We provide these market reports for our broad range of clients: buyers, sellers, renters, property developers.
We offer tailored market analysis and segment review for each of these clients. For each client’s benefit, we limit our public market commentary to high-level trend/cycle/shift analyses, reserving for private client discussion the segment insight and dynamic inventory analyses that drives proprietary advantage.
These consist of in-house statistics and observations not available from third-party vendors or major brokerages. This edge derives from our customized methodologies based in economic, consumer, and demographic research, informed as well by architectural and interior design fundamentals and trends.
The KEY CONCLUSION to our recent real estate market research is that home prices still have surprisingly long legs, as real property ownership costs have not risen meaningfully due to the Federal Reserve’s easy money policy. We have completed a carrying costs analysis–as distinct from nominal price move measurements–for all major affluent communities in the Greater Boston area: for example, our principal finding is that whereas nominal single family home prices expanded 63% in Brookline and 50% in Newton between 2006 and 2015, carrying costs increased but 25%+. Adjusted for inflation, that increase is around 12%. Naturally, upper middle-class buyers had meaningful gains in incomes over that period, along with a wealth effect from equities (and where applicable real estate holdings). Affordability is in fact quite intact, unlike the situation in the last real estate cycle. In that run up, the ratio between incomes and carrying costs had widened to impossible limits. Aside from geo-economic contagion or domestic slowdown, which seem unlikely given the positives of (A) improving emerging markets and EU+China stabilization and (B) U.S. GDP expansion, the central risk to home prices we foresee is a reckless Fed. (We should note that commodity price floors seem to have been established.) Were the Fed to prove overeager to raise rates, a risk of economic stagnation and therewith stagflation could result. That said, economic forecasting tends to nebulous beyond a three to nine month period. In sum, this remains a real estate bull market, notwithstanding the props and the global risks. Additionally, the flight to safety that has characterized massive Chinese investment in Boston (and other prominent cities) should not fall away, given the Sino high net worth interest in parking capital in the apparently more stable U.S. political economy . As far as chasing yield and finding desirable property, Boston remains especially attractive.
Sales activity remains a story of low inventory and pent-up demand. Lackluster inventory formation persists despite low mortgage rates. Whereas single family sales volumes have been consistently strong, condo volumes have dropped on a year over year basis (as much as 20% in some communities), coincident with a spike in final condo sales prices and a highly competitive, multi-bid auction environment. Single family pricing remains robust: whereas Brookline, at first glance, saw a 4% rise in median value in 2015, that followed a 16% increase in the year earlier period. Consistent with neighboring markets showing leader-follower pricing patterns, in 2015 Newton had a 15% increase in median home values. As in the capital markets between and within different asset classes (stocks, bonds, commodities), there are historical spreads between neighboring communities–while the min/max limits may be tested, the pricing relationships tend to regress. In 2015, Brookline returned to the middle of the historic range at 145% of Newton’s median single family home value: the year earlier it had accelerated to 162%.
It is notable that expectations of inventory remaining low create a negative feedback loop, in which owners who need to sell in order to buy–whether to expand, to relocate, to downsize–are effectively frozen: they are concerned that while they may be able to get their property under agreement and sold swiftly, they will be without a new residence. Markets rely on positive signals in order to structure inventory shifts. This is an unintended negative consequence of the Fed’s rapid ratcheting down of mortgage rates. A seller’s solution to this predicament is simple on the one hand: a seller can get a purchase property under agreement before listing their current residence. And yet this measure is not easily achieved, given the competitive bidding environment and seller concern about execution risk with such an approach. For the sales environment to change, for inventory to increase significantly, we believe that sales prices must accelerate upwards fast enough to tempt sellers, so as to alleviate their worries of being stranded. There have been some signs of this acceleration, but the outlook remains equivocal.
The Greater Boston rental market is being driven by a different pricing and volume dynamic: in a word, OVERSUPPLY. Inventory reflects the more lengthy days on market characteristic of the off season but amplified by the excess supply from thousands and thousand of units of new construction in the Greater Boston area. The relative preponderance of available units is also consistent with a late-stage commodity cycle, i.e. considerable apartment complex unit build outs, have finally been completed and have generated excess supply. We have seen time and again that rental markets, which pivot at the margin–based on tightness or slackness–can shift into oversupply or undersupply and see significant prices swings accordingly. Moreover, renter resistance to sharp price hikes–renters staying put in apartments priced below the marginal market rate– initially dampened down prices and is now seemingly slowing price increases. Landlords have not been mindful that the interest rate subsidy the Fed has been providing to buyers does not aid renters. It is not there in any way for renters, and it is for all intents and purposes irrelevant. We expect that the off-season (indeed winter) rental market will drive days on market well beyond the current 50+ days–a cyclical high for this time of year even so–and possibly extend to 70 days into February. To shorten vacancy periods, landlords will need to contribute in half or whole terms to the standard leasing fee and adjust downward their pricing. To wit, the $3.00/sq ft in Brookline and $2.50/sq ft in Newton that is sought in cases where units are not highly renovated is simply not tenable. Some landlords should also be seriously consider their sell versus lease option.
Sales: We anticipate a firm market, with the potential for a spring leg up, as the cost of property ownership remains attractive relative to (rising) incomes, while inventory has remained constrained for single family, condo and multi-family units (though the latter have run up on developer-buyer pricing).
Rentals: We expect the soft rental market to persist and possibly worsen. Landlords stand to adjust their perspective on appropriate pricing and resultant days.