Housing Market Woes Endanger PA Economy, Keystone Research Finds

Bursting Housing Bubble, Rising Foreclosures, and Credit Squeeze Could Mean Hard Times for Many Pennsylvanians

State as Well as Federal Policymakers Need to “Be Prepared” with Contingency Plans for Investment in the Future

Harrisburg, January 31—The first detailed study of the housing market in Pennsylvania and its major economic regions is being released today by the Keystone Research Center (KRC) in Harrisburg.

The study, A Building Storm: The Housing Market and the Pennsylvania Economy, shows that while the Commonwealth has escaped some of the huge housing-related troubles that have struck neighboring states, Pennsylvania residents should not be lured into a false sense of security.

The bottom line, said KRC economist Mark Price, co-author of the new report, is that “the volatile cocktail created by a bursting housing price bubble, rising foreclosures in the subprime mortgage market, and a credit squeeze in financial markets could yet translate into hard times for many more Pennsylvanians.

Given that reality, Price said, “policymakers in Harrisburg as well as Washington, DC, need to be prepared with creative responses that help keep Pennsylvania, and Pennsylvanians, above water.

The full report, including specific housing data for the state’s 14 metropolitan areas, is available at http://www.keystoneresearch.org/housingmarket. Those metro areas include Philadelphia, Allentown-Bethlehem-Easton, York-Hanover, Reading, Lancaster, Harrisburg-Carlisle, State College, Lebanon, Scranton/Wilkes-Barre, Williamsport, Johnstown, Pittsburgh, Altoona, and Erie.

Keystone Research Center is a nonprofit, nonpartisan economic research organization working for a prosperous and equitable Pennsylvania economy.

Price and fellow KRC economist Stephen Herzenberg say in the report that, contrary to many perceptions, Pennsylvania did experience a housing bubble. While the recent run- up in housing prices began slightly later in Pennsylvania than in the rest of the nation, housing prices here have mirrored the national trend since 2001. In just five years, from 2001 to 2006, housing prices rose 54 percent, compared to an overall inflation rate of only 13 percent. “Housing price hikes far outstripped increases in rents and the cost of construction,” said Herzenberg. “That is clear evidence of a bubble in Pennsylvania.

“So far,” added Price “the bursting of the housing bubble has had limited impact on overall job and output growth in Pennsylvania. But economists are waiting for the other shoe to drop, and for housing market troubles to trigger a broader slowdown.”

Price cited three reasons for this expectation, each discussed in depth in the report.

First, he said, Pennsylvania’s booming construction industry, which had been sustaining job growth in the first years of this decade, is slowing down. Total construction employment in Pennsylvania from March to November of 2007 was down 2.3 percent, an even steeper decline than in the nation as a whole.

Second, with housing prices now stagnant or falling, homeowners can no longer use their houses as ATM machines by taking out home equity loans backed by inflated home values. In Pennsylvania as in the nation, this will drive down consumption demand.

Finally, according to Price, increasing foreclosures nationally and statewide could lead to a shortage of credit, with nervous investors pulling back from financial institutions holding significant numbers of subprime loans in the form of mortgage-backed securities or bonds. “Even business investors and households who are good credit risks may find themselves unable to borrow,” he said.

A Building Storm also reports that:

• the foreclosure rate on subprime loans issued in 2006 in Pennsylvania is projected to be 53 percent above the rate on subprime loans issued here from 1998 to 2001.
  
• an estimated 45,500 subprime mortgage foreclosures are projected in Pennsylvania between the third quarter of 2007 and the end of 2009. That, say the authors, represents a loss of $2.4 billion in property values.

Price pointed out that one way to gauge vulnerability to foreclosure in a particular neighborhood is to examine the number of subprime mortgages as a share of all mortgages. In Pennsylvania, according to data on new home mortgages originated in 2006, the counties with the greatest share of subprime home loans are Forest, Cameron, Venango, and Fayette. Maps showing the share of 2006 mortgages that are subprime, in each census tract within each county, are also available at http://www.keystoneresearch.org/housingmarket.

Herzenberg said the most important piece of the KRC housing report is the section that proposes practical solutions. “Much of the responsibility for stimulating the economy rests with the federal government,” acknowledged Herzenberg. “But creative state action can also help Pennsylvania remain in better shape than other states and position it for robust prosperity once any recession ends.”

Like the Boy Scouts,” Herzenberg said, “the state should ‘be prepared’ if the economy worsens. To help develop contingency plans, we recommend that the state set up a Commission on Investment in the Future. We know that Pennsylvania’s infrastructure—roads and bridges, mass transit and telecommunications highway, sewers and waterways, school and community college buildings—falls short of the ideal. We also know that our workforce lacks critical skills sought by high-performing businesses. Like a farmer who sharpens his tools in the winter, Pennsylvania needs to use any pause in private sector growth to get ready for the spring planting.”

Herzenberg said Pennsylvania policymakers also need to enact reforms in three other areas: