Rhode Island's Not So Perfect Storm of Economic and Housing Problems Is Behind the States High Foreclosure Rate

A large portion of the Rhode Island population consists of blue-collar workers who need moderate housing, despite the state being mostly known for its ritzy enclaves like Newport and its fine coastline.  So while the rest of New England felt the recession in keeping with the rest of the country, Rhode Island has the highest rate of foreclosures and serious delinquencies in the whole region.

In the fourth quarter of last year, the country's tiniest state boasted 13,300 mortgages either in the foreclosure process or more than 90 days delinquent. That meant the state's foreclosures and delinquencies were 20 percent higher than neighboring Massachusetts; 17 percent greater than western neighbor Connecticut; 34 percent more elevated than New Hampshire; 7 percent bigger than weak-economy Maine; and double Vermont's rate.

What happened to Rhode Island was unique from anywhere else in the country and created the perfect storm of economic and housing problems. The biggest underlying problem with Rhode Island was that coming into the recession the state experienced a severe undersupply of affordable homes.

"We have a different foreclosure crisis than other parts of the United States," said Nellie Gorbea, executive director of HousingWorks RI, whose members include banks, builders, Realtors, chambers of commerce, and community-based agencies and advocates.

Between the first quarters of 2000 and 2006, home prices increased at the steepest rate in the state's history, peaking at a median price of $283,500. Conversely, during the same period of time, Rhode Islanders experienced a decline in median wage. The rapid rise in home prices, up to twice the increase in other New England states, combined with declining wages, contributed to a situation of "severe housing unaffordability," Gorbea said.

None of that stopped Rhode Islanders from buying homes because we had the mortgage bubble going on. Despite the loss of wages, Rhode Island homebuyers could borrow buckets of dollars for those ever-increasing prices on homes, which, of course, pushed prices even higher.

That all seemed to work until the housing bubble deflated. Rhode Island housing prices dropped like a red brick falling off the roof of an old Pawtucket house. Over a three-year period, home prices dropped from $283,500 to $199,000 before recovering a bit to $210,000. Still, that meant a lot of Rhode Islanders faced a mortgage crisis.

About 1 in 5 Rhode Island homeowners are underwater with their mortgages, according to HousingWorks RI.

The recovery in prices hasn't been solid. At the end of second-quarter 2011, median home prices declined again to $205,000, said Stephen Antoni, president of the Rhode Island Association of Realtors and a broker associate with RE/MAX Professionals in East Greenwich.

"The recession has made people unsure as to which direction to move. They are used to looking at the house as being the No. 1 investment in their lives and in some cases the homes have been devalued by as much as 50 percent," Antoni said.

That's not Rhode Island's only problem. The state is dotted with small, multifamily buildings, most of which are older, three-unit flats. During the bubble, these were the target of small investors, and median prices for multifamily homes shot up from $96,000 in 1999 to $290,000 in 2005, reported HousingWorks RI. When the bubble burst, so did prices of the multifamily buildings, falling all the way to $90,000 in 2009, before seeing a recovery to $121,900.

That didn't help those investors who bought at or near the top of the bubble. More than 35 percent of all Rhode Island foreclosures between 2009 and 2010 were multifamily homes that form the bulk of the rental housing in many communities.

That's been a rental disaster because multifamily properties in foreclosure usually means tenants have to move. "During the first six months of 2011, 28 percent of foreclosures were in multifamily homes," Gorbea said. "We estimate that 908 rental units were lost due to 317 multifamily closures in the first six months of this year."

Basic economics says when you have less supply, prices rise, and that's what happened in Rhode Island. "The average rent for a two-bedroom apartment was $1,165 in 2010 and that's 50 percent higher than in 2001," Gorbea said. "One in four working families in Rhode Island spent more than half of their income on housing-related expenses in 2008 and 2009. We have the highest percentage of cost-burdened people in New England in regard to wages versus housing expense."

To make matters even worse, Rhode Island is not replacing its housing or even adding much in the way of new housing.

Looking over the data from this past summer, Leonard Lardaro, professor of economics at the University of Rhode Island, shakes in wonderment. "The last summer month that we have data for, we had just 53 building permits for the whole state. That's been typical in recent months. On an annualized basis, we are looking at between 600 and 700 permits a year. That's incredible."

Could things get any worse for Rhode Island? The answer is yes, because the state's unemployment numbers have been awful. Recently, Rhode Island was the fifth-worst state for unemployment with a rate of 10.8 percent, which is at least better than in 2009, when the state was No. 1 for unemployment with a rate close to 13 percent.

Although Rhode Island is a major location for defense contractors, a large percentage of jobs are service-related.

"Our employment peaked in December 2006," Lardaro said. "That's what happens when you don't have technology or other growth-oriented industries. We didn't have the insulation that a Massachusetts or Connecticut had, where the growth industries propelled the economy longer going into the recession. We went into recession well before the other states."

For the short term, Lardaro is not optimistic. "To some extent, the lack of new-home construction will help the healing, but it doesn't generate the construction employment and multipliers that thrive when you are in recovery."