Housing slide may deepen

The housing downturn in Massachusetts will last longer, and prices will fall further than first projected, according to an economic forecast released yesterday.

Housing prices will slide by as much as 10 percent from their 2005 peak before hitting bottom in early 2008, according to the forecast by the New England Economic Partnership. They should stay flat through 2009, before beginning to climb gradually.

A year ago the nonprofit research group forecast prices would decline less than 3 percent, bottom at the end of 2006, and regain their peaks in early 2008.

The new forecast is more pessimistic than others, which see the housing market near the bottom and turning soon. In a recent analysis, Moody's Economy.com, the West Chester, Pa., consulting firm, cited improving job growth in Massachusetts and recent declines in mortgage rates as evidence the worst is almost over for the local housing market. Lawrence Yun, senior economist at the National Association of Realtors, agreed, predicting prices here should begin "perking up" in the spring.

"It's very difficult for me to see prices continuing to fall in a job-creating environment," Yun said.

But Alan Clayton-Matthews, the University of Massachusetts at Boston professor who prepared the forecast, said job growth isn't strong enough, and mortgage rates aren't low enough to so quickly offset the main reason for the correction: Home prices outstripping incomes.

During this recent housing boom, the gap between income and home prices reached an all-time high, exceeding the gap of the late 1980s, the last time a boom turned bust, Clayton-Matthews said. The number of homes on the market is up significantly from a year ago, he said, and the Massachusetts Association of Realtors has reported plunging home sales and prices in recent months.

"Once prices start declining there's a lot of force to keep going until they are more in line with income," said Clayton-Matthews, adding that it's difficult to predict where housing prices will go. "That's what we saw in the late '80s and early '90s."

The weakening housing market was the main dark cloud in an otherwise sunny forecast that projected slow, but steady, economic and job growth through 2010. Over the longer run, Clayton-Matthews said, the housing correction could prove a silver lining, making homes more affordable and the state more competitive.

At the peak of the boom in 2005, the median single -family home price in Massachusetts was 8.5 times the state's per person income, compared to 6.5 times in the United States. By 2010, with prices stabilizing and incomes rising, the home price gap in Massachusetts should shrink to about 6 times income, compared to about 5.5 times nationally.

"This could help repair our cost-of-living disadvantage," Clayton-Matthews said. "Once again, we could be a state that's pleasant to live in and also affordable."

Massachusetts' economy is coming off its best year since 2001, according to Clayton-Matthews. The state economy outpaced the nation's, growing 3.4 percent, compared to 2.9 percent nationally. In addition, the state added more than 30,000 jobs over the year, a 1 percent growth rate that matches the nation's.

Earlier in the recovery, state employment was growing at half -- or less -- the national pace.

Strong global demand for the state's science and technology products has provided the economic spark, Clayton - Matthews said. Growth will moderate to an average of about 2.7 percent a year through 2010, while payroll employment will continue to grow at about 1 percent.

The projected growth, however, is far slower than the 1990s, when payroll employment grew 2.2 percent annually, and the state won't regain all the jobs lost in the last recession until at least 2011, according to the forecast.

Robert Gavin can be reached at rgavin@globe.com.