The State of the Massachusetts Housing Market

Last week I was invited to testify before the Joint Housing Committee at the State House in Boston.  They asked me for my assessment of the residential housing market in Massachusetts.  Here, in a nutshell, is what I told them.

The residential housing market remains a threat to the statewide and national economic recoveries

The housing slump in Massachusetts has now entered its sixth year.  While according to the S&P Case-Shiller Home Price Indices it appears that prices may have bottomed out, there are a number of reasons for any optimism to be of the cautious variety.

1)  About 15 percent of Massachusetts homeowners with mortgages are "underwater" or in a negative equity position (owe more on their homes than their homes are worth in today's market).   

While this fact in itself does not mean these homeowners are likely to default -- see Foote, Gerardi and Willen for more on the relationship between negative equity and foreclosure -- it definitely makes these households more vulnerable to default in the event of a disruption in their income (job loss, divorce, death etc) and, in light of continuing difficulties in the labor market, is not an encouraging sign.

Clearly, as the preceding chart makes abundantly clear, it could be much worse.   In states like Nevada, Arizona, Florida and California, the rates are much much higher.   

2)  To date, price declines have not appreciably improved affordability

The pattern in price levels similarly highlights the different trajectories that the national housing market and those states that have had the worst housing bubbles are on as compared to Massachusetts.

As the following chart illustrates, absolute price levels in Massachusetts rose significantly higher during the so-called "housing bubble" period, declined more slowly during the downturn, and have only recently appeared to have leveled off.

 

The fact that price declines have been relatively and comparatively moderate is, of course, not much consolation to the thousands of homeowners across the Commonwealth who have lost their homes to foreclosure.  It does, however, help to explain how we could be experiencing price declines of this magnitude without improving affordability in any significant way.

Two very insightful articles in a recent issue of MassBenchmarks (by Koshgarian and Vaisanen respectively) help to shed some light on how this seemingly counter-intuitive situation is playing itself out.  They remind us that it is not absolute price levels but rather the relationship between prices and incomes that is the key to affordability.  As discussed above, prices have only fallen to 2003 levels and income growth for most households has been anemic in recent years.  That is not a recipe for greater housing affordability for the vast majority of households in Massachusetts.

Bottom line, while price declines to date have undeniably created opportunities for potential buyers with relatively high incomes and good credit, for most renters, homeownership in Massachusetts remains well out of reach and tens of thousands of households (owners and renters) across the Commonwealth continue to spend greater than 50 percent of their income on housing costs (see Koshgarian for more details).

3)  Foreclosures are putting downward pressure on housing prices

Foreclosures in Massachusetts are no longer simply an urban problem.  As the Masachusetts Housing Partnership's Foreclosure Monitor noted late last year, " The gradual movement of distressed properties away from urban areas has reached a tipping point as there are now more distressed units in the suburbs and rural communities.”

The spread of bank-owned properties (REOs) has the insidious effect of muting a recovery in housing prices in many areas of the state.  The heavy price discounting typically associated with the these kinds of properties makes it more difficult for both traditional home sellers and for homeowners who have seen their home equity dwindle and, in a significant number of cases disappear altogether.   

This helps to fuel a "vicious circle" in which declining prices threaten to push more households into a negative equity position and, combined with an uncertain job market,  provides prospective buyers with a strong incentive to either use their market power and/or wait for further price declines.   Additionally,  the most common ways in which "comparable sales" data are used in mortgage lending make it difficult for buyers who may be willing to pay more to obtain financing and further limit the potential for price appreciation. 

While Massachusetts is clearly in much better shape than many other states in this regard, it is by no means immune from the impacts of these forces.  

4) The housing decline has dramatically reduced housing production exacerbating a structural shortfall in housing supply

According to a recently released report prepared by a research team that includes yours truly and several colleagues from the UMass Donahue Institute, UMass Boston and Northeastern,  Massachusetts has an inadequate supply of housing in most of its regions and faces an estimated structural shortfall of over 29,000 units.  

Even during good times Massachusetts doesn't produce a lot of housing in part due to our archaic land-use regulations and zoning codes and, a widespread local resistance to development of any kind....especially the sort that is expected to attract children.   

No doubt our inadequate housing supply combined with a dramatic decline in housing starts has helped to limit housing price declines in Massachusetts.  However,  the large reductions in real estate development activity have taken a serious toll on the blue collar end of the national and Massachusetts labor markets leading to what Andy Sum and his colleagues recently termed "A Depression in Blue-Collar Labor Markets in Massachusetts and the US".

I concluded my testimony by suggesting that state policymakers focus their efforts in the near-term on assisting those households who have been most directly and negatively affected by these conditions and break the vicious circle described above.  I also echoed concerns raised earlier in the hearing by CHAPA's Aaron Gornstein that these efforts will be severely hampered should proposed cuts in federal housing programs be enacted.

In the medium to long term, I advised the committee members to focus their attention on attacking our chronic housing affordability problems by prioritizing economic development programs and policies that serve to increase the opportunities to earn higher incomes  and make long-overdue changes to Chapter 40A to reduce the regulatory restrictions that have artificially limited new housing development in the Commonwealth.  This of course is easy for me to say and not so easy for anybody to do in the current fiscal and political environment.

While the most recent state employment report and other indicators provide some good reasons to feel hopeful that a solid economic recovery is underway in Massachusetts, whether it will be sustainable and continue to be as imbalanced as it has been will depend in an important respect on what happens in the housing market.