Excerpts from the Board | Economic Currents | Measure of Massachusetts Data
November 8, 2006
Much of the Board meeting discussion focused on the declining housing market in the state, and the possible impacts on the state economy. Sales of single-family houses have been declining in the state since early 2005, while over roughly the same time period inventories of unsold houses have been rising. Somewhat more recently, housing prices have started to decline. The hope is that housing prices will experience a “soft landing,” though it is too early to know.
Declining housing sales and prices have numerous impacts on the state economy. Often a household’s largest asset is their home, and widespread declining values of this asset, or even uncertainty surrounding future values of the asset, can have a negative impact on consumer spending, through the “wealth effect.”
In addition, both the real estate brokerage and the construction sectors are hurt as the market adjusts to falling demand for housing and increased inventory. Relative to the size of the economy, the housing construction industry in Massachusetts is not as large as it is in other, faster-growing regions of the country, but the impact of the slowdown is still being felt.
A related development is the rise in mortgage interest rates since early- to mid-2005, and the increased mortgage payments being experienced by many holders of adjustable rate mortgages. Of particular concern is the pressure that is put on higher-risk borrowers who have taken on sub-prime mortgages. To the extent that there are neighborhood patterns to these sub-prime mortgages, foreclosures, forced sales, and steeper declines in housing prices may be focused on specific geographic areas, with spillover effects in neighboring areas.
A salutary impact of declining housing prices is the increased affordability of housing in one of the most expensive regions of the country in which to buy a house. Especially in the Boston metropolitan area, in recent years housing has been priced out of the reach of many first-time home buyers. One result of high and rising housing prices, especially during a time of slow economic growth, has been elevated out-migration of our population. Falling housing prices provide an opportunity for new home buyers, and presumably can serve as a brake on the pace of out-migration. This is especially important in Massachusetts, with traditionally slow labor force growth.
Apart from the declining housing market, Massachusetts has been experiencing moderate economic expansion during the past year, apparently driven by a global increase in high technology and healthcare-related spending. The timing, and therefore the expiration, of this expansion may be dictated more by “tech cycles” than by more traditional business cycle fundamentals. This makes it particularly difficult to foretell how the timing of this cycle will play out in the Massachusetts economy.
It is unclear at the moment how long and how deep the decline in the state’s housing market is going to be. It is also difficult to predict the duration of the technology expansion the state is currently experiencing. We are going through a period of reasonable economic conditions, but considerable uncertainty.