UMass Donahue Institute

RAY SUAREZ: Today's news that U.S. home construction fell last month was another sign of the continuing national housing slump. The Commerce Department said today housing starts dropped just over 2 percent in May. Construction permits for single-family homes fell again, as they have in four of the last five months.

And yesterday, a report showed home-builder confidence at its lowest level in over 16 years. Add to that: rising mortgage rates, excess inventory, growing foreclosures, and the picture of the national housing market seems grim. But, after all, real estate is all about location, location, and location.

For a look at conditions at the regional level, we're joined now by economists from four parts of the country. Raphael Bostic, director of the Master of Real Estate Program at the University of Southern California, he joins us tonight from Cleveland, Ohio. Mark Dotzour is the chief economist at the Real Estate Center at Texas A&M University. Donald Grimes, research specialist in economics at the University of Michigan, he's in Tampa tonight. And Michael Goodman, director of economic and public policy research at the University of Massachusetts Donahue Institute, he joins us from Hartford, Connecticut.

And Michael Goodman, does the profile in the New England states resemble that of America as a whole?

MICHAEL GOODMAN, University of Massachusetts: In certain respects, yes; in certain respects, no, Ray. New England is always a bit of a different case, and I think we've got it a bit worse in some respects than the nation and a bit better in others.

We're worse in terms of the price declines that we've been seeing to date and the length at which those price declines are expected to continue. At the New England Economic Partnership, we're expecting that they'll be price declines in the New England region through the second quarter of 2008. So I think we rose much faster, and we've got a bit further to fall.

On the positive side, we don't make a great deal of housing here in New England and in Massachusetts in particular. We still have local control over land use. We don't have county government. And so it's very difficult to develop new housing, and so we haven't been doing a good job of producing housing. Consequently, there's not a big drop-off that we can expect to see in the construction sector, which is, I'm sure, an issue facing many other regions of the country.

RAY SUAREZ: Raphael Bostic, what's the scene as you review the data that's coming out of California?

RAPHAEL BOSTIC, University of Southern California: Well, in some regards, we're quite similar to what you're seeing in New England, in that we have a tight housing market, in terms of very little supply that's being added in the core part of the region, but also we have really strong underlying fundamentals, which have really helped keep or minimize the extent to which you're going to see these price declines.

What we see in the West is a lot of strength and a lot of confidence, but also pockets of concern, particularly among home builders, who have taken a bet that the houses they're going to build will be sold, sort of "if they build it, they will come." But we're starting to see weakness in those areas.

But in the core parts of most western cities and western locations, we're still seeing strength as the underlying fundamentals, the demand, job growth and job creation have stayed strong, and have really helped keep those markets somewhat stable.

A unique situation in Texas

RAY SUAREZ: Mark Dotzour, how does Texas resemble what you just heard from Massachusetts and California? And how does it resemble the nationwide trends?

MARK DOTZOUR, Texas A&M University: Hello, Ray. It's good to visit with you. We down here in Texas we have a real, unique situation going on right now. We've got a combination of very strong job growth. It's basically double the national average. We've got home price appreciation that's going up at an increasing rate in many of our metropolitan areas.

And at the same time, we've got population growth. I noticed just last year we had 570,000 new people come into the state of Texas. And at the same time, the home builders have cut back on production, as well, like you've previously heard. And so we're in kind of an interesting position, where home builders are cutting back on their building, but inventory levels of homes for sale are quite low. And that's why we're seeing the good rates of price appreciation in many parts of Texas.

RAY SUAREZ: And let's finally stop in Michigan. Donald Grimes, how's the scene there?

DONALD GRIMES, University of Michigan: Well, you described the national housing market as grim. And if it's grim nationally, it's doubly grim in Michigan. The housing market in Michigan is in very, very bad shape and, unlike the rest of the states that you have talked to and mentioned, the problem in the housing market in Michigan stems from a very weak economy, a weak economy that has lost jobs in each of the last six years, and last year Michigan's population actually declined.

So the weak housing market results from a weak economy. It's not a cause of the weak economy. And in order for Michigan's housing market to recover, the local economy has to recover or at least stop falling.

Artificial scarcity

RAY SUAREZ: Well, Donald Grimes, what does that mean right at market level, at ground zero? If you are a buyer or seller looking at the market in one of Michigan's big cities or in its rural northern areas, what's the practical effect?

DONALD GRIMES: Well, I'm afraid I don't have any good advice for somebody who's trying to sell their home. The economy is likely to stay weak for quite a while, at least until we work out the decline in the auto industry, which, of course, is what drives Michigan's economy, the decline in the big three has to stabilize before we can really get anything going in the housing market.

There are some very good deals in Michigan, however, if you're a home buyer and can basically ride it out for a little while. It may not be a bad time to buy. But be selective, drive a hard bargain, and if you need to sell your house, I'm afraid you've got a problem.

RAY SUAREZ: Raphael Bostic, you said something that struck me, that there are still a lot of buyers in the marketplace, and the people who build houses just haven't supplied enough inventory. We're told that that doesn't happen, that markets make supply. What happened?

RAPHAEL BOSTIC: Well, a lot of the issue there is local land use control, and it's actually hard to build in many parts of California because we have sophisticated communities who will try to oppose and slow down the pace of development. We actually, in many areas, are constricted in terms of the available land, and so the new stuff that's happening fairly peripheral to the metropolitan areas.

And so it is kind of paradoxical. I'm an economist, love markets. They all should work. But there are some regulatory and procedural processes that have really constrained the ability of the market to respond really quickly.

I will say one thing: In California, this is as strong and as positive a time for buyers as we've seen in a long time, because of the weakening in the housing market, the subprime market really taking a hard hit. If you want to think about buying or selling, I'm starting to lean toward the buyer side much more.

RAY SUAREZ: Mark Dotzour, why don't you jump in there? Because you described a similar situation with a kind of artificial scarcity. Why aren't the people who are building houses build more for a marketplace where there are 575,000 new people to house?

MARK DOTZOUR: Over the last 10 or 15 years, a lot of national volume home builders have pretty much captured a large market share in many of Texas' cities, as well as many cities around the country. A lot of those volume builders are publicly traded firms. Their earnings are down, and their shareholders are demanding that they cut their volume back, walk away from land that they've purchased to try to regain more profitability.

That's probably a good idea in many parts of the country where the economy is slowing down. There's too many houses maybe a little negative job growth. But in areas where you've got robust population growth and job growth, it doesn't make a whole lot of sense.

It's good for Texas homeowners right now. We've got places like Midland, Texas, where houses are up 21 percent from a year ago. Austin and San Antonio are both up almost 11 percent. So we've got a real unique situation here.

And if you don't mind, I'd like to kind of take issue with that idea that the real estate market is America in a grim market, because when you really look at it, the Office of Federal Housing Enterprise Oversight, OFHEO, recent numbers show that home price appreciation in America is still 4.25 percent. And, nationally, over the last 27 years or so, that's averaged about 5.25 percent.

So I don't really see it as grim. The fact is, home builders are cutting back. That's good for America, because we don't want to have a large oversupply of homes. And it may be grim for home builders in the short term, but that's good for America in the long term.

Some of New England overheated

RAY SUAREZ: Michael Goodman, why don't you jump in there? Because I'm guessing that it's almost a fallacy to talk about New England as if it's one place. There are probably interior, northern tier, midsize cities where it's pretty tough if you're trying to sell a house, while there are very popular, overheated markets near the coast, where it's terrific, and you're still getting price appreciation.

MICHAEL GOODMAN: That's absolutely right. Certainly, to make a comment on the last assessment, it certainly looks grim from where we're sitting here in the Northeast. Prices have been declining. There's still a lot of pent-up demand out there, people who would like to be able to get into the housing market, but really can't afford it, and people who've accumulated a great deal of equity who've got a price in mind that they want to sell and, at this point at least, a reluctance to sell for it.

As far as the New England situation is concerned, I think there's the greater metro Boston area, which really has become overheated and has begun, I think realistically, to start to fall down to earth a bit. The prices had risen to quite unsustainable levels there.

But the story across the rest of the six-state New England region, I think, is quite interesting. In Connecticut, in Rhode Island, and in parts of southern New Hampshire, you are seeing the same kinds of overheated housing markets, driven by demand for access to the jobs that are available in greater Boston, technology innovation jobs, et cetera.

Across the rest of the region, in northern New Hampshire, Vermont, and Maine, you do see a lot of second-home-ownership-driven bubble issues. That is, people who earlier in the decade were looking for greater rates of return than could be offered by the stock market and other investments in many cases sunk those investment dollars into homes, which inflated those local markets across the region.

And so a lot of those absentee owners, I think, are really starting to think twice about the value of that investment, and that's brought some properties back onto the market and begun to exert some downward pressure in those areas.

Long term, though, I think we continue to have an affordable housing problem in New England, particularly in Massachusetts and Connecticut, because we're simply not producing the numbers of housing units that we need to keep up with demand and significantly producing them at price points where working families, middle-income included, are able to find a way to be here.

I suspect some of the people that are going to Texas are originating from some of the New England states. In Michigan, for that matter, many of our younger, better-educated residents have been voting with their feet and moving to other parts of the country.

When we do public opinion research at the U-Mass Donahue Institute, they tell us that available jobs and the cost of housing are the driving factors. And so we've had relatively slow growth in our economy. We lost a lot of jobs earlier in the decade. And between that and larger market forces that are playing themselves out regionally and nationally, we've got ourselves a pretty challenging situation here.

Challenges for low-income workers

RAY SUAREZ: Raphael Bostic, just this week, a study came out from Harvard noting that one of every seven households in America pay half their income for housing. And this burden falls heaviest on low-wage service workers, part-timers, the disabled, and retirees.

Does the marketplace -- and I ask you, in part, because you've got a couple of very large metros in your state which have very high discrepancies between the very rich and the very poor -- does the marketplace work for those workers? Do housing industries in these metro areas produce enough low-cost housing?

RAPHAEL BOSTIC: The short answer is no. And one of the challenges is making housing construction work at the price points that's necessary. One of the biggest challenges in California -- and on both coasts, for that matter -- is that the cost of land with no structures on it is very high, which means that, if you're going to build housing that's going to be affordable for the workforce, your teachers, your low-wage earners, you're going to have to find ways to make, on a per-unit basis, it make sense.

And so, typically, the answer in that context is to build much denser housing so that you get much more cash flow from a developer perspective for each parcel where you have construction. Dense housing is a hard sell in most communities in California, and I would imagine across the country, and so it becomes very difficult to build in configurations and in the volumes that can allow people at all income levels to afford housing.

I would just say, people in California are moving to Texas, and Arizona, and New Mexico, as well, as they're finding the challenge of affordability to be something that they can't overcome, and you can find housing at far more affordable levels in those other states.

RAY SUAREZ: And, Raphael Bostic, I'm going to have to close it there. Gentlemen, thank you all for joining us.

June 19, 2007