ALAN CLAYTON-MATTHEWS
Foresees ‘a painful process’
Bay State home prices will fall about another 5 percent through next year and the beginning of 2008 before leveling off and beginning to climb slowly, according to a nonprofit research group.
The New England Economic Partnership, which presented New England regional and state forecasts last Tuesday, is predicting that Massachusetts home prices at the beginning of 2008 will be 7 percent to 10 percent below the peak levels seen about a year ago.
Prices will continue to decline because of weak job growth and slow gains in population and the labor force in Massachusetts as well as moderate income growth, explained Alan Clayton-Matthews, an associate professor at the John W. McCormack Graduate School of Policy Studies at the University of Massachusetts in Boston who prepared the forecast.
In addition, recent price declines are contributing to a “market psychology” that will continue to put downward pressure on prices until housing costs are more in line with incomes in the next four years, he said.
“If you’re a recent homeowner – particularly if you have little or no equity – this will be a painful process,” Clayton-Matthews said.
But while the downturn could drag down the economy through its effect on housing construction, consumer spending and household wealth, lower home prices could boost the state’s economic competitiveness by making Massachusetts more affordable for future workers, he said.
Last week’s economic forecast presented a less-than-rosy outlook for the Bay State. The state is not expected to regain jobs that it lost during the last recession until the next decade, and Massachusetts’s economic growth through 2010 will lag the nation’s, NEEP predicted.
Economic growth has been strong in the last year, with Massachusetts posting its strongest year of growth since the recession began in 2001, according to NEEP. Gross state product growth is estimated to be 3.4 percent between last year’s third quarter and the third quarter of 2006, outpacing the U.S. gross domestic product growth of 2.9 percent over the same period of time.
The job market has been improving in recent months. Even though the overall unemployment rate, which stood at 5.1 percent in September, has not declined from a year ago, the long-term unemployment rate was nearly 20 percent lower than last year, and about half what it was in 2003. Still, employment growth will continue to lag that of the nation.
Clayton-Matthews pointed out that economic growth through 2010 is expected to be “tepid,” in comparison to the expansions of the 1980s and 1990s. The average annual rate of employment growth through 2010 will be just under 1 percent, according to the forecast. And the state’s employment numbers at the end of 2010 will still be lower than the peak seen at the beginning of 2001.
‘High Downside Potential’
Clayton-Matthews did present some positive news for the Bay State economy – the possibility of population gains.
Citing information from the American Community Survey, NEEP reported that the state lost 22,500 individuals who either were in college or had at least a bachelor’s degree between April 2002 and April 2004. But between April 2004 and April 2005, the state actually saw an inflow of 4,900 educated individuals.
“This [gain] is critically important to our economy,” he said.
The economic outlook and forecast comes as home sales in Massachusetts have plunged and prices have dipped. Single-family home sales were down 15 percent during the first three quarters compared to the same months in 2005. The median single-family home price in Massachusetts has slipped 5 percent to $330,000 through the first three quarters of the year compared to a year earlier, according to The Warren Group, parent company of Banker & Tradesman.
The drop-off follows a period of robust price appreciation. The median single-family home price in Massachusetts reached $345,000 last year, a 72.5 percent increase from 2000 when the median home price was $200,000, according to The Warren Group.
Home prices had risen so rapidly and steeply that they outpaced income growth in Massachusetts. Median single-family home prices as recently as last year were eight to nine times higher than per capita income. But with prices easing, the ratio between prices and incomes could go down to six by the end of 2010 – which is more in line with the nation as whole – according to NEEP.
In the New England region, Massachusetts and Rhode Island – which saw the steepest increases in housing prices – are expected to have the slowest growth in home prices through 2010.
If the housing slump nationally and regionally lasts longer and proves to be deeper than anticipated, it could more dramatically affect the economy, according to NEEP forecasters.
“There is a relatively high downside potential of the forecast, mostly influenced by uncertainty in the housing market. A weaker and longer-to-recover housing market nationally and in the region than that in the forecast would have a significant negative influence on the New England regional economy,” said Ross Gittell, a professor at the University of New Hampshire’s Whittemore School of Business and Economics, in a prepared statement.
Nationally, the housing market correction will continue through mid- to late 2007, predicted Mark M. Zandi, chief economist of Moody’s Economy.com.
Zandi, who presented the national forecast last week, said a rise in interest rates, a decline in affordability, the disappearance of investors and overbuilding in some regions of the country have spurred the market correction.
The initial catalyst for the housing market correction was a rise in interest rates, which caused housing affordability to erode, he explained. The National Association of Realtors Housing Affordability Index, which measures affordability factors for homebuyers making a 20 percent down payment, is currently just above 100. An index of 100 means that household making the median income has the exact amount needed to purchase a median-priced home. The current affordability index is the lowest it’s been since the mid-1980s, according to Zandi.
But the collapse in housing affordability and its impact on the housing market was delayed in part by aggressive lending practices that pushed products like option adjustable-rate mortgages, said Zandi.
Investors’ interest in the housing market also started to wane as home price appreciation moderated. “Investors who had been piling into the market are now exiting,” he said.
