Local housing market faces lingering long-term threats

Boston – The Greater Boston housing market is faring better than many nationally, but faces lingering challenges that make real recovery difficult. That was one of the messages in the 9th Annual Greater Boston Housing Report Card, which was released today in an Understanding Boston forum at the Boston Foundation.

Principal author Barry Bluestone of Northeastern University presented the report, which noted that while Greater Boston has not suffered as greatly as many other major cities, the headwinds from a struggling national economy threaten to slow any recovery in Massachusetts. The researchers also found that signs last year that the Greater Boston housing market was beginning to recover have faded, with prices and sales sliding into a new trough.

“Just as we saw in last year’s report card, Massachusetts is still faring better than much of the nation in both its housing market and its overall economy,” said Paul Grogan, President of the Boston Foundation. “But the reality is that Massachusetts is inextricably linked to the national economy, and a true recovery of the local housing market remains difficult until the national headwinds abate.”

The analysis also finds that the weak housing market is not just an effect of the stagnant economy but is serving as its own drag on the recovery, creating what Bluestone calls a “giant ‘feedback loop’ between housing and the economy, with the depressed housing market actually driving the economy.”

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:

• Housing construction in Massachusetts remains in a tailspin, with home construction in 2011 expected to be at its slowest pace in two decades   
• After signs of promise in early 2010, home and condominium sales and prices have stagnated or fallen in recent months
• Greater Boston’s low homeowner vacancy rate, a reluctance of first-time homebuyers to enter the market, tighter credit regulations and a lack of new rental properties have combined to drive up rental prices to record levels
• Affordable housing remains a concern, despite efforts at the state level to protect affordable units, encourage smart growth and save homeowners from foreclosure

But the study does illustrate some positive trends for the Massachusetts economy in 2011. The report finds Massachusetts has been the second-fastest growing state in the country since December 2007. Massachusetts has outperformed the national economy in seven of the past eight quarters, and that trend is expected to continue through the end of 2011.

Unfortunately, Bluestone notes, “the Commonwealth is subject to headwinds created at the national level and on the global stage In the current economic and political climate, Washington has come close to declaring unilateral disarmament in the face of a renewed economic crisis The White House-Congressional agreement on the debt ceiling limit has constrained federal fiscal policy in such a way that it has little room to stimulate the economy.”

Housing Slump Could Linger for Years

And while researchers noted a correlation between the strongest state economies and home prices, Massachusetts has not entirely followed suit. Home prices in mid-2011 lagged the June 2006 prices by 17 percent – barely above the national average and worse than more than 30 other states.

One major issue is weakness in home construction. If estimates hold true, Massachusetts home builders will have pulled fewer permits over the most recent three years than they did in 2005 alone. The weakness is especially pronounced in multi-unit construction, which has plummeted 86 percent for 2-4 unit buildings and 74 percent for 5+ unit structures since 2006.

Also dragging down the market – foreclosures. Although the number of foreclosure petitions in Greater Boston has fallen sharply since 2007, the number of foreclosure deeds is slower to drop – suggesting Greater Boston still has a long way to go before getting foreclosed properties sold and stabilizing the overall market. The explosion in foreclosures has also created price volatility in low-income communities – seven of the 10 communities where home prices rose most quickly in 2000-2005 were on the list of worst performers in the second half of the decade.

The long-term trends don’t bode well for a recovery. Comparing the Case-Shiller data for the current housing downturn and the 1988-1997 slump finds two moved in parallel for their first four years. But where the earlier slump hit a bottom and then returned to growth in the early 1990s, home prices have bumped along near their lows for the past 24 months, suggesting a possibility that “we may not see a full price recovery until very late in this decade,” according to Bluestone.

Record Rents Defy Economy

The weakness in the economy and home prices has had what on the surface is a surprising impact on the Greater Boston rental market – driving rents to historic highs in 2011. The report card finds the region has created fewer than 1,200 new rental units between 2009 and the spring of 2011, but demand has risen sharply because of three factors:

    Families who have lost their homes to foreclosure turned to the rental market, driving up demand
    A decrease in younger families moving into homeownership, either because of tighter credit or because of anxiety over buying into a weak market
    Continued pressure of a rapidly growing number of college students, particularly graduate students, entering the rental market

As a result, as of spring 2011, Greater Boston has the third highest average rent among major metropolitan areas, trailing only New York and San Francisco. The result, the report card warns, is a need for policies that stabilize home prices and a need to encourage creation of new rental housing to alleviate a supply crunch which is punishing lower-income residents and has the potential to drive the more mobile to cities with lower rental costs.

A Racial Gap in Home Ownership

Despite the foreclosure crisis, the overall home ownership picture remains strong in Massachusetts and Greater Boston. In fact, the report card finds home ownership in Greater Boston reached its highest level ever in 2010. But beneath the surface, there is concern over the gap in home ownership rates between white and black households in the state.

Figures from the 2010 census show that while the home ownership rate for non-Hispanic white households reached a new high of 68.9% in 2010, black home ownership rates lag at just 33.5%, virtually the same level as 1970. The disparity leaves black (and other ethnic group) families less able to capitalize on the economic, social and civic advantages of home ownership.

Public Policies

The report recognizes a number of positive policy developments in support of housing over the past 12 months. The defeat of a referendum to repeal Chapter 40B in November 2010 demonstrated public support for affordable housing – and the report cites a number of activities at the state level to help grow and maintain the state’s affordable housing stock.
Among the programs:

• The HomeBASE Program, which took effect July 28, 2011, which provides short-term rental assistance to families facing homelessness  
• An Act to Stabilize Neighborhoods, signed in August 2010, which gives homeowners facing foreclosures and their tenants protection and greater options  to keep their homes  
• Chapter 40T, which gives the Department of Housing and Community Development opportunities to preserve subsidized rental housing units in the face of opt-outs, prepayments, and expirations of subsidized 40-year mortgages   
• Chapter 40R, which encourages municipalities to create ‘smart growth’ zoning districts with higher density development near transit, in town centers or on undeveloped land in return for local aid. As of August 2011, 33 approved 40R districts could provide more than 12,000 units of housing as the economy improves.

The report notes that these efforts at the state level are unlikely to be complemented by federal actions, in an economic climate where funding and legislation for affordable housing are unlikely to receive much support.

What Should Be Done?

The report cites four areas to target to revive the housing market while assuring low- and moderate-income families safe and secure shelter:

• Stabilizing home prices in the short term 
• Providing for construction of affordable housing units 
• Increasing availability of rental housing to bring down rent 
• Increasing production of homeownership units to moderate future prices

There is a vast array of existing and new approaches that warrant consideration, the report notes, including protection (and even expansion) of federal and state programs and policies to support affordable rentals and home ownership – listing more than a dozen ideas.

“If some of these approaches were implemented quickly,” the report concludes, “we could begin to see a faster exit from the Great Recession and at the same time put in place housing programs that will stabilize home values for those who have seen the values of their homes depreciate, reduce the number of families facing foreclosure, take pressure off the overheated rental market and provide additional affordable housing for low- and moderate-income households.

“There is much work to be done.”

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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 $796 million. In Fiscal Year 2010, the Foundation and its donors made more than $82 million in grants to nonprofit organizations and received gifts of close to $83 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