Forecasters: No quick end to housing ills

Hub Fed chief says slump likely longest in 50 years

Eric Rosengren, president of the Federal Reserve Bank of Boston, sees the housing slump continuing. Eric Rosengren, president of the Federal Reserve Bank of Boston, sees the housing slump continuing.
Email|Print| Text size + By Binyamin Appelbaum
Globe Staff / January 9, 2008

It could be a long slump.

Housing prices in Massachusetts and the nation likely will keep falling through next year and beyond, according to a growing chorus of economic forecasters.

Eric Rosengren, president of the Federal Reserve Bank of Boston, told a Hartford audience yesterday that the current housing slump could be the longest in 50 years, increasing the risk of a broader economic downturn.

Rosengren said spending by home buyers has declined in every three-month period since the beginning of 2006, and likely will continue to fall through at least June 2008. That would be the longest downturn since 1958.

Falling home prices hurt the broader economy, in part by reducing consumer spending, Rosengren said. In turn, a broader economic decline cuts spending on housing. The back-and-forth can create a downward spiral.

Forecasters once saw housing prices beginning to recover by the end of 2006, the middle of 2007, then the end of 2007, and the middle of 2008. The latest pushback in projections follows the release of federal data last week showing unemployment climbed to 5 percent in December - a sign at the very least that the economy won't help the housing market.

Mark Zandi, chief economist for Moody's, said in a December report that prices in the Boston area would decline into the first quarter of 2009, dropping 10 percent from the market's peak in the fourth quarter of 2005. Zandi said the decline could be steeper if unemployment numbers keep climbing.

Global Insight, a Waltham company that crunches economic data, projected last week that housing prices would keep sliding well into 2009.

Daniel Mudd, chief executive of mortgage giant Fannie Mae, said in a speech yesterday that prices likely would not begin to recover until 2010.

And Robert Shiller, a Yale economist famous for forecasting the burst of the dot-com bubble, has warned this slide could last five years or more.

There are contrarians.

The chief economist for the National Association of Realtors said the real estate market already has hit bottom. The group projects prices to hold steady in 2008, and sales to increase slightly, before the market roars back in 2009.

The realtors association last year predicted that 2006 was the bottom for the real estate market, and that sales volume and prices both would rise in 2007. In fact, the trade group overestimated sales by 700,000 units, and prices dropped 2 percent.

How have things become so bad?

In his speech yesterday, Rosengren said the very efficiency of the capital markets, which funded the unprecedented boom in housing prices, may now be accelerating the decline.

Lenders once provided the money for loans from their own vaults. But most mortgages are now packaged as securities and sold to investors, which provides lenders with a stream of money for more loans.

"The trend toward securitizing mortgage loans allowed the financing arrangements to be driven by national rather than regional conditions," said Rosengren, speaking before the Connecticut Business and Industry Association. As a result, regional problems - which once had a regional effect - now reduce the availability of loans nationwide.

The best response, Rosengren said, is to calculate and accept losses as quickly as possible. Banks should report and close the books on bad loans, and home sellers should accept the need for price cuts, drawing investors and buyers back to the market with the prospect of new profits.

Art Foley, a Quincy real estate broker, said many sellers on the South Shore seemed unwilling to cut prices. As a result, while prices in the Boston area have held relatively steady, the number of sales dropped sharply in recent months, suggesting buyers are waiting for larger price cuts.

"A good real estate broker today will walk away from a lot of listings they could have because the seller is not being reasonable on the price," said Foley, who owns Century 21 Annex Realty.

He said some agents joke that it is best to be the third agent to work with a seller, because after the seller fires the first two, he might be more willing to listen to the argument that the price needs dropping, and not the agent.

There is a longer view of the current problems: This downturn follows an unprecedented boom.

Housing prices in the Boston market peaked in September 2005, according to the S&P/Case-Shiller Home Price Index. As of October 2007, the market was down 7 percent from its peak - meaning that a dollar spent on housing in September 2005 was worth only 93 cents. But the latest drop has only rewound the markets back to the summer of 2004. A dollar spent on housing in 1997, when the boom began, still is worth about $2.15.

There also is a longer view of the future. The Joint Center for Housing Studies at Harvard University noted in its annual survey that a rebound is inevitable, even if the timing is unpredictable.

Over the next decade, the report said, the combination of a growing population and rising wealth, "will help propel residential spending to new heights."

Binyamin Appelbaum can be reached at

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