Local economic recovery surpasses the nation but high costs here still squeeze area residents

Boston – The Boston Foundation released its eighth annual Housing Report Card at an  Understanding Boston  forum today. According to Principal Author Barry Bluestone, the report, The Greater Boston Housing Report Card 2010: Taking Stock in an Uncertain Time , identifies a growing weakness in the regional and national economy, which began to appear in the early summer, disappointing earlier hopes of a faster recovery. Direct evidence of that weakness includes a year-over-year drop in home sales by fully 27 percent in July, as direct federal housing supports ended. Rents are also projected to stay high, making Boston the fifth most expensive rental market in the nation. Meanwhile, foreclosures and repossessions were seen to run at record levels.

“There is important positive news in this report about the basic resilience of the regional economy, but the need to address fundamental issues in Greater Boston’s housing market remains troubling and compelling,” said Paul S. Grogan, President and CEO of the Boston Boston Foundation. “We continue to put intolerable pressure on those least able to afford a place to live, and we continue to risk losing our young people who are motivated to move to parts of the country where the cost of housing is far lower.  This report is a call to address a set of issues that are critical for the region’s economic wellbeing.”

The data analyzed by Bluestone, Director of the Dukakis Center for Urban and Regional Policy at Northeastern University, and his team, identified the following trends:

• A sharp rise in foreclosures predicted for the year ahead;   
• The continued high cost of rent which has a disproportionate effect on the region’s poorest residents; 
• The slow rate of housing production and the role of Chapter 40B as an effective strategy for increasing the number of affordable units; and   
• The impact of a steadily growing graduate student population, which competes with local families for moderately priced housing.

Against areas of local concern in housing stands some good news on the economic front, when Massachusetts is compared to the nation as a whole. In particular, the recession did not hit the Commonwealth as hard and recovery here is proceeding faster than it is for the rest of the country. Using job growth as one indicator, the report notes that employment in the Commonwealth in July was down 2.8 percent from December 2007, while in the nation it was down by 4.8 percent for the same time period. Fully 40 percent of jobs lost here in the recession had been replaced by July; fewer than 8 percent of jobs lost nationwide have been replaced in the same time frame.

Indeed, every major sector from construction to manufacturing to finance and tourism has seen an expansion in employment in Massachusetts since the start of 2010. In addition, there has been an increase in the state’s population for the first time in nearly a decade. The report also charts an increase in student population in Greater Boston, with an increase from 290,000 students in 2001 to 336,000 in 2009. The past two years alone account for an increase of more than 19,000 students. While undergraduate populations have increased since 2004, the number of graduate students has increased more rapidly—and more steadily. Since 1984, the number of graduate students in Boston has almost doubled, adding more than 22,000 students since 2001

The increase in student populations reflects a culture shift, in which more education and added credentials are seen as important for those seeking jobs or career advancement. Master’s degrees in particular have increased appeal and are drawing more students. This level of graduate education is also seen as a money-maker for universities, unlike doctoral programs, which creates an added incentive for expanding graduate programs.

According to Bluestone, in the next decade, the number of graduate degrees bestowed is expected to increase by fully 20 percent, nationwide.

That is good news as the higher education sector continues to be a critical part of the region’s economy and identity, as one of the most significant education centers in the world. However, a growing student population means greater competition for existing housing in the city and region. Even the good news of a recent increase in state population adds to the pressure on housing, helping prices to remain high despite the economic downturn.

“It is important to take note of the good news shown by the research findings,” said Bluestone. “The region remains economically vibrant even while we have suffered the effects of one of the most severe recessions in recent history.”

Housing challenges for Greater Boston

The rate of production of housing continues to be an important issue for the region. Currently 2010 is on track to be the second-lowest year for permitting in over a decade—in some municipalities in Greater Boston, no permits for new housing were issued in all of 2009. And the situation is worse for multifamily housing. Of the 161 communities tracked in Greater Boston for this report, fully 128 added no multifamily housing last year.

Home prices for all types of housing units continued to decline through 2009. Prices dropped the most for two- and three-family homes. Only at the start of 2010 did prices begin to rise again with a moderate recovery in all housing types. According to research at the Dukakis Center, prices could take as long as 60 months to fully recover. Bluestone predicts home prices will not fully recover their 2005 peak until sometime in 2014.

The rental market has remained expensive in Greater Boston. While the vacancy rate nationwide has exceeded 10 percent for the first time since at least 1956, the corresponding rate was below 4 percent for the first quarter of 2010 and under 6 percent for the second quarter. Partly because of this market pressure, the average cost of an apartment in Greater Boston actually rose by 12 percent or about $186 a month between the end of 2005 and the third quarter of 2008. Rents briefly dipped in 2009 by approximately $50 a month, but by the second quarter of 2010, rents were rising again

As a result, Boston remains among the most expensive rental markets in the nation. Only New York City; Westchester County, N.Y.; San Francisco; and Fairfield County, Conn; had higher average rents than Boston.  This remains a significant challenge for young residents, those who are unable to buy a home, and the poorest residents of the area.

Foreclosures may rise again

A wave of foreclosures in the region that began in 2005 soared to historic heights in 2008. In 2007, the number of foreclosure petitions rose to almost 16,000, compared with just 700 three years earlier. But after a sharp decline beginning with a moratorium on new petitions, the number of foreclosure petitions increased steeply again in 2008, continuing upward until June of 2009. That trend reversed itself in Boston this year and the number of foreclosure deeds increased sharply in the first few months of 2010. In fact, the number of foreclosure deeds in the first six months of 2010 is 124 percent higher than in the same period of the previous year.

Not all housing types showed an equal vulnerability to foreclosure: condominiums far outpaced other housing types, with single family homes in second place in terms of foreclosure volume. Despite this level of activity, which would be expected to depress home values in these categories, the greatest loss in value has been for three-family homes, which have lost 45.4 percent of their value on average since their high-water mark in 2005.

Foreclosures are not evenly spread across the region, according to the report. The southern parts of the Boston region and towns along the New Hampshire border have the highest rates of foreclosures, and there are high concentrations in the cities of Lynn, Revere, Everett and Brockton. In fact, Brockton was the community most affected, with over 2.5 percent of all housing units showing a foreclosure petition in 2009. Other towns with exceptionally high rates of foreclosure included Millville, Wareham, Randolph, Lawrence and Plymouth. At the other end of the spectrum, rates of foreclosures were lowest in Brookline, Sherborn, Cambridge and Belmont.

The impact of Chapter 40B

The report examines the role of Affordable Housing legislation in Massachusetts in the region—principally of Chapter 40B, enacted in 1969 to encourage the production of affordable housing  across the Commonwealth by offering an alternative zoning process to developers who agree to have 20-25 percent of the unites in a planned development remain affordable. The legislation targets communities where less than 10 percent of existing housing meets a formula for affordability, which means that a household with 80 percent of the area median income can afford a home in that community without spending more than 30 percent of gross income.

Chapter 40B has resulted in more than 50,000 units of affordable housing in over 1000 project across the state.

Chapter 40R, in effect for four years, complements Chapter 40B by encouraging municipalities to create so-called Smart Growth zoning districts that allow for greater density development near existing transit lines in return for state financial aid. To date, 31 communities have approved Smart Growth districts. In addition, some communities that already approved these districts have increased their size. These districts are expected to result in 12,000 units of affordable housing, with 7,000 units in Greater Boston.

These two strategies are among a number of programs designed to address the high cost of housing in Massachusetts and Greater Boston examined in the report.

Conclusions

The report notes that much disconcerting recent data offers a confusing picture of the region’s economic wellbeing and of the local housing market. National trends have been negative, with GDP falling in the second quarter and the number of unemployed people increasing in the nation as a whole. Consumer confidence has slipped along with business confidence.

While Massachusetts has generally fared better than other sections of the country, the new economic data carries the potential for a local downturn, as well. The ongoing shortfall in housing production is a point of particular concern. Unless the housing supply is increased to meet rising demand—from the recent influx of new residents as well as from the continued increase in the number of college and university students—rising prices could again dissuade potential new residents from moving to the region. Rents also are not likely to decline without a significant increase in building stock.

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The Boston Foundation, Greater Boston’s community foundation, is one of the oldest and largest community foundations in the nation, with assets of $737 million.  In Fiscal Year 2009, the Foundation and its donors made over $95 million in grants to nonprofit organizations and received gifts of over $81 million. The Foundation is made up of some 900 separate charitable funds established by donors either for the general benefit of the community or for special purposes.  The Boston Foundation also serves as a major civic leader, provider of information, convener, and sponsor of special initiatives designed to address the community’s and region’s most pressing challenges.  For more information about the Boston Foundation, visit www.tbf.org or call 617-338-1700.