Forecast: No housing recovery until 2009

Boston-area prices could fall 8% more

A widening credit crunch and rising risks of a US recession will delay the Boston housing market's recovery until mid-2009, according to a new forecast.

House prices in the Boston metropolitan area, which have fallen 7 percent since their 2005 peak, will decline another 8 percent before starting to recover in the middle of 2009, Moody's Economy.com said yesterday.

The forecast has "gotten a little bit worse," said Gus Faucher, director of macroeconomics at the Philadelphia economic consulting firm. "We expect prices to bottom out in 2009."

Most economists now agree US and local housing prices will fall through 2008 and won't begin to rise again until next year.

For example, Freddie Mac said yesterday that house prices would continued to decline through 2009. Freddie Mac said prices nationwide would drop another 7.9 percent this year, on average, and 3.3 percent in 2009. They fell 8.9 percent in 2007. Freddie Mac, a quasi-government agency, provides mortgage funding.

Moody's Economy.com had previously forecast a turnaround for late 2008. But Faucher said mortgage lenders' tighter credit standards are hitting the housing market hard this year, including in the Boston area.

Interest rates for jumbo mortgages, which are used heavily in expensive markets like Boston's, are almost a full percentage point higher - around 7 percent - than are rates for conventional fixed-rate mortgages.

Investors who buy these mortgages perceive jumbo loans (those currently defined as those exceeding $417,000) as being more risky. Previously, many such loans were too large to qualify for backing from Freddie Mac or Fannie Mae.

The economic stimulus package Congress passed recently increases the lending ceiling for loans that Freddie Mac and Fannie Mae can guarantee. The government is expected to specify new limits for various markets within a few weeks.

US Representative Barney Frank's office had estimated the new loan limit for the Boston area would be about $538,000. Still, loans above the old $417,000 ceiling could carry higher interest rates because Fannie Mae and Freddie Mac may have trouble reselling them on the secondary mortgage market.

And subprime loans, which fueled the real estate boom earlier in the decade, have virtually disappeared, eliminating mortgages used by an entire segment of buyers, economists said. Many buyers with less than stellar credit turned to subprime loans.

Now, "It's much more difficult to get a loan, so that's really weighing on the market," Faucher said.

Forecasts are notoriously difficult to get right. That's even more true when economic data are in flux and economists remain uncertain whether the US economy has entered - or will enter - a recession. If unemployment rises, it is more difficult for people to buy homes or trade up to bigger properties.

"If we have a recession, demand is going to drop further and put more downward pressure on prices," said Chip Case, a housing economist and professor at Wellesley College.

But, Case said, the Boston and Massachusetts housing markets could turn around this year. He noted a wide variation between troubled markets such as in Lawrence, where subprime mortgages were concentrated, and wealthy suburbs such as Weston that are holding up well.

"You look at these different segments and see different things," he said.

Alicia Sasser, senior economist for the Federal Reserve Bank of Boston, also predicted that house prices in New England, including Massachusetts, would decline for a second year in a row in 2008.

She, too, said the region could begin to recover late in the year - and before the rest of the country - because New England's housing market slumped earlier than elsewhere.

She shared her predictions with real estate agents yesterday at a conference of the Massachusetts Association of Realtors in Cambridge. Also, there were fewer new homes built here than in the South and West, where the population is expanding rapidly, Sasser said, leaving those regions saddled with large inventories of unsold homes.

"Our oversupply is not as dire as in the rest of the country," she said, adding, "It's still going to take time to work through that inventory."

When local markets do recover, Sasser said, they will do so without the rapid price appreciation of 10 percent or more a year that characterized the boom years.

New England house prices, she predicted, will rise about 2.1 percent annually.

Massachusetts, along with Rhode Island, she said, "will have the slowest growth in housing prices through 2011."

Kimberly Blanton can be reached at blanton@globe.com.