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Reading the signposts – Is Boston heading into a real estate housing bubble?

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Reading the signposts – Is Boston heading into a real estate housing bubble?

No — experts do not think there is a housing market crash looming in 2024. Lending standards are much more strict now than they were before the Great Recession, and with low inventory and high demand both continuing, the housing market is not likely to enter a recession in the coming year.

Peace be with you

Updated: Boston Real Estate Blog 2024

Byline – John Ford Beacon Hill Condo Broker


Reading the signposts – Is Boston heading into a real estate housing bubble?

Boston condo mortgage rates rose from 3% to 7.79%,  condominium prices are rising, which is a pricing out a large portion of the Boston condo buyer population.

Housing Bubble FAQ’s

What is a “Housing Bubble”?

“Housing Bubble” is a term used in Boston to describe when Boston condo for sale prices become artificially  inflated.

The good news for Boston condo sellers and some degree Boston condo buyers is that many housing experts don’t see rapid price increases or a a housing bubble in 2022.

Will we see another housing crash like 2007 – 2008?

Economist Roy Epstein former adjunct professor of finance at Boston College, does not think there will be another real estate crash like 2007. He just expects housing prices to tamper off.

The further increases in interest rates, will help cool down the housing market and maintain price stability.

Why is this not like the last housing bubble?

Unlike 2007 – 2008 there is not a lot of sub-prime lending anymore. 

Are Boston condo mortgages tougher and more strict compared to 2007-2008?

Yes, all the aggressive financing options such as no income verification, no documentation loans and poor credit loans have been eliminated. The underwriting of loans are a lot tougher and more strict in 2022.

Source: Boston College

Updated: Boston Real Estate Blog 2022

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A “Deer Xing” sign isn’t there to tell the deer where to cross the road.

It’s there to let drivers know that this is the spot where deer often choose to cross the road.

Because deer can’t read signs, and even if they could, they probably wouldn’t bother to obey them. People, on the other hand, are far more likely to be killed by hitting a deer than they are by a shark bite.

A good signmaker is aware of “who’s it for” and “what’s it for.” In this case, the hope is that drivers will be more careful.

Too often, signs and recent Boston real estate sales data, are simply ALL CAPS in the headlines YELLING about something they can’t control. If you can’t influence something, why are you yelling about it?

Reading the signposts – Is Boston heading into a real estate housing bubble?

Analysts say mortgage rates are rising, and that will cool housing prices

Google search trends show people are searching things like, “When will the housing market crash?” And “Why is the market so hot?” Home prices have been up 10 percent year over year because demand is so high and supply is so low. Diana Olick joins ‘The News with Shepard Smith’ to discuss

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Someone must have passed a law; if it is Spring time and the pandemic is coming to a close, so you must publish something debunking bubbles.  The saturation point is near, so we will attempt to summarize arguments as to why, despite rapidly rising home prices, we aren’t in a bubble.  Or as some Boston downtown real estate broker say, “Not yet.”

The concern is understandable. Scars are still in our memories’ from the last bubble and there are plenty of warning signs regarding a new one:

  • Boston suburb single-family home prices have been on a tear for the last few years, growing about twice as fast as the long-run average and outpacing income growth.
  • The number of large metropolitan statistical areas with unusually-high house-price-to-income ratios has grown substantially.
  • An increase in construction costs nonetheless have increases single-family home prices per square foot.

How does one predict a downtown Boston real estate housing bubble?

It is difficult to spot a downtown Boston real estate bubble before it bursts, but a a Boston real estate broker I know there are defining characteristics.

First, they are fueled by self-fulfilling predictions, i.e. prices rise simply because people expect them to. Nobel Laureate Robert Shiller called them “a kind of social epidemic” where price increases generate enthusiasm among investors, who then bid prices higher. The feedback continues until prices get too high, and the bubble bursts.

That is the second defining feature of bubbles, they do indeed burst. Not just correct, a normal part of the ups and downs of asset prices, but crash, reflecting a sudden realization that prices have become unsupportable.

The third defining feature is the central role easy credit and low interest rates plays in their growth.  When lenders begin to believe that price increases can go on forever, they grow less concerned about whether borrowers can repay the loan.  Bubbles collapse when lenders finally get worried and restrict riskier types of credit. Paradoxically, Becketti says, in the last decade lenders restricted credit, thus pricking the housing bubble and triggering the burst they were trying to avoid.

Hunting for bubbles is problematic.

Since prices might make a soft landing, it is tempting to monitor conditions a bit longer rather than act.  Identifying a bubble can spook people and trigger a crash that didn’t need to happen. 

Mu concern is more with the Boston real estate suburb market, more so than the Boston downtown real estate market.

The inventory shortage is strong evidence against a price bubble and the slow rate of increase in construction suggests any eventual price adjustment will be gradual rather than a collapse.

A second piece of evidence is a bubbles’ reliance on easy credit. Freddie Mac looks for signs of credit deterioration. Increasing delinquencies and defaults tend to appear very late in a bubble’s life, so it isn’t surprising that the company’s book of business “has exhibited stellar credit performance to date.”

A much earlier sign is an increase in leverage; declining home equity. But the reverse is currently the case.  While house prices have risen rapidly since 2001, outstanding mortgage debt has barely budged. “Homeowners, at least in aggregate, are not funding a spending spree with the equity in their homes.”

So far, no sign of an imminent bubble, however there are those fast-rising home prices. The national PTI ratio provided plenty of early warning about the last bubble, enough to have taken corrective action before It burst. But one possible warning sign isn’t enough, confirming evidence is needed.

Read the full report here:

The New York Times ran a story a while back regarding the state of the housing market.  They asked some good questions about the “housing bubble” and responded with well-thought-out answers.

Here are my answers, in regard to the Boston-area housing market.

Is speculation rampant? The author of the article uses the low turnover rate in New York City (7%) to support his belief that very few people are buying and flipping.  Now, New York is a bit different than Boston and other metropolitan areas.  New York City has many more co-ops and fewer condos than Boston.  However, I don’t believe there is a lot of speculation in Boston.  I am basing this on personal knowledge.  First, there really aren’t that many new buildings going up in Boston, although you might feel differently.  There’s a couple thousand new units coming on the market, each year, tops, in the high-end of the market.  Beyond that, not much coming on (which is partially responsible for the increase in pricing – supply & demand).

How cheap is cheap money?  Some believe it is actually cheaper to buy a home than it was five or ten years ago, because of the very low rate of inflation over the past several years.

Markus K. Brunnermeier, an assistant professor of economics at Princeton University, said that people should make decisions on whether to buy or rent a house based on the real interest rate, that is, the mortgage rate minus inflation. Instead, they tend to look only at nominal interest rates.

Mr. Brunnermeier sees a powerful link between inflation and house price trends. When inflation is high, he says, people often make a basic mistake in their mental accounting when deciding whether it makes more financial sense to rent or buy a home. They tend to ignore the fact that rents will rise steadily with inflation, while, because of the same inflationary effect, the value of their mortgage payment will actually go down in real terms. This makes them think renting is cheaper than it is and tends to draw people away from the housing market, which in turn can help drive down housing prices.

Therefore, it might still make more sense to buy than rent, if you believe inflation will rise quickly, over the coming months and years.

Are we getting more?  Here, I differ with the author.  He takes one specific property that has sold several times over the past fifteen years, to compare whether it costs more or less to buy, today.  The property he chose sold for $160,000 in 1988, and last year for $560,000.  You might think that lower interest rates today would help someone buy this property, today, but, unfortunately, the rapid increase in sales price completely wipes out any benefits due to lower rates.  In the author’s example, the monthly mortgage loan payment would have been about $1,100 in 1999, and $2,600 today.

However, Boston’s a different story, because prices haven’t risen, as quickly.  I don’t have the figures readily available, but I think your monthly payment would have risen more slowly, in Boston.  Plus, as the author notes, if you use inflation adjusted figures, that 1999 payment would equal $1,900 in today’s dollars.

Is buying power stronger?  Possibly.  In New York City, the median annual income isn’t enough to buy a median-priced condo.  However, that’s because there are so many low-income residents (on public assistance, students, the elderly, etc.)  If you take the average annual income, then there are more than enough buyers for all of the median-priced condos.  This is because some of the people in New York City are paid a ridiculous amount of money.

This is, to a certain extent, true in Boston.  We have the second-highest median income in the country (oh, alright, I don’t have the data to back that up, but trust me on this one).  Therefore, we have enough people willing to buy the high-end properties in the city of Boston.  Or, so I think.

More research needs to be done on this.

Complete article: Reading the Signposts

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