Jobs held hostage by housing

Like new england Patriots victories, high housing costs became matter of fact in Massachusetts over the last decade. As we rebuild from the Great Recession and the housing bubble that precipitated it, now is a good time to revisit whether the high cost of living is something the state can continue to take for granted.

New data show our housing costs are once again outpacing the nation. While this trend may have negligible impact on growing high technology sectors, housing costs out of line with other states will surely make it difficult for Massachu­setts to add the middle-class jobs most residents of the Commonwealth seek.

Before the real estate bubble burst, the outflow of young adults was the clearest sign that housing costs were taking a toll on the Massachusetts economy. Between 2000 and 2006, our population in the 25 to 34 age group fell by 110,000 residents. In just a few short years, a city of young workers the size of Cambridge and Allston combined vanished because we simply couldn’t produce housing at prices young families starting out could afford.

Post-bubble, today’s scenario seems reversed. The state’s young population has at least stabilized and it’s probably even grown. This follows a national trend of young unemployed and underemployed residents moving back home with their parents. But as the economy improves nationally, if Massa­chusetts can’t put the brakes on our tendency to outpace the nation in escalating home values, these children will leave the nest for jobs elsewhere.

We should expect this because surveys of young adults conducted by the Boston Globe, MassINC, and others during the last expansion clearly showed that young people were migrating out for lower-cost housing and jobs, both of which we weren’t creating in sufficient quantities here. Economists including Ed Glaeser, Barry Bluestone, and Ed Moscovitch looked at the data and concluded that our high housing costs were caused by barriers to developing modestly priced homes. They also found that our slow job growth wasn’t the result of a broader downturn in our industries. Our mainstays like finance and IT were growing, just not here in the Commonwealth, where we couldn’t house their workers at a reasonable cost.

The good news is the Massa­chusetts economy is recovering some lost ground. For seven straight months, we’ve added jobs, a total of 64,300 between January and August. But with 304,400 unemployed residents, and signs that the recovery nationally may be losing steam, the question is, how much longer will we maintain strong job growth with housing prices much higher than the rest of the country?

Massachusetts home prices have fallen from their all-time peak relative to the rest of the country. In November 2002, Bay State homes were priced 80 percent higher than the US average. But for 28 consecutive months, the state’s home values have been diverging from the nation’s. July’s figures, the most recent that are available, show our homes now cost 62 percent more than the US median.

This is not just a symptom of our relatively healthy market holding its own against a national figure weighed down by hard-hit states like Florida and Nevada. Compared to key competitors, our high housing costs continue to put us at a disadvantage. For 21 straight months Massachusetts has lost ground to North Carolina; we’re now paying 121 percent more than residents there. California remains the only state with higher prices (the zillow.com data we rely on do not include Hawaii). But three years ago California prices were an astonishing 50 percent higher than ours; in July our prices were just 17 percent lower than theirs.

Economists have been describing various scenarios for an economic recovery. It’s worth reflecting on how our high housing costs position us for each of these potential pathways to growth.

The status quo scenario is high-skilled knowledge industries continue to do very well, and both low- and middle-skilled industries continue to see jobs move overseas. A slight variation on this theme would be more government policy focused on fostering high-growth start-ups. Research shows these companies create a lot of jobs, but they tend to scatter them all over the map, moving the bulk of the work to locations where it can be performed at the lowest cost.

If we follow these trajectories and the recovery is mostly in skilled knowledge sectors, what will the outcome be for Massachusetts? Regional data do show Greater Boston, our high-tech economic engine, becoming less cost competitive relative to other leading metros. Regions like San Francisco, Seattle, and Washington, DC, have seen home values fall by about a quarter from the peak. Boston is off by just 16 percent. But in the past, the high premium for talent meant businesses showed little sensitivity to cost-of-living. Innovators would do almost anything, including living under a cubicle, to be where the action was. It’s difficult to say whether this will change as more cities around the world attempt to replicate our innovation ecosystem, but at least in the near-term, Greater Boston’s knowledge sector seems relatively safe.

The real concern for us should be the missed opportunity if the alternative scenarios some economists have described, which are much more favorable for middle-class Americans, should transpire. Optimistic economists believe that companies have already begun to tire of dealing with offshore production and shipping costs, and will move some manufacturing back to the US. They also see potential in a renewed national commitment to manufacturing, and a focus on rebuilding export markets for domestic products, which could lead to more jobs for low- and middle-skilled workers.

While Greater Boston will probably always struggle with high costs when competing for growth in less-skilled sectors, we might look to regions outside of Boston, where housing prices are dramatically lower, as the state’s opportunity to add these jobs. But the median home in the Worcester area still costs $17,000 more than the median home in Greater Chicago. A house in the Springfield area is $8,500 more than a home in the Raleigh-Durham metro area. Contrasts to other mid-size regions are even more discouraging—Springfield homes cost 54 percent more than homes in Rochester, New York; homes in Worcester are 52 percent more expensive than homes in Ann Arbor, Michigan.

As we contemplate our future and strategies for renewed economic growth, it’s critical that we keep housing as a focal point. Massachusetts voters who dream of one day having the kids move out should think carefully about the fate of Chapter 40B when they go to the polls in November. The so-called “anti-snob” zoning law has created 58,000 housing units. During the last decade, the vast majority of rental housing in greater Boston wouldn’t have been built without 40B.

At the same time, it should also be clear that 40B is not enough to solve our problem. We need is a policy that gives communities real incentive to produce housing that middle-class families can afford. Chapter 40R, which establishes these incentives, is an excellent framework. The state just needs to make a greater commitment to it with a reliable funding stream. As it stands now, towns have little confidence that the state will fulfill its obligation to reimburse them for costs incurred by new development.

Beyond efforts to create more housing opportunity in Massachusetts, we need to be especially mindful and vigilant when it comes to qualities that mitigate our high housing costs. Two in particular are at risk.

Protecting public education should be our first concern. Employers value the Commonwealth’s strong public schools. To the extent families are willing to pay more to live here, in large part it’s because they have confidence in our schools. As the federal government withdraws its support for cash-strapped states, we could easily flitter away this asset by underfunding our public schools.

The second is our transportation system. After housing, transportation is by far the highest household expense for most families in the Commonwealth. According to a recent Urban Land Institute report, the typical family in Greater Boston spends more than half their income on housing and transportation. Massa­chusetts must maintain a reliable transportation system to reduce commuting costs and make communities with affordable housing more accessible. If major employers lose faith in the future of the debt-laden MBTA, we could find ourselves in real trouble.

As much as we’d like to see recovery in our housing markets, there’s no cause to celebrate Massachusetts outpacing the nation in home-value appreciation. At the polls in November, we should support those who are committed to reducing the state’s high cost of living and building an economy that works for all of us.

Ben Forman is research director at MassINC and Sam Greeley was a summer policy intern for MassINC.