In discussions about the local real estate market, a question that comes up often is: Are home prices in Boston still going up?
Recent data shows that home prices continue to be higher year-over-year and month-over-month. The most recent data point we have for the S&P/Case-Shiller MA-Boston Home Price Index is from May 2022. The index was up 15.7% compared to May 2021 (i.e. year-over-year). The index was up 1.8% month-over-month from March to April 2022, which is a 23.9% annualized rate.
The Boston real estate market has been strong despite mortgage rates that have risen significantly this year. Mortgage rates were 3% at the beginning of the year and spiked to 6% in mid-June. Rates have come down a little since then, but a 30-year fixed rate mortgage in Massachusetts is still over 5%. Higher mortgage rates put downward pressure on home prices.
Zillow’s estimate of the average home value in Boston is up 14.7% from June 2021 to June 2022. This index was also up between May and June 2022, but only marginally.
Will higher mortgage rates eventually cause prices for Massachusetts real estate to decline? Possibly. In the short run, potential sellers might be reluctant to acknowledge their “losses” (declines in the market value of their homes). This could lead to a stagnation in activity. Over the longer run, sales prices will need to reflect the higher financing costs for buyers; home prices would decline, all else equal.
Housing market progression
How did we get to this point? During the housing boom of the late 1990s and early 2000s, American homebuilders were very active. Housing starts averaged 1.74 million units per year from 1998 to 2006. Meanwhile, the number of households was growing only by 809,000 per year.
By 2006, the U.S. had a housing surplus of 2.1 million units, according to economist Lawrence Yun. The average home price declined from its peak in 2005, bottoming in 2009 during the Global Financial Crisis. After home prices crashed, the production of housing declined. This reduced the housing surplus, eventually resulting in normalization by 2011. Still, the underproduction continued, and by 2015 there was a shortfall of 2 million homes. By 2020, the shortfall reached 4.8 million homes. The lack of supply has contributed to intense upward price pressure in recent years. The real estate market was also bolstered by low interest rates and a strong labor market.
Homebuilding activity in 2021 was above historical averages, and the higher pace of construction continued in 2022. It will take at least a few years to eliminate the housing shortage.
Supply and demand
States in the northeastern U.S., which generally have lower population growth than the rest of the country, are constructing the fewest new homes per capita (source).
The Boston/Cambridge/Newton area had 5-year population growth of 4.1% (0.8% per year). Construction of new housing was 30.3 units per 10,000 residents, which is a growth rate of only 0.3% per year. This data suggests that builders are still having trouble keeping up with housing demand in Massachusetts. As demand rises faster than supply, rents and home prices move up.
The sharp rise in mortgage rates since the start of 2022 is likely to impact the trajectory of real estate prices in the Greater Boston area. A buyer who intends to use financing cannot afford to pay as much for a home now as they could in December if they want to keep their monthly payment amount the same. For example, the purchase of a $1 million home with 20% down and a 6.0% 30-year fixed rate mortgage would require $4,796 in monthly principal and interest. At an interest rate of 3.0%, the monthly payment would have been $3,373 (30% lower). In order for the borrower on the 6% mortgage to have that $3,373 monthly payment, the purchase price would have to be $703,200.
For now, the Boston real estate market remains strong, but this could change quickly as some macroeconomic forces work their way through the market on a lag. On a longer time horizon, the same forces that buoyed the Boston area real estate market in the past continue to support it. These include a vibrant and diversified local economy, a high quality of living for residents, housing supply constraints, and general price inflation. And providing shelter will remain useful for a very long time.
U.S. Department of Housing and Urban Development
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Yun, Lawrence. “Summer of the Speed Buyer”, Magazine.Realtor July-August 2021