ALAN CLAYTON-MATTHEWS
State remains ‘well-positioned’
The slumping housing market and problems in the subprime mortgage sector will be a drag on the Bay State economy in 2008, according to a new forecast.
Massachusetts will grow at annual rate of 2.1 percent through 2011, lagging the nation and the region as a whole, the New England Economic Partnership predicted last week.
The housing industry’s woes are weighing heavily on the economy. Home prices in Massachusetts will continue to decline about 5 percent through mid-2008 before starting to climb moderately. By the second quarter of 2008, prices are expected to be 10 percent lower than their peak in 2005, according to Alan Clayton-Matthews, forecast manager for NEEP.
“Prices will begin to appreciate but at a slower rate than the nation,” said Clayton-Matthews.
NEEP has downgraded the regional economic outlook from its spring forecast. New England’s real gross product growth is now expected to average 2.2 percent annually through 2011 compared to 2.7 percent nationally. That prediction puts the region’s economic growth below the 2.6 percent that NEEP forecast in the spring. The change largely stems from national credit crisis and housing downturn.
Despite the grim news, Clayton-Matthews said the Bay State will continue to be a high income and earning state. Average wage and salary disbursements per worker in Massachusetts were 22 percent higher than the nation’s at the end of last year and are projected to be 17 percent more through the end of 2012.
The state’s highly educated workforce is a key reason why earnings are higher. And it’s one of the state’s chief advantages, according to NEEP. About 40 percent of the state’s 50-year-olds held at least a bachelor’s degree at the end of 2000, compared to 30 percent nationwide, said Clayton-Matthews. The state also was ranked first in terms of college-educated residents who were 25 and older at the end of 2000.
“Our state is well-positioned in this global economy,” said Clayton-Matthews, noting that the state is rich in both highly skilled labor and financial capital.
Economists say the housing correction is necessary to help bring prices more in line with incomes, particularly in Massachusetts. Bay State home prices skyrocketed in relation to income in the late 1980s and early 1990s, largely because the state’s economy boomed and demand increased, explained Clayton-Matthews. At the same time, there were restrictions on housing construction.
The home price-to-income ratio peaked in the late 1980s, but when the economy plunged into a recession, the ratio fell closer to the national level. The strong economy in the late 1990s, coupled with low interest rates and substantial household wealth and income, fueled prices increases again. The median single-family home price in Massachusetts more than doubled from $158,000 in 1998 to $345,000 in 2005, according to The Warren Group, parent company of Banker & Tradesman.
By the end of 2005, the median house price was 8.5 times the per capita income in Massachusetts. However, with the recent price drops and projected modest price gains, the home price-to-income ratio will come down. The median single-family price fell 5.8 percent in 2006, according to The Warren Group.
“We’re halfway into a new cycle in which prices are falling or growing more slowly than incomes,” said Clayton-Matthews.
‘In Decline’
New Hampshire will lead the region in overall economic growth. The average annual growth in gross state product in New Hampshire will be 3 percent, according to the forecast.
Meanwhile, Massachusetts and Rhode Island are anticipated to have the highest unemployment rates, averaging 4.9 percent and 4.8 percent, respectively.
Health and education services are going to be the fastest-growing employment sector in New England, followed by professional and business services, and leisure and hospitality. The weakest employment sectors will be construction and manufacturing.
Key issues to watch will be the region’s modest gains in employment, population and real gross domestic product.
“Even with research-and-development and education advantages, there are indications that the region’s economic competitiveness is in decline and vulnerable to further decline,” NEEP said.
Ross Gittell, vice president of NEEP, said between 1990 and 2004, the region lost 25 percent of residents ages 25 to 34. The loss of those young adults compares to a national average decline of 7 percent during that period and comes as some Western and Southern states saw an increase in that population.
“Massachusetts has done a better job of importing college-educated adults than other New England states,” said Gittell.
Nationally, the economy will grow slowly in 2008 but is likely to avoid recession, according to Mark M. Zandi, chief economist for Moody’s Economy.com.
But Zandi said it’s important to watch oil prices. If they don’t recede from $100 per barrel, and gas prices hit $4 per gallon, the economic expansion could unravel, according to Zandi.
Zandi also characterized the housing market as a “mess,” noting that some regions – such as California, Nevada, Arizona and Rhode Island – will see prices plummet more than 10 percent.
Nationwide, there is an excess of 750,000 unsold vacant homes, Zandi estimated. And the inventory will climb only because mortgage defaults and foreclosures will continue throughout 2008, he said.
“Global investors are correctly fearful that there are more losses to come in the U.S. residential mortgage market, and that financial institutions have still not fully accounted for the losses to date,” Zandi said in a prepared statement.
Last week, the National Association of Realtors said the median existing-home price will decrease about 1.5 percent this year from 2006, the first drop since the Great Depression. The trade group also adjusted its forecast, saying existing-home sales will total 5.5 million this year, the same pace as 2002. In January, NAR predicted a total of 6.42 million sales in 2007.
Businesses outside of the housing industry are doing well. Corporate earnings have doubled in five years, Zandi said.
“Corporate profit margins are extraordinary,” he said.
Other good news: While job growth will be slow and employers are cautious about new hiring, they’re not laying off workers and trade is strong.
