Have Boston Home Prices Peaked?

Boston Home Prices

2016 Mid Year Market Review

Early this year, I shared with you my hypothesis that Boston’s meteoric price rises might be explained as the market making up for lost time. Home prices were flat for many years thanks to the housing/financial crisis. With the crisis behind us, Boston rocketed ahead with prices rising in the South End for example, by 50% in just 5 years. Crazy! But when we spread that over 10 years, the total rise was just 56%.  What’s more, if we posited a “normal” growth rate of 5%, we were actually exactly where we would have been in 2015 if prices had risen just 5% each year from 2005.  Here’s the graph:

My question then was since we hit the trend line, would we break through and keep on rocketing up anyway? Or would that trend line hold and we’d see prices slow.

2016 Boston Home Prices – The Results So Far

With only the first half of 2016 data in, we have to take into account seasonality. Spring is traditionally our busiest time but those sale closings don’t hit the books till July and August.  Which means they show up in the 2nd half of the year’s numbers making the 2nd half of the year look better than the first even though many of the buying decisions were made in the first half.

That cycle repeats and we drop back down again in the first half of the next year in terms of # of sales.  Importantly however, all price metrics tend to at least hold on to their previous levels or more typically, continue to rise.

Think of it like waves on a beach, with the 2nd half peak of each wave bigger than the year before, and the trough while lower than the peak, is generally higher than the trough of the year before. Each wave built on the one before it as we moved from year to year over the past few years.

That is perhaps, until now as we shall see as we look at 3 iconic neighborhoods for clues on the market’s direction.

The Back Bay:

Arguably Boston’s premier neighborhood, the Back Bay commands high prices and is known for luxury housing.  Average home prices are over the $1.5M mark but the # of transactions is relatively low at typically less than 250 units per year thanks to tight geography and a big mix of commercial vs. residential.  Average home price per sq. ft. is over $1,100 here.

Here’s how the numbers stack up over the past few years:

# of Sales – Back Bay shows the typical seasonal pattern of up and down sales.  2016’s first half sales of 137 units is basically the same as 2014’s 131.  Not a lot of sales, but a steady pattern.

Average & Median Price – Because of the relatively small # of sales, prices can be moved by just a few big sales. It’s more important to watch the trend.  And what we see in that trend is average price rise is tapering off, median price flattening, and now in the the first half of 2016, both actually falling.

Average price per sq. ft. fell for the first time this year and the total $ amount of sales gave back all its advances from 2015 and is now lower than it was in 2014.  All told, the Back Bay market has arguably slid backwards.

The South End:

The trendier neighbor to the Back Bay, Boston’s South End has gone from funky to fully gentrified over the past 20 years and is firmly established as the neighborhood of choice for many. Average prices here are lower than Back Bay, at about $1M, and thanks to its larger geography, at roughly 500 sales per year sees about twice the volume of the Back Bay. Average price per sq. ft. is about 20% less than Back Bay.

In general, the South End stayed stronger than the Back Bay but is showing similar signs.  The number of sales in the 2nd half of 2015 was an all time high for recent years, but fell all the way back in 2016 to the same level as the same time last year. Average price is slightly lower than it was in the first half of 2015, a first in recent years.  And the median price curve flattened.

As a result, the total market size in first half of 2016 was slightly lower at $261M vs $266M for the same period in 2015. Similarly, average price per sq. ft. although at its highest level ever at $885 per sq. ft., rose markedly slower than any period over the past few years.  So while a better performance overall than the Back Bay, the South End still showed signs of slowing momentum.

Dorchester:

Geographically Boston’s largest neighborhood and one if its most affordable and diverse, it’s a good contrast to the other two neighborhoods. Here average prices are much lower – in the mid $400’s and sales are much higher – close to 700 sales last year.  On a per sq. ft. basis, Dorchester is a relative bargain at about $360 per sq. ft.  That’s about 3 times cheaper than the Back Bay.  This has made it an increasingly popular option as people are priced out of other locations.

Dorchester showed the same seasonal ups and downs in # of sales as the other neighborhoods. In contrast however, all other metrics show a nice slow and steady rise.  There’s been a slight tapering in average price but everything else is on the rise as shown below.

This may well be thanks to Dorchester’s far more affordable price points. Even though they have been rising, they have been doing so slower than other locations and therefore perhaps are less likely feel the pressures of the other locations.

Conclusions

It’s a tricky business to read the market, and trying to do so with just half the year on the books is even trickier.  But I do think we see a pattern emerging.

After 5 years of meteoric price growth, the market may very well be hitting a pricing head wind. Boston home prices are actually down year over year in the Back Bay in all 3 measures (median, average, and price per sq. ft.)  The South End still saw higher price per sq. ft and median price, but not by much.  And average price dropped for the first time in recent years.

Dorchester has likely been the beneficiary of higher prices elsewhere driving more value conscious buyers to the much more affordable end of the spectrum.  And its more measured pricing growth may be more sustainable, at least for now, where as the far more expensive markets have hit a wall in terms of buyer price resistance. But that “location location location” rule is always in play so we may see a trickle down effect at some point.

What’s Next for Boston Home Prices?

The rising tide seems to be slowing or even going out a bit in some places. Is this a just a blip before another rise, is it ebb tide where things stay still, or will it continue to recede or even rush out?

Fortunately our market fundamentals are still very strong as Boston’s economy continues to thrive which drives demand. Inventory is still painfully low, and thanks to history and geography, we can’t rapidly overbuild like say Miami so supply remains tight. It’s still a seller’s market by any definition, at least for now and I don’t see any reason for a big market correction to strongly disrupt supply or demand.

But after years of large price appreciation maybe we have hit that trend line I mentioned at the beginning of the article.  Boston home prices have caught up to where they would have been minus the financial crisis and may be entering a period of stability or minor correction, particular in more expensive locations.

Keep in mind slowing price growth is not a necessarily a bad thing.  Huge year over year price increases are not sustainable nor healthy for the market.  At some point that pressure has to give.

Also keep in mind that insanely low mortgage rates have been helping for years but that won’t last forever. And the geopolitical instability both here and abroad is certainly a factor. All markets, the housing one included, don’t like surprises.

So if you are thinking of selling, this is a darn good time to get off the sidelines and sell. The strategy of waiting till next year so you’ll get much more may have run its course. You may not get more next year.

If you are holding rental property and don’t plan to keep it long term, selling now may make even more sense as the one place we do see a glut of supply is rental housing, particularly at the high end.  And so the rental market is softening (which may be another reason why we see sale price growth slowing or reversing).

If you have been thinking of buying, slowing price rises will help keep you from being priced out of the market, a very good thing.  But remember a rise in interest rates remains a danger and with inventory still at record lows, I don’t expect any big downward moves in prices.  Finding and winning a place may still take months and months so the earlier you start the better.

The Take Away

For years now supply has lagged demand, pushing prices higher and higher.  And there have been more than enough buyers that could and would pay those higher prices leading to multiple bidding wars. But based on early 2016 data, that willingness may be starting to run short or even run out As a result, rampant price increases may be coming to an end so that we can return to a more normal and balanced market. That’s a good thing. As always the market will let us know in time, and so I look forward to updating you at the end of the year!

In the meantime, let me know what you thought of this report, or ask me to run the same analysis on your town or neighborhood. And if you know of anyone who would enjoy this report, let me know and I’ll be happy to send them this and future editions!  Love to hear your feedback as well – feel free to email me at ken@kensnyderhomes.com.