WESTBOROUGH -- The Massachusetts housing market will slump over the next two years, with prices falling slightly, then flattening before resuming modest appreciation, according to an economic forecast released yesterday.
If the forecast proves correct, it would mark the first home price declines since early 1995, when the state was still shaking off the effects of the 1980s real estate bust, and the average price slid 1.4 percent from the previous year.
The new forecast, by the New England Economic Partnership, a nonprofit research group, projects the average price of a single-family home in Massachusetts will decline less than 3 percent in the second half of 2006, before beginning to recover in early 2007. Even then, the prices will rise only slowly, with year-over-year appreciation holding below 3 percent through 2009.
''That would be a very modest downturn," said Alan Clayton-Matthews, the University of Massachusetts at Boston professor who prepared the forecast. ''I think homeowners would be lucky if that is the extent of the downturn."
The average sale price of single-family home was about $443,000 in the second quarter of 2005, according to the Massachusetts Association of Realtors.
Massachusetts's once-blazing market has cooled noticeably in recent months. More homes are on the market, and they're staying there longer. Over the past year, the inventory of unsold homes has risen nearly 40 percent, according to the association. Increasingly sellers, who a year ago might have entertained multiple offers for more money than they asked, are cutting prices to attract a dwindling pool of buyers.
Economists have long predicted a housing market slowdown because home prices, which have appreciated at or near double-digit rates for the better part of six years, were outstripping income. Historically low mortgage rates helped bridge the gap, driving home sales and prices higher, but now interest rates are rising. The average rate for 30-year fixed mortgage has jumped a half-point in the last six weeks, according to Freddie Mac, the government-created lender.
And in Massachusetts, the gap between income and home prices is now greater than the gap was at the peak of the real estate boom of the 1980s, according to the New England Economic Partnership.
The median home price in Massachusetts is 8.7 times greater than per capita income, compared to 7.6 times greater in 1989.
Analysts don't expect an '80s-style collapse, largely because the economy is expanding, unlike in the late 1980s, when it slipped into recession. In addition, mortgage rates are still much lower, just above 6 percent, compared to about 10 percent in 1989.
Still, said Clayton-Matthews, ''We're due for a correction."
Economists agree a price correction is likely because incomes have to catch up to home prices. But, they add, it's difficult to predict the length and extent of such a correction. Much depends on how high interest rates rise, and how quickly.
Hot housing markets like Boston's, which have seen some of the nation's fastest price appreciation, are particularly at risk, said Gus Faucher, senior economist at Economy.com, a West Chester, Pa., forecasting firm.
Based on an analysis of historical prices, Economy.com estimates Greater Boston's housing market is overvalued by about 27 percent, compared to a 15 percent overvaluation nationally.
Adding to the downward pressure here is the state's slow economic growth. The state economy is creating payroll jobs at about half the pace of the nation as a whole, and still has 160,000 fewer than at the pre-recession peak. The New England Economic Partnership forecasts the state won't regain all those jobs until 2010.
''The underlying, supporting fundamentals are not good," Faucher said.
Faucher and other economists project a worst case for the Boston housing market of single-digit price declines in the short term. Karl Case, a Wellesley College economics professor who studies the housing market, said prices appear most likely to flatten.
Unlike in a stock crash, in which investors have to sell at depressed prices or risk losing everything, homeowners often have the option of taking their property off the market and staying put until the market changes, Case said.
''When the housing market comes down, it comes down very reluctantly," Case said.
''Sellers resist, lean against the wind, and they won't sell."
Robert Gavin can be reached at email@example.com.