Sunday, November 06, 2005

Boston real estate blues

It would appear that the long-awaited correction in the local housing market is finally on. As Robert Gavin writes in the Globe:
Greater Boston's once-sizzling home sales have cooled so much this fall that realtors are reverting to a description not heard in a decade: ''Buyer's market." From the South End to the South Shore to Cape Ann, the list of unsold properties is growing, and so are reductions in asking prices...For the last two Sundays, John Ford, of Ford Realty Inc., held open houses at a two-bedroom South End condo on a strong residential block of Columbus Avenue with parking, patio, and hardly outrageous asking price of $570,000. Not a single person showed up... In Jamaica Plain, even a $70,000 price cut -- to $399,000 -- hasn't generated much interest in a two-bedroom, bi-level condo in a 19th century mansion that has been on the market for about a month. Sunday, only four people, including two curious neighbors, came to an open house. ''My seller is willing" to consider a lower price, said the broker, Anne Connolly, ''but there's no buyers to deal with.” The fall slowdown not only represents a sea change for sellers, who for years have enjoyed multiple offers and higher prices, but also indicates the region's bull housing market is at an end. Real estate agents say a long-predicted market correction appears underway as the gap between the price of housing and peoples' incomes -- now even wider than at peak of the 1980s housing boom -- has become too great to sustain the recent pace of sales and appreciation.
This is worrying most of all, I rekon, because of the issue of timing. It's hard to put one’s figure on a single (or multiple) precipitating event. The last time the region suffered a real estate slump, at the end of the 1980s, these events were: a weakening national economy, a sharp stock market correction, a slowdown in defense spending, and a regional lost bet on the relevance and economic utility of the minicomputer sector.

It’s difficult, though, to see similar parallels in today’s Boston real estate market. The national economy is strengthening. Stocks aren’t booming, but the actual correction in this market ended several years ago. There’s no shakeout in a single industry comparable to what the region experienced fifteen years ago as the likes of Digital and Wang saw their fortunes sink. There was the recent bursting of the dotcom bubble, of course, but the worst of this shakeout was pretty much over by ’03 or so; in retrospect it was a remarkably quick downfall – nothing like the slow, agonizing, multi-year death spiral that snuffed the minicomputer sector out of existence.

That's not to say recent economic events haven't hit the Boston area hard; there's no question that the region's economy has suffered some fairly nasty setbacks of late. Massachusetts as a whole appears to have bled jobs for the first several years of this decade. Population growth has been minimal, and appears to have turned negative of late. But that’s just the point: the real estate sector has been buoyant, even booming, throughout this gloomy period.

And the recent uptick in mortgage rates has been only that – an uptick. Fixed 30s can still be had in the low sixes. So you can’t really even blame the usual suspect, interest rates, for why this region’s real estate market is sagging.

Thus, the cyclical timing of this real estate correction, if indeed one is beginnig to occur, is problematic. One would expect a downturn in the property market to occur simultaneously with some of the aforementioned negative economic trends. I mean, when population and jobs are decreasing, you’d normally expect house prices to accompany these statistics downwards.

If anything, I suspect the job market in eastern Massachusetts has strengthened somewhat over the last couple of years. Largely that’s a function of the fact that workers are in somewhat shorter supply as many have left the state. But it’s also the case that many of the state’s weakest firms (especially in the dotcom sector) simply no longer exist, and the firms that survive are, almost by definition, stronger. So what we have here is a case where the local real estate market is sliding into a correction even as the national economy continues to strengthen, and the local employment picture is brighter than it might have been a couple of years ago.

My guess is what’s happening here is that the economy in Massachusetts has, since the late 90s, been weaker than anyone has realized, but that the property boom has masked this situation. The fact is, this is a very costly place in which to live and do business. When you can use your house’s booming value as an ever-expanding credit card, this reality is hidden from you. But such a state of affairs is not sustainable forever.

So, add one part tepid job growth to two parts higher fuel costs and throw in a dash of higher interest rates and unsustainable debt, and you’ve got a recipe for lower house prices. If the job market is indeed (as I think it may be) strengthening a bit in the region, a fairly high price floor could conceivably be placed under the correction, and little damage caused. I don’t think anybody will have cause to complain if all we see out of this downturn is a ten or twelve point drop in house prices. I also suspect pent-up demand could well exert a similar effect to that of an improving jobs picture: lots of people have been priced out of the region’s housing market, and many of them may well rush in to buy at the first concrete signs of a sustained price correction.

But interest rates are the X factor. It would nice for Greater Boston if the debt markets were as regional as the market for property. But this, alas, is not the case. Interest rates are set by national, and indeed global, market forces. The latest GDP figures are about the last news I’d want to read if I were planning on putting a home on the market in these parts any times soon, because this robust economic growth, coupled with recent inflation figures, means that interest rates are unlikely to come down any times soon, and are likely headed upwards. And house prices, as if I need to remind anyone, move in the opposite direction as interest rates.


At 10:47 AM, Anonymous Marty said...

And house prices, as if I need to remind anyone, move in the opposite direction as interest rates.

PB: true...seems, though, the economy runs on an interest rate-sensitive feedback loop, ie., if rates pick up much more, and head toward 7 or higher, the economy will slow down, maybe dramatically (housing is a BIG part of the economy these days), which in turn will allow interest rates to come back down...this in turn should insure any property decline is short-lived and mild...I think one possible outcome is that high-priced areas like Boston could be doomed in the long run to remain pricey, slow-growth economies -- high quality of life perhaps, for those who are truly affluent, but not a lot of opportunity for those who aren't...

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