitality – are forecast to grow at average annual rates of 1.9 percent and 1.5 percent through the end of 2011.
The state’s economy continued a slow, steady growth last year, and by most measures – including employment and population growth – it was the best year for an expansion that started in 2003, said Clayton-Matthews.
However, New England’s economic gains will continue to trail the nation’s growth over the next four years, according to NEEP.
Nationwide, the housing market will continue to be a concern. The national median home price was down 4 percent in the first quarter from its peak at the end of 2005. Part of the problem is that there has been a surge in the number of homes listed for sale.
Mark M. Zandi, chief economist of Moody’s Economy.com, said there was a record high of about 1 million newly built and existing homes listed for sale at the beginning of this year.
“Until we make a dent in that, I don’t see how one could argue that the housing correction is near bottom,” he said.
Lending standards also have tightened as a result of the subprime market meltdown, which means that fewer buyers will be able to purchase homes, he noted. And as foreclosure and delinquency rates climb, it will flood the market with more homes.
March saw a record high in the delinquency rate of residential mortgages, and Zandi said he anticipates more to follow this summer and fall as rates on mortgages adjust. “The degree in erosion of [mortgage] credit quality is stunning,” he said.
He added, “For anyone to say this is the bottom of the housing market, I don’t know how they can say that. It just doesn’t make sense.”
The condo market will be hit particularly hard in some parts of the country that saw a boom in new condominium construction in response to short-term demand, Zandi predicted. Condos comprise a large portion of the inventory glut in many parts of the country and some condo developments are finding themselves back in the rental market.
“The condo market will be under tremendous pressure in coming years,” he said.
Overall, however, Zandi said that the economy is performing well, with almost full employment and corporate profits doubling in the past five years.
“The major drag on growth is obviously housing,” he said.
