Update on the New England Economy and Housing Markets

Alicia Sasser, Senior Economist

New England Public Policy Center

Federal Reserve Bank of Boston

New England Realtor’s Conference

March 3, 2008

The presenter would like to thank Yolanda Kodrzycki and Ana Patricia Muñoz for providing data. The views expressed in the presentation are not necessarily those of either the Federal Reserve Bank of

Boston or the Federal Reserve System.

Areas of Focus

• Employment situation

• Consumer and business confidence round-up

• Housing situation

• Economic outlook for New England

New England Employment Situation

Good News: Employment held steady year-over-year.

• Employment grew by 0.8 percent, just below U.S. growth.• No increase in unemployment rate, still below nation’s.• Personal income growth comparable to the U.S. average.

Bad News: Employment slipped at the end of 2007.

• Lost jobs at end of 2007, still below 2000 peak job level.• Unemployment rate increased slightly in Nov and Dec. • Unemployment claims increased, similar to U.S. trend.

4

IEmployment in New England slipped at the end of 2007.

- 30

- 20

- 10

0

10

20

30

Dec-00

J un-01

Dec-01

J un-02

Dec-02

J un-03

Dec-03

J un-04

Dec-04

J un-05

Dec-05

J un-06

Dec-06

J un-07

Dec-07

Monthly Employment Change in New EnglandThousands of Jobs

Source: U.S. Bureau of Labor Statistics.

5

As a result, year-over-year employment gains for New England were small.

-6

-5

-4

-3

-2

-1

0

1

2

3

4

Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07

Percent Change fromYear Earlier

United States

New England

Employment Growth

Source: U.S. Bureau of Labor Statistics.

6

By major sector, employment growth in New England was mixed compared to a year earlier.

0.7

1.8

3.1

2.7

0.6

1.2

0.4

0.7

-0.3

2.0

2.0

1.4

0.5

0.6

-0.1

-2.5

-0.2

-1.5

-1.3

-0.4

-4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0

Construction

Manufacturing

Trade, Transportation, & Utilities

Information

Financial Activities

Professional & Business Services

Private Education & Health Services

Leisure and Hospitality

Other Services

Government

United States

New England

Percent Change, Dec 2006–Dec 2007(Seasonally Adjusted)

Source: U.S. Bureau of Labor Statistics.Note: New England data represent only CT, MA, and NH. Seasonally adjusted data are not available for ME, RI, or VT.

Employment Growth by Supersector

7

New England’s unemployment rate edged up at the end of 2007, but was lower than the nation’s.

0

1

2

3

4

5

6

7

8

9

Dec-91

Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-05

Dec-05

Dec-06

Dec-07

Percent

Source: U.S. Bureau of Labor Statistics.

United States

New England

Unemployment Rates

8

Year-over-year, the unemployment rate was unchanged for the region, but fluctuated widely

across New England states.4.4

4.6

4.1

4.6

5.2

3.5

5.1

3.8

5.0

4.6

5.0

5.1

4.5

5.5

4.0

3.6

0 1 2 3 4 5 6 7

United States

New England

Connecticut

Maine

Massachusetts

New Hampshire

Rhode Island

Vermont

Dec-06

Dec-07

Source: U.S. Bureau of Labor Statistics.

Percent

Personal income in New England continued to grow through the third quarter

of 2007.

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

89Q3 91Q3 93Q4 95Q3 97Q3 99Q3 01Q3 03Q3 05Q3 07Q3

Percent Change from Year Earlier

Source: U.S. Bureau of Labor Statistics.

United States

New England

Total Personal Income

New England Consumer and Business Confidence Round-up

The Good: Business confidence was unchanged in December and Massachusetts employers

showed some optimism about future conditions.

The Bad: Consumer confidence among New England residents held steady in December, but

remained below year-ago levels.

The Ugly: Compared to a year ago, the percentage of Boston area workers who see their personal

financial situation as improving has fallen.

Confidence among Massachusetts employers was virtually unchanged in December.

Index

Source: Associated industries of Massachusetts.

AIM Business Confidence Index

35

45

55

65

75

Dec-00

Jun-03

Dec-03

Jun-03

Dec-03

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Massachusetts

New England consumer confidence held steady at the end of 2007 but below year-ago peaks.

1985 U.S. Average=100

Source: The Conference Board.

Consumer Confidence

110

91

131

119

96

73

89

70

108

93

76

55

0

25

50

75

100

125

150

Dec-06

Dec-07

Consumer Confidence US NE

Present Situation US NE

Future Expectations US NE

Confidence among employees continued to erode for Boston and the nation.

Percent Responding

Source: Hudson Highland Group.

Workers’ Assessment of Personal Financial Situation

4139

34 33

38 3841

43

39

34

31

28

41 414342

0

5

10

15

20

25

30

35

40

45

50

US Improving Boston ImprovingUS Worsening Boston Worsening

Dec06

Nov07

Dec07

Oct07

Dec06

Nov07

Dec07

Oct07

Dec06

Nov07

Dec07

Oct07

Dec06

Nov07

Dec07

Oct07

New England Housing Situation

Good News: Not as bad as some other regions.

• Prices fell but not as sharply as some other areas.• As prices continue to soften, affordability may improve.• About one-quarter of subprime borrowers could refinance.

Bad News: It’s not over yet.

• House prices continued to soften through the end of 2007.• Existing sales and new home construction are down. • Foreclosures are at record highs and still rising.

House prices continued to soften through the end of 2007 in both New England and the U.S.

-10

-5

0

5

10

15

20

25

30

1983 -Q1

1985 -Q2

1987 -Q3

1989 -Q4

1992 -Q1

1994 -Q2

1996 -Q3

1998 -Q4

2001 -Q1

2003 -Q2

2005 -Q3

2007 -Q4

Source: Office of Federal Housing Enterprise Oversight (OFHEO).

Percent Change from Year Earlier

United States

New England

All-use index

Purchase-only index

OFHEO House Prices Indices

16

House prices for homes purchased fell in 2007 Q4 for every New England state except Maine.

-1.3

-0.4

-1.4

0.1

-3.6

-0.9

-1.5

-2.8

-6 -4 -2 0 2 4

United States

New England

Connecticut

Maine

Massachusetts

NewHampshire

Rhode Island

Vermont

Percent ChangeQ3 2007–Q4 2007

Source: OFHEO

-0.3

-1.1

0.9

2.0

-1.9

-2.7

-0.4

-3.6

-6 -4 -2 0 2 4

United States

New England

Connecticut

Maine

Massachusetts

NewHampshire

Rhode Island

Vermont

Percent ChangeQ4 2006 – Q4 2007

OFHEO Purchase-only House Price Index

House prices continued to fall in Boston, but not by as much as some metropolitan areas.

Source: S&P/Case Shiller

Percent Change from Year Earlier

-15

-5

5

15

25

Dec-88

Dec-89

Dec-90

Dec-91

Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Composite Index, top 10 cities

Boston

S&P/Case Shiller Home Price Indices

Composite Index, top 20 cities

Boston had the smallest decline in house prices among the Composite 10 metro areas for 2007.

-9.8

-9.1

-3.4

-4.6

-4.5

-15.3

-5.6

-15.0

-10.8

-9.4

-17.5

-13.7

-18 -16 -14 -12 -10 -8 -6 -4 -2 0

Composite index for top 10 cities

Composite index for top 20 cities

Boston

Chicago

Denver

Las Vegas

Los Angeles

Miami

New York

San Diego

San Francisco

Washington

Source: S&P/ Case-Shiller Percent Change, Dec 2006 – Dec 2007

S&P/Case Shiller Home Price Indices

Growth in Real Single-Family House Prices, 1995-2007

90

100

110

120

130

140

150

160

170

180

190

200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

CT

MA

ME

NH

RI

VT

NE

US

Source: Authors’ calculations based on the house price index calculated by the Office of Federal Housing Enterprise Oversight (OFHEO).Notes: Adjusted for inflation using the Consumer Price Index, excluding shelter.

Yet despite the decline in prices, house price levels are still relatively high in New England.

Index

Ratio of Real Annual Median Household Income to Real Annual Income Needed to Purchase the Median Priced

House

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Connecticut

Maine

Massachusetts

New Hampshire

Rhode Island

Vermont

United States

Notes:Annual median household income are three-year moving averages as calculated from the Current Population Survey for householdswhere the head is age 25+ and is not enrolled in school, adjusted to $2006 using the CPI-U.Annual median income needed to purchase the median priced house are based on annual house prices as reported by the Federal Home Finance Bureau, adjusted by the OFHEO index and deflated by the CPI-U less shelter .“Middle-income” households are those that fall into the 3rd quintile of the income distribution.

Threshold of Affordability

As of 2006, the affordability picture had not changed much for New England residents.

Existing home sales were down in New England, parallel to the national drop-off.

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

1991Q3 1993Q3 1995Q3 1997Q3 1999Q3 2001Q3 2003Q3 2005 Q3 2007 Q3

Index, 1990 = 1

CT+ME+MA+RI

Source: National Association of Realtors.Note: Data for New Hampshire and Vermont are not available for some quarters (data are missing).

United States New England

Existing Home Sales

Single-family housing permits in New England fell to levels seen in the early 1990s.

0.0

0.5

1.0

1.5

2.0

Dec-83

Dec-85

Dec-87

Dec-89

Dec-91

Dec-93

Dec-95

Dec-97

Dec-99

Dec-01

Dec-03

Dec-05

Dec-07

Index, 1988 = 1

Source: U.S. Department of Commerce,Construction Statistics Division

United States

New England

Single Family Permits

Multi-family housing permits have fallen even further in New England.

0.0

0.5

1.0

1.5

2.0

2.5

Dec-83

Dec-85

Dec-87

Dec-89

Dec-91

Dec-93

Dec-95

Dec-97

Dec-99

Dec-01

Dec-03

Dec-05

Dec-07

Source: U.S. Department of Commerce, Construction Statistics Division

Index, 1988 = 1

United States

New England

Multi Family Permits

0

0.2

0.4

0.6

0.8

1

1.2

Q1-03 Q3-03 Q1-04 Q3-04 Q1-05 Q3-05 Q1-06 Q3-06 Q1-07 Q3-07

US

NE

CT

ME

MA

NH

RI

VT

Foreclosures Started, All Loans

Source: Mortgage Bankers Association / Haver Analytics

Foreclosures initiated in quarter, as a percent of loans in pool.

Foreclosures reached record highs both in New England and nationally.

0

1

2

3

4

5

6

7

Q3-03 Q1-04 Q3-04 Q1-05 Q3-05 Q1-06 Q3-06 Q1-07 Q3-07

Subprime ARM

Subprime FRM

Prime ARM

Prime FRM

Foreclosures Started by Type of Loan

Source: Mortgage Bankers Association / Haver Analytics

Foreclosures initiated in quarter, as a percent of loans in pool.

Foreclosures rates in New England are highest for subprime ARM mortgages.

New England Economic Partnership’s Economic Outlook

Employment• Employment forecast to grow slowly at 0.8 percent per year over

the next three years, slightly below the national forecast.

Housing

• House prices expected to decrease through the 2nd half of 2008 with slow recovery going forward, lagging the nation.

Overall Economic Growth• Real gross product for the region is expected to grow 2.2 percent

per year for 2008 through 2011, slower than the nation.• Credit crisis and the housing market downturn are expected to

slow growth through 2008.

Employment in New England is expected to grow slowly over the next 5 years.

Source: New England Economic Partnership.

House prices are expected to fall through the second half of 2008 then slowly recover.

Source: New England Economic Partnership.

New England is expected to grow slower than the nation on average through 2011.

Source: New England Economic Partnership.

Boston Sports IndexIndex 1920=1 (Babe Ruth traded to the Yankees, the curse begins)

Celtics Reign of Terror (57-69)

Multiple Bruins and Celtics Championships

Buckner!

Patriots Super Bowl Wins

Yankees win Game 7 ALCS with walk-off homerun

Red Sox come back to beat Yankees in ALCS and win WS

Red Sox 2007 WS Champs

Pats 16-0 and no Super Bowl

Notes: Red Sox given favorable weights. Yankees suck.

0

0.5

1

1.5

2

2.5

1950 1957 1964 1971 1978 1985 1992 1999 2006

Celtics?

But New England has been through tough times before...