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Massachusetts housing slump rivals late 1980s { May 25 2007 } Original Source Link: (May no longer be active)
http://www.boston.com/business/globe/articles/2007/05/25/housing_slump_may_rival_late_80s/http://www.boston.com/business/globe/articles/2007/05/25/housing_slump_may_rival_late_80s/
Housing slump may rival late '80s
Study's author says state could gain by being less expensive
By Robert Gavin, Globe Staff | May 25, 2007
The Massachusetts housing market will remain in a slump, and by the time it hits bottom about a year from now, prices will have dropped 14 percent from the peak in 2005, according to an economic forecast released yesterday.
Such a decline would mean the current downturn would match the real estate collapse of the late 1980s and early 1990s, when the median single-family home price also fell about 14 percent.
If the forecast by the nonprofit New England Economic Partnership proves accurate, it means more bad news for home sellers, who are already have trouble unloading their properties despite it being the high season for real estate. Statewide, median single-family home prices would drop from $370,000 in the second quarter of 2005, to $318,000 next year, under this forecast.
But such an outlook bodes well for buyers, and the local economy, said Alan Clayton-Matthews, the University of Massachusetts professor who prepared the forecast, because high housing costs have held back economic growth here.
"Although these price declines are not welcome by existing home owners, they are healthy for the economy," he said. "With housing prices in line with incomes, Massachusetts will once again be affordable for the state's future labor force."
In New England, the median single-family home price is projected to fall 11.5 percent from the peak, while nationwide prices are forecast to drop 8.4 percent, according to the Partnership and Moody's Economy.com.
Members of the real estate industry called the forecast too pessimistic. Lawrence Yun, senior economist at the National Association of Realtors, expected the New England market to hit bottom soon, noting recent data shows the rate of price declines slowing.
Moreover, Yun said recent job growth in Massachusetts should bring new buyers to the market, while still low mortgage rates will provide further support. The realtors association forecasts home prices in Massachusetts and the nation will begin rising by year's end. "This is completely different than the '90s when we were having job losses," Yun said.
Pat Magnell, a buyer's broker at Buyer's Choice Realty in North Andover, said her business is as brisk as it was in 2005. Two properties she recently showed even attracted multiple offers. "The year started slow, it picked up in March, and it's accelerating," she said. "Whether it runs out of steam remains to be seen."
But earlier this week two separate reports said home sales in Massachusetts dropped around 1.7 percent in April, compared to the same period last year. One report, from Warren Group, said home prices declined 4.7 percent, while the Massachusetts Association of Realtors reported a 2.3 percent price drop.
And Clayton-Matthews said several factors will contribute to further declines.
Increasing foreclosures, particularly among borrowers who took out riskier loans near the peak, will put more homes on the market and make it difficult to reduce the sizable inventory of homes for sale. In Massachusetts, a high percentage of these riskier loans, known as subprime because they go to buyers with less-than-stellar credit, are delinquent, according to Moody's Economy.com.
In Boston, for example, nearly 30 percent of the subprime mortgage debt is delinquent, suggesting more foreclosures ahead, said Clayton-Matthews. In response, lenders are tightening up on credit, which in turn will reduce the number of eligible buyers.
Finally, Clayton-Matthews said, the state's job growth, while improved, is not strong enough to jumpstart the housing market. He forecasts employment will grow about 1 percent a year over the next few years. The state won't recover all the jobs lost in the last recession until 2011.
"All this is going to force prices to adjust," Clayton-Matthews said.
Lower prices ultimately attract more buyers to the market, leading to more sales, economists said. For example, the US Commerce Department yesterday said the median price of new single-family homes nationwide fell nearly 11 percent in April from a year earlier, the biggest year-over-year decline since 1970. Meanwhile, sales surged 16.2 percent from March, the biggest one month jump in 14 years, which analysts attributed to buyers drawn by lower prices.
Clayton-Matthews said the price adjustments will make housing here more affordable. During the housing boom, prices rose too fast for incomes. By the 2005 peak, the median home price was 8.5 times higher than per capita income, compared to 6 times nationally. That gap should narrow by mid-2008, when the median Massachusetts home price is projected at 6.5 times income, compared to 5.5 times nationally, according to the forecast.
The state's economy has performed well in the first few months of the year, but the shakeout in housing will slow it, Clayton-Matthews said. Over the next few years, job growth in Massachusetts will be below the nation's projected average of 1.2 percent annually.
Robert Gavin can be reached at rgavin@globe.com. Material from the Associated Press was used in this report.
© Copyright 2007 The New York Times Company
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