The Boston area real estate market is showing early signs of slowing after an extended period of being very hot. Inventory is still low, but affordability has taken a significant hit from higher mortgage rates. Marginal buyers are reluctant to lock in the higher financing costs, and some potential homebuyers are leaving the market and renting instead.
For many years, the real estate market in Massachusetts has been extremely tight. New supply has failed to keep up with demand, which has pushed up prices. Inventory has been low, especially since the start of the pandemic. Low mortgage rates allowed a large number of buyers to compete for homes in the market. The recent spike in mortgage interest rates has changed that, with some buyers backing away from the market. Inventory in the greater Boston area is still low. The next six to twelve months could be interesting as the real estate market adjusts to recent changes in the economic environment.
Real estate is local: market changes depend on the city or town. There are even significant differences among neighborhoods. The differences between one neighborhood and another can be even more pronounced when an area is undergoing change, such as new residential or retail developments, upgrades, or public transit construction. The Green Line Extension Project in Somerville is an example of a public transit project that will have major impacts on that local real estate market. The number of homes on the market in neighborhoods like Lexington, Davis Square, and East Arlington has been insufficient to meet the demand.
The Arlington market is up 10.3% year-over-year as of the end of September. However, August and September saw price declines compared to July, with the Zillow index down slightly. A week ago, out of the 70 homes that were on the market, only 1 had a recent price cut (244 Pleasant Street had its price reduced from $1.625 million on September 7th to $1.599 million on October 3rd). Over the past few days, 10 properties had price reductions.
Four to six months of home supply is generally considered a balanced market, according to Realtor Magazine (“If you build it…”, July-August 2021, p10). Over the last 5 years, there were an average of 48.3 transactions per month in Arlington across single families, condos, and multi-families, using MLS data. There are currently only 71 properties on the market. This equates to only 1.5 months of supply. For Somerville, that figure is only 2.1 (242 on the market vs. 114 sales per month).
The Lexington real estate market was up 15.1% year-over-year, and the rise continued through the end of September. MLS data shows that single family homes between 1,000 and 4,000 square feet sold for 11.7% more per square foot between the July-September period than the same period in 2021.
Cambridge home prices experienced their third consecutive month of declines in September. However, the declines were tiny: Zillow’s index is off around 1% from its June peak. The typical home value was up 8.9% from its June peak compared to June of 2021.
Boston’s South End
For the city of Boston as a whole, the real estate market was up 6.0% year-over-year. The peak was in June, but prices have not fallen much since then.
In the South End, the average condo sale per square foot was $1,120 during the July-September period using MLS data. In 2021, the average was $1,031, so prices were up 8.6% year-over-year.
In Dorchester, the largest neighborhood of Boston, the average price per square foot of a multifamily sale was $331 from July 1st to September 30th, 2022. During the same period last year, the average was $306 per square foot. This reflects an 8.2% increase year-over-year. For condominiums, average PPSF was up only 1.6%, and with 56% fewer transactions than 2021. Higher mortgage rates have hampered demand from owner occupant buyers and small investors.
Going forward, short-term changes in the real estate market will be heavily influenced by the path of mortgage rates. The recent spike in mortgage rates was relatively dramatic. Some buyers have switched over into the pool of renters, which pushes up rents. They could come back to the home-buying market if mortgage rates come down a little. Also, high rents provide support for the residential real estate market through investor demand. In the long run, the Boston real estate market is supported by the area’s strong and diverse local economy and high quality of life.