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THE DOWNSIDE OF RHODE ISLAND'S
HOUSING MARKET BOOM

BankRI, Lardaro on the Economy Series
June 2004
 

The strength of Rhode Islandís housing market continues to be extraordinary. Home prices here continue to rise far faster than the national average. And although the median price for an existing home is currently around $240,000, good luck finding a decent home anywhere near that price! While the pace of home sales and prices will slow a bit in coming months as mortgage rates rise, this shouldnít pose much of a problem since we are beginning this move from very low rates. Actually, rising mortgages will make housing momentum more sustainable.
 
The greatest downside risk to Rhode Island arising from this housing boom is not the threat of rising mortgage rates, but the potential impact this boom will ultimately have on the skills of our labor force. For both March and April, as national employment rose sharply, Rhode Island experienced a net job loss. This is probably the first step in Rhode Island's resuming its historical job growth status - lagging the nation. The combination of very expensive homes, continued healthy home sales, and a lagging employment picture scares me. Why?

Skilled workers in Rhode Island who own homes and have either lost their jobs here or view future job prospects unfavorably can easily sell their Rhode Island home. With a very sizable capital gain in their pocket, they can move to a part of the country with better job prospects and substantially lower home prices. The difference between home prices here and in the other state can either be invested or, more likely, subsidize their job search in the new location.

As this occurs, and it will, Rhode Island will be losing skilled workers at a greater pace than it will be adding them, since the inflow of skilled persons from other states can be expected to be a trickle at best. So, whether we like it or not, the housing boom here will ultimately erode the skill base of Rhode Islandís workforce - not a very cheery prospect in a skill-based economy!

 

by Leonard Lardaro

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