ERIC BELSKY
Things ‘settling down’
The room was full and the conversations heated at last Thursday’s special members’ luncheon held by the Massachusetts Mortgage Bankers Association, “The Economic Outlook for 2007.”
Company-paid cars are on their way out as the sales market declines, one guest told a friend. A group of broker-lenders had strong opinions on why lending business is so bad: Wall Street secondary mortgage-market purchasers, once hungry to buy and re-sell the riskiest loans lenders could offer, at the highest interest rates, are backing out as they see the loans fail and regulators take more interest.
But after the roughly 150 MMBA members and guests at Newton’s private Brae Burn Country Club chatted and networked their way through ginger chicken and apple crisp, guest speaker Eric Belsky, executive director of the Joint Center for Housing Studies at Harvard University, turned their conversation in a more hopeful direction.
“You’ve been pretty badly beat up,” he acknowledged. “But I do think that things are settling down.”
Still, he advised, “What you got used to in the last two to three years – you can forget about it.”
The market isn’t the worst it’s ever been, said Belsky. In fact, despite the 14 percent decline in Massachusetts home sales this year compared to 2005 (and compared to an 8 percent decline nationally), 2006 was the third-best year for home sales in the Bay State since 1999, and the fifth-best year ever.
Statewide, refinance mortgages actually claim a greater share than purchase loans of total loans issued, according to statistics collected and compiled by The Warren Group, parent company of Banker & Tradesman – and the number of those originated fell dramatically last year.
“They are likely to stabilize where they are,” Belsky predicted. But if interest rates rise, he added, lenders rightly can expect refinances to go down.
Meanwhile, “On the purchase [origination] side, watch the employment numbers,” he advised, explaining the job loss and divorce are the two biggest reasons people run out of money and can’t afford a home.
Massachusetts’ home-sales economy is in better shape today than in the late 1980s and early 1990s, Belsky said. That period of “enormous price correction” – which saw homes in the Bay State decline 8 percent in value, after tripling in value in the previous decade – was characterized in part by many more new-home permits being issued in the mid-1980s than today, he said.
The commonwealth is also doing better than many states in the home-price department. Massachusetts home prices in the third quarter of 2006 fell by 2.5 percent, annualized, Belsky said, which compares favorably to the current decline of 10 percent to 15 percent that Indiana is seeing, and 5 percent to 10 percent dip that some Michigan, Florida and California cities have experienced.
When home prices go down, so does consumer spending, he noted – another indicator for which bankers might be able to watch in their consumer loan departments.
Nationally, home prices rose last year, albeit by a very small amount – less than 1 percent – compared to 2005.
Homes are still less affordable in Massachusetts than elsewhere, and the economy here is recovering more slowly than in the country in general, Belsky said.
But boding well for Massachusetts economy in general is that two of its largest employment sectors – financial services and high-tech – are considered strong in today’s economy.
A ‘Godlike’ Figure
Amid the more predictable signs, there’s still one wild card, Belsky said: the Federal Reserve.
The all-powerful federal regulator and bank could change any economist’s predictions by raising interest rates, he said – joking, “I don’t know of anyone who’s made money on interest-rate futures.”
Belsky talked of industry officials viewing former Federal Reserve Chairman Alan Greenspan as a “godlike” figure, recalling a conference he attended at which Greenspan, who spoke and took questions, was beamed in via satellite, his image on a giant screen looking down on the participants.
Greenspan retired last year, and Ben S. Bernanke is now Fed chairman.
Belsky singled out Florida and Arizona as two markets experiencing particularly severe corrections, compared to Massachusetts.
New building permits here were off last year by about 13 percent, compared to the year before, he said. In Florida, they were off 60 percent, and in Phoenix, by 40 percent.
“Florida has had a huge decline in construction employment and activity,” he said.
A large number of speculators flooded the Florida market a few years ago, eyeing increasing home prices and the ability to turn them over. But the supply has outgrown the demand, and some have suggested that buyers who might like a home in the American tropics can’t finance it because they can’t sell their own homes in the Northeast.
Meanwhile, Belsky said, investors or speculators – those who buy a home to resell it – have a 20 percent share in the Phoenix market. That’s compared to the 9 percent share they own nationally, and anywhere from 3 percent to 7 percent in various metropolitan areas in Massachusetts.
Before his talk, Belsky said the one message he hoped guests would take with them after leaving the event was the following: “It takes awhile for the market to fully correct,” and “even though the economy will improve, housing will stay slow.”
The housing sectors will improve, if slowly, along with the economy, by the second half of this year, he added in his prediction, but “the big cloud of uncertainty” over everything is the Fed, and the interest rates it controls.
