Boston Real Estate for Sale
Is the Boston real estate market in a housing bubble? Or is it just basic supply and demand?
With property prices soaring across the country, many are wondering if the housing market in a bubble right now. And it’s a good question.
When prices rise double-digits year-over-year as they have recently (up 12% YoY in January!), it’s wise to be skeptical of a bubble. Rapid increases in asset prices can be an indicator of a bubble in both the housing and stock markets.
But when I look at the underlying data that has been fueling the housing market’s meteoric rise, I don’t see a bubble. I see a very unique economic environment that has tipped the scales of the market almost entirety to a seller’s market–but still a market based on solid fundamentals.
Let’s take a look.
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When we look at the housing market since the beginning of 2020, inventory has been the predominant force. Well, I should say the lack of inventory has been the driving force in the market.
Looking back through the year 2000, we can see that the fall of 2020 was the lowest that HUD’s “Months of Housing Supply” index has hit since the year 2003. People are just not selling their homes.
The basic economic concept of supply and demand tells us that when supply drops, as it did at the beginning of the pandemic, and demand stays constant, prices will increase. When the same amount of buyers want fewer houses it creates bidding wars–which we all know have become the norm in many major metros.
So that is the primary factor here–low inventory.
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Above I wrote that when supply drops and demand stays constant, prices tend to go up. But what happens when demand goes up as well? In that scenario, prices tend to go crazy, and this is exactly what we’re seeing right now.
CalculatedRISK charted the index of weekly mortgage applications for purchases (not refinances). As you can see, there was a temporary drop in demand at the beginning of 2020, but since then, the numbers have continued on the same trajectory they’ve been on since around 2015. You may notice that demand is currently down a bit, which is almost certainly normal seasonality. Buying slows in the winter and accelerates over the summer.
Demand is growing, but not at a crazy rate. It’s not spiking in a way that seems unsustainable, or in a way that is even approaching where we were in the 2000s. The slope of demand growth is still less than what it was in the years between 1990 and 2006.
In my mind, demand is going up for two reasons.
- The pandemic is prompting people to seek new homes in a way that I cannot really quantify (yet). People seem eager to find their nests or to move out of a city and into the suburbs in a more pronounced way than in the past. That is all anecdotal evidence, but I believe it.
- Interest rates are extremely low, which is a quantifiable and understandable reason demand is up.
When interest rates decline, it makes mortgages less expensive and houses more affordable. This is attractive to buyers. All of a sudden, a buyer could pay $100 per month less on the house they were considering. Or a buyer’s budget might jump from $250,000 to $280,000. This increased affordability, therefore, has dual effects: It increases demand (more people want to take advantage of cheap money), and it pushes up housing prices all on its own (people can and will pay more for the same house–bidding wars!).
To me, these factors indicate that the run in housing prices over the last few months is based on simple economics. Supply is low and demand is up.
But what we’ve looked at so far is all backward-facing. The question on everyone’s mind is, “What’s going to happen next?”
I don’t think we’re in a bubble—and I don’t see the market crashing in the next 12 months. We have these three important factors driving prices up, and while I think they will ease, I don’t think they’ll change dramatically in the coming months:
- Inventory is recovering but is unlikely to fully recover in 2021. New housing starts only reached pre-pandemic levels in January 2021. There will be a lag in new construction helping to boost inventory numbers, even if existing home sales go up.
- Demand remains up! There is no signs that demand is going to go down.
- The Fed has stated that they are going to keep interest rates near zero for the foreseeable future. Perhaps even into 2023. That’s great news for mortgage seekers. Bond yields play a big role in mortgage rates. Although they have climbed in 2021, they have leveled off. If they grow more, it will likely cool the housing market, but not cause any sort of crash.
First, I think the housing market will continue to show above-average appreciation numbers through the end of summer 2021. I don’t think they will remain as high as they have been, but still in the 2%+ range for quarterly appreciation.
I am basing this on the fact that the economic recovery is looking very strong right now. Employment numbers are recovering (the number of new jobs jumped from 468,000 in February to 916,000 in March), and the consumer confidence index (CCI) made its biggest jump in years, indicating that people have money and plan to spend it.
Lastly, we haven’t seen inventory return to expected levels—although that could change by mid-summer.
After the summer, my best guess is that things will start to cool. Rather than seeing quarterly appreciation rates in the 3-4% range, I think they’ll drop down to 1-2%. For historical context, this is not a crash or a correction—this is still good appreciation! It’s just more of a return to normal than what we’ve seen recently.
I am basing this hypothesis on two things.
- Interest rates are forecasted to rise from 3.4% to 3.8% by the end of the year. Rising rates will cool off the market, but a 30-year fixed-rate mortgage at 3.8% is still crazy low in historical terms. Demand and appreciation are likely to continue growing, albeit at a slower pace.
- Inventory has to recover at some point. My personal belief is that very few people were willing to sell their homes during the worst of the pandemic. I think there will be an increase in inventory starting in May and continuing through the summer, and at some point in the fall, things will return to a normal level of inventory.
By no means are my hypotheses here terribly unique? In general, I think many of the big players in the real estate space have it about right.
In their latest quarterly forecast, Freddie Mac predicted house price growth to hit 6.6% nationally this year, before dropping to 4.4% in 2022. These are both still excellent numbers. You can see their quarterly forecast below.
Personally, I think prices could cool a little faster than Freddie is predicting with a slightly steeper decline from Q3 2021 through Q2 2022, but, overall, I think this is directionally a good analysis. Remember, 4.4% appreciation is still really good in historical terms and is likely to outpace inflation, even with inflation potentially on the rise.
I can’t tell what will happen for sure, but I personally don’t see any sort of crash coming. I believe appreciation will come back down to earth and flatten over the coming quarters but will continue on a national level. Combined with historically low mortgage rates, it’s still an intriguing time to buy—if you can find someone to sell you a house.