A Building Storm: The Housing Market and the Pennsylvania Economy

Stephen Herzenberg
Publication Date: 
January 31, 2008

In the nation and in Pennsylvania, a building storm of home foreclosures, falling home prices, and tightening credit markets has put the brakes on economic growth, and led to mounting concern that the
country may face a deep recession. To date, however, no one has examined in detail the housing market in Pennsylvania or the impact of housing market developments on the Pennsylvania economy.

This briefing paper fills that gap. It examines housing market trends, in Pennsylvania and in each of the commonwealth’s major economic regions. It also considers recent trends in job growth and unemployment in the Pennsylvania construction industry and in the overall Pennsylvania economy. Our analysis sets the stage for a discussion of what policymakers can and should do—in Pennsylvania as well as the nation—in response to the housing crisis and a slowing economy.

We find that:

• Contrary to many perceptions, Pennsylvania, particularly in certain regions, did experience a housing bubble. To be sure, the recent run-up in housing prices began two years later in Pennsylvania than in the nation as a whole, in 2001 rather than 1999. Nonetheless:

o Housing prices in Pennsylvania from 2001 to 2006 mirrored the national trend, rising by 54% compared to an overall inflation rate of only 13%.

o Pennsylvania housing prices between 2001 and 2006 grew much faster than rental prices and the cost of construction, strong evidence that the uptick in housing prices stemmed from a speculative bubble.

o Just as Pennsylvania housing prices followed the national trend on the way up, in the first three quarters of 2007 they began to follow the national trend down. If Pennsylvania
housing prices continue to follow the national trend, they can be expected to fall over the rest of this year. (National housing prices are projected to fall 6% to 13% from August 2007 to August 2008.)

• Rising mortgage foreclosures are also hitting Pennsylvania as well as the nation.

o The Center for Responsible Lending projects that the foreclosure rate on Pennsylvania subprime loans issued in 2006 will exceed by 53% the foreclosure rate on loans issued from 1998 to 2001.

o The Joint Economic Committee of the U.S. Congress projects that, from the third quarter of 2007 to the end of 2009, there will be an estimated 45,470 subprime mortgage foreclosures in Pennsylvania, representing a loss of $2.4 billion in property values.

• Recent developments in the housing market have already contributed to a decline in employment in the Pennsylvania construction industry.

o Seasonally adjusted employment in the Pennsylvania construction industry declined by 6,000 jobs between March and November of 2007.

o Unemployment of construction workers in the summer months of July to September (months in which construction employment usually peaks) rose from 4% in 2006 to 7.5% in 2007.

The vulnerability of different parts of Pennsylvania to rising foreclosure rates depends on three main factors: (1) the extent to which families rely on subprime mortgages; (2) the extent to which the area
experienced a housing bubble, a rough predictor of how much property values may now fall; and (3) the state of the regional economy—when unemployment rises, so do foreclosure rates.

• Families in low-income communities rely most heavily on subprime mortgages. In nine counties—eight rural ones (Cameron, Clearfield, Fayette, Forest, Jefferson, Monroe, Venango, and Warren Counties) and Philadelphia—subprime mortgages make up more than 35% of
all mortgages. In some neighborhoods, subprime mortgages make up 60% to 80%, or more than 80%, of the total.

• From 2001 to 2006, housing prices escalated the most within the Philadelphia metropolitan area. To a lesser extent, prices also rose in the Lehigh Valley and South Central Pennsylvania.

• Currently, unemployment rates are somewhat higher in some rural parts of Pennsylvania, but no area of the state has very high unemployment rates. This is, of course, subject to change based on the national economy.

To see maps showing the share of subprime mortgages within each census tract of each county in Pennsylvania, visit http://www.keystoneresearch.org/housingmarket.