Scott Van Voorhis can be reached at sbvanvoorhis@hotmail.com
I have no appetite for a rehash of the top economic stories of 2008.
We all know what happened. The global financial markets nearly collapsed, housing prices plunged to new lows and everyone finally stopped that interminable debate over whether we are actually in a recession.
So here’s my take on what to look for 2009. (Warning, it may make you pine for the good old days of 2008.)
No rebound in home prices: The National Association of Realtors is predicting a modest rebound in prices in 2009, a whopping .4 percent, followed by more sizeable jump in 2010. Sounds great to me, but if life were determined by wishful thinking, we would all be billionaires. More realistic is Martin Feldstein, an economics professor at Harvard University. He predicts that home prices will fall another 15 percent – and that’s if we are lucky! If we are not, look for an even bigger drop. That could push the median home price in Massachusetts, already now below $300,000, down to $250,000 and beyond.
Still, if the economy stabilizes, look for the return of a promising trend that first emerged this summer, which coupled falling prices with rising sales. In past downturns, that has been a precursor to an eventual bottoming out on prices.
Hard times and the office market: The first signs of trouble in the once booming office market appeared in the latter half of 2008, as rents fell and vacancies started to increase. But 2009 is shaping up to be a year of reckoning for the Boston office market, which till now has escaped the ravages of the economic downturn. The financial services sector, a mainstay of the downtown market, is poised to slash thousands of jobs, with Fidelity Investments and Bank of America having announced big payroll cuts. That should drive vacancy rates back up into the double digits, while driving rents for the best tower space back down below the $60-a- square-foot range.
Developers forgo building for planning: If you are not already in the ground with your project, you can forget about starting until the next boom. That’s what most Boston builders will tell you. Of course, not even projects that appear to be under construction are immune from the credit crunch. John Hynes has been forced to stop work on the redevelopment of the Filene’s block, while Joe Fallon is struggling to keep the long-delayed Fan Pier project, finally under construction, on track. Says Jay Doherty, who is struggling to keep his own, $1.5 billion Westwood Station on track: “It’s shocking how quickly major projects in the region have winnowed down.”
That said, some developers are taking advantage of the downtime to push their projects through the local approval process. Given it can months if not years to get a new development approved in Boston, for example, it makes sense to get everything lined up for the next upswing in the cycle.
Battle for survival for construction companies and engineering and design firms: If developers aren’t building anything, then construction companies are going to have big, big problems. Ditto for the architects and engineers. Even thoughtful strategies for dealing with the downturn may not be enough in this environment. Suffolk Construction chief John Fish a couple years ago began weaning his company off residential projects and taking on more institutional work for colleges and hospitals. However, now even the big institutions are cancelling or putting projects on hold after seeing their endowments hammered in the stock market crash.
Local banks face new challenges: Local banks have largely avoided the slow motion train wreck that brought down some of the most powerful players on Wall Street. They did it by shunning the crazy subprime loans that, with their high-interest rates and fees, looked so attractive for a time. But 2009 could prove a real challenge. The recession is now cutting into industries across the board, and making even the once safe commercial lending business look risky.
Still, there may be a modest silver lining for banks and mortgage companies in the current downturn. The Fed and Treasury are pushing mortgage rates so low that it appears bound to spark a frenzy of refinancing.
A second wave of foreclosures? At some point, the current torrent of foreclosures on homes bought with crazy, high-interest subprime loans will fall off. There are only so many of these loans left over from the boom that haven’t gone bad yet. But there could very well be a second, and more disturbing wave, of home seizures. This time, the newly unemployed will be the ones losing their homes, many of them never having touched a subprime mortgage.
