HOME SWEET HOME - FULFILLING THE AMERICAN DREAM

Published on 05/24/04
By Dee Royale - Serving the South Shore - Realty Executives

Nationally, the ten-year run-up in housing prices looked as if it might finally be pulling back late last year. Prices declined slightly in Seattle, Houston, and Cincinnati, and rents declined nationally about 1 percent in the fourth quarter of 2003. But the year finished off strong: 5.6 million homes sold across the country in 2003, up 5 percent over 2002. The war and higher interest rates could alter the trend this year, but the bubble won't likely burst but rather gradually deflate.

Meanwhile, in the Massachusetts market, the dips have been fleeting and the gains magnified. The median price of home in Greater Boston hit $410,000 last year, roughly 2 1/2 times the national median. In 2003, 46,769 single family homes were sold in Massachusetts, a 5.1 percent increase over 2002. The average selling price was $346,000 up 12 percent over 2003; the average condo price was $244,000 up 16 percent over 2002. Greater Boston had the most expensive average price for a single family house: $520,180. "It's a pretty amazing market," says Dee Royale, a realtor with Realty Executives. "The softness is not there, but the economy is where it was in 1989, " - that is, in bad shape.

Spending under a half-million dollars is of course, what most people looking for a home have in mind. So for them, the puzzling question remains: Why? Why are prices so high, and why do they stay that way? What's so different about Massachusetts?

To pick some early and only slightly arbitrary culprits, wind the clock back and blame the Atlantic Ocean, the Pilgrims and Harvard.. As the oldest continuously settled part of the Republic, Massachusetts has had lots of time to fill in the nooks and crannies of buildable land in every direction but east, because of the ocean. So the region is mature and confined geographically, and for most of the past decade especially, economically robust and thus a popular place to be. Massachusetts is home to a greater diversity of ideas-based information-based business than other parts of the country, helped in large part by the presence of the colleges, universities, and research laboratories that attract a skilled work force.

But it's not all new people moving in and looking for a place to live. Indeed Massachusetts grew by just 332,672 people from 1990 to 2001, bringing the total population to 6.3 million, according to the US Census. That was an increase of just 5.5 percent. The new arrivals are joined by legions of people already here who have jumped into the home-buying market. In what analysts call "household sprawl", there are fewer people under each roof today: more singles, divorced people, or young people who leave the nest.

Where there were historically at least 12 people in a triple-decker, there now may only be 4, a professional couple on the upper floors and two tenants on the first floor. The number of Massachusetts households expanded by 130,000 in the 1990's, according to Harvard's Joint Center for Housing Studies.

Immigrants, as well, are boosting the number of would-be home buyers. Not so much the most recent arrivals, who double or triple up in apartments and work in entry level jobs, but the foreign born who have been here for five or ten years and have saved up the down payment or are well paid workers at technology or biotech companies and are looking for single family homes in the suburbs, just like everybody else.

Toss in the availability of 30 year fixed mortgages at an interest rate of as low as 5.75 percent, the lowest rates in 40 years, and the popularity of real estate as a sounder investment than the stock market, and the result is a mountain of demand.

And the supply? In normal circumstances, when a bunch of people clamor for a product, the market responds by making more of it. But in Massachusetts, the supply of housing hasn't increased much, despite the obvious business opportunity. Studies show that the number of new homes produced each year actually declined from an average of 8,460 in the late 1990's to 8,194 in 2000. That decline, the driving force behind home prices soaring 50 percent in Greater Boston between 1998 and 2002 has been the subject of much analysis and soul searching.

Developers say that the root of the problem is that there isn't enough land to build on, not so much a physical scarcity as a scarcity of land that cities and towns are willing to allow development on. There is actually lots of land but local residents opposed to further development can veto proposals in classic "not in my backyard" (NIMBY) fashion, especially housing proposals, some of which actually prohibit multifamily residential developments. About 45 communities have passed slow-growth or no-growth measures on top of the existing rules, such as caps on building permits per year. What ends up being built are large lot, single-family subdivisions; by definition more expensive homes, and not very many of them.

High labor costs, the cost of land and low interests rates all form the foundation for inflated prices, but is the squeezing off of supply and the constrains on developable land that intensify everything so that the duplex in the South End of Boston and that bungalow in Newton can sell for twice what they went for a few years ago, because of fundamentals like location and quality, but also because those properties are in a marketplace that has been shrunk to boutique proportions.

What's equally messy is what could happen to the state's economic profile. Families earning the median income in the Boston area about $60,000, can afford the monthly payments for a $250,000 home; that's if they can have enough for a down payment. It gets hard with all the other monthly expenditures of living to squirrel that money away.

Some couples are finding housing in the $330,000 range unacceptable. Mostly unimpressive condos in Boston, where they do not choose to raise their children. The problem is compounded by employees who can't afford to live near the community where they work and end up leaving the state, making long commutes that ruin their quality of life. And lately that concern is extending to better paid professionals. MIT recently warned that more and more workers are unwilling to relocate here.

People searching for a home they can afford are looking farther and farther from Boston - "drive till you qualify" is the realtors phrase - leading developers to build single family subdivisions on farmland and woods beyond I-495. Land is used up, and more cars are added to already congested roadways. The red-hot market also could ultimately hurt the state's economic competitiveness, as skilled workers give up on the house hunt, leave the state, or, just as commonly, refuse to relocate here because of the costs. Entry-level jobs could be hit even harder.

In the worst case scenario, social stratification intensifies, the economy is drained of its diversity, and suburban towns turn inward as exclusive enclaves, so much so that a family sues, alleging that it is being deprived of constitutional guarantees for at least a shot at the American dream.

For the people lucky enough to be homeowners, it's a market that is richly rewarding. For some, it's been a ticket to luxurious retirement or a trade-up to a suburb they've always dreamed of calling home. For the real estate industry, needless to say, the market is an utterly joyful phenomenon. In short, is not so much a fear that the real estate bubble will burst in Massachusetts. It's what will happen if it doesn't.