As part of our Weekly Market Watch, a copy of which is available to our clients via email (request here), Otis & Ahearn tracks the inventory of available properties in a sample of 12 Full Service buildings in Downtown Boston.  The trend in this sample is indicative of the market as a whole, inventory in decreasing.  In June 2009 the available inventory was 91 condominiums, by year-end 2009 there were 60 available. 

Throughout 2010 and ’11 the total available inventory went down to 55, YE 2010 and to 38 as of the 20th of January 2012.  Over the past two and one half years the market has absorbed the inventory in these buildings and there is no new inventory being created to replace it.
Looking to the broader Downtown Boston market, the inventory has dropped 20% from 845 properties available January 20th 2011, to 677 on January 20th 2012.  All the while transactions per month have increased by 25 from 222/month in 2011 to 226/month in 2012.  This increase in transactions and concurrent reduction in available inventory has reduced the month’s supply of inventory to levels last seen in 2004 and 2005.  Both those years saw robust appreciation in average and median sales prices for condominiums.  With inventory low, no new inventory under construction and additional market factors, including historically low mortgage rates, expect continued upward pressure on prices throughout 2012.

Have you had that thought?  If I only knew then…well you don’t have to be one of the youngest billionaires on the planet to have realize that you could have done something different.  What struck me is the REASON Mark Zuckerberg would have stayed in Boston; “If I were starting now I would do things very differently. I didn’t know anything. In Silicon Valley, you get this feeling that you have to be out here. But it’s not the only place to be. If I were starting now, I would have stayed in Boston. [Silicon Valley] is a little short-term focused and that bothers me.”  - That comment got me to thinking about how many of the ills that affect the National housing market are the result of Short-Term thinking.  (read the full post on TechCrunch)

During the first five years of the century, 2000 to 2005 the year over year gains in housing values grew at extra-normal rates.  Based upon the The S&P/Case-Shiller Home Price Indices 20 City Composite a single family home purchased in January 2000 for $1,000,000 would be worth 1.1239% more a year later, 1.364% more by January 2003 and by January 2005 that same home had increased in value by 1.7644%.  Home buyer became used to these gains in value and came to expect that whenever they purchased a home, the value of that home would increase – short-term thinking.  Let’s look at the second part of that decade 2006-2010.  In January 2006 that home purchased for $1,000,000 in 2000 had increased in value by 2.0244%, double the value in six years!   Looking at those numbers would compel a buyer to keep investing in, or take profits from their home.  However here is where the trend changes and from 2007 to 2010 the value of that property recedes from it’s high point so that by the end of the decade that same house was worth 1.4531% more than it was in 2000.  If a home buyer looks only at the 2006 -2010 year over year changes they will see a market declining and leveling out at a bottom and hence would not be compelled to purchase. Short-term changes moved in both upward and downward directions but Long-term the property held value and grew over the decade.

Upward pressure on pricing is evident in the market and is coming from demand for re-sale homes.  This is confirmed in the data when we compared YTD 2011 to YTD 2008.  YTD 2008 new construction sales accounted for 18.5% of the total sales volume in Downtown Boston, those sales were concentrated in Battery Wharf, The Mandarin Oriental, and The InterContinental.  YTD 2011 just 7.5% of the sales volume is in new construction buildings; The W, Battery Wharf, The Clarendon, and 45 Province, yet average and median selling prices continue to experience upward pressure.  The fact that Downtown Boston has held value through the financial crisis, great recession is a substantiation of the contrarian nature of the market relative to the National real estate environment.

*2008 Record Data Points:

1. Highest Average Selling Price
2. Highest Median Selling Price
3. Most Sales over $1,000 per square foot
4. Most Sales over $1,000,000
5. Most Sales over $2,000,000
6. Most Sales over $3,000,000
7. $1,000,000 Sales as a percentage of sales volume

Through the past decade, the condominium values in Downtown Boston have held a consistent upward trend line, as noted in the chart at the top of the page. Through numerous macro-negative economic events, prices have increased in both the average and the median.  Current market conditions; low inventory, low mortgage rates, high rental occupancy, multiple buyer profiles, as well as a strong local economy have helped to underpin values with the strong probability of upward pressure on prices on the horizon.

While the value of a single family home in Massachusetts held steady since 2003 the value of a Downtown condominium rose 25%.  Over the first two quarters of the year, affluent buyers have been investing in Downtown housing, often as all cash purchases, driving the percentage of sales over $1 Million to 14.5%, (in 2003 this price segment was just 6%).

*Source: Otis & Ahearn Weekly Market Watch

I’ve watched the bike racks get installed all around Boston over the past few days and now riders are taking advantage of the system.  It’s called Hubway, an interesting nod to the city with the first Subway system, and the Hub of the universe.  Boston is one of the mostwalkable cities and with the addition of this bike sharing system, I expect a very bikeable city.  There is a limited time to get a year pass at a discount on the Hubway website, where you’ll also find locations and other information.

Great eco-friendly option to getting around town.  Now if I could only find some old Mickey Mantel baseball cards to put in the spokes like I did in the summer of ’67…..

Basic economic rules dictate that when fewer consumers pursue a product or commodity, the associated price for that item will decrease.  However, in Downtown Boston, prices are increasing, as noted in the chart above.  The YTD average price, $695,689 is at a record high while the YTD median price, $475,000 is second only to the high of $485,000, set in 2008.  The upward pressure on pricing is due, in part, to a lack of available inventory.  In the first quarter 2004 there were 1223 properties available for sale, in the same quarter of 2011 there were 865*, a difference of 358.  With no new for-sale development under construction (contrary to the 2005-2008 period when there were many new developments underway and proposed), expect inventory to remain at or below current levels causing continued upward pressure on pricing.      

*Inventory information compiled from LINK “Citywide” Quarterly reports.

• There was a net shift of 1.4 Million single family homes from owner occupied to rentals in 2007-2009 (nearly double the number 2005-2007), rental vacancy rents have fallen and given lift to rents and property values.
• Nationally homeownership rates have dipped below 67% in 2010, down from 69% in 2004.  The farther homeownership rates fall the longer it will take to work through excess inventory.
• The value of the national housing market has been re-set back to 2003 levels according to data from First American CoreLogic.  In contrast Downtown Boston has seen the Median Price of a condominium home increase 29% since 2003 from $375,000 to $485,000 with the Average Price increasing 48% from $478,000 to  $709,008.
• Nationally real home equity fell from its peak of 14.9 Trillion in Q1 2006 to 6.3 Trillion year end 2010, would be single family homeowners are waiting for prices to firm.
• The National Vacancy Survey shows that the number of renters swelled by 3.9 Million from 2004 to 2010.
• The vacancy rate nationally dropped below 10% in 2010, in Boston it is below 5%.
• 74% of current renters believe owning a home makes more sense than renting while 84% of the population as a whole believes the same.
• Demographic housing trends will continue to influence the housing market as Baby Boomers (born 1946-1964) age-in-place.  By 2020 the number of households over the age of 65 will increase by 8.7 million.
• One in three heads of households aged 65-74 in 2007 reported having moved in the previous 10 years, many to smaller homes.  If Baby Boomers match this mobility rate, some 3.8 Million will downsize their homes over the coming decade.
• The enormous Echo-Boomers (born after 1986) are just beginning to form new households.  This group is less predictable than previous generations yet will have an important impact on housing markets.  There is reason to believe that the Echo-Boomers will be large enough to boost the number of young adult households in 2010-2020 and in turn demand for starter apartments and single family homes.
• The number of households under age 35 will grow to nearly 26.5 Million by 2020.  Household growth should hit one million per year, on average, over the next decade.
• Areas with job creation will see housing prices stabilize and values increase at a quicker pace than areas with higher unemployment.
• Nationally homes at the high end of the market have held value better than homes at the low end.
• In 2010 the government owned or insured 90% of the mortgages originated.
• More stringent lending practices such as higher down payment and credit score requirements will limit the first time buyer market.
• Once consumers perceive that a floor has formed under home prices, their reentry into the market could quickly burn through the lean inventory of unsold new homes and slim down the supply of existing homes on the market.

As the market moves forward we expect to see the burgeoning cohort of Baby Boomers to be a big part of the demand for urban style living, specifically condominiums.  They will either remain in their homes or downsize locally while Echo Boomers begin forming households.  Across the U.S., local markets will revive at different rates, affected by the range of price fluctuation during the boom, the excess inventory due to speculation, overbuilding or foreclosures, and the rate of job growth.  An extended period of job growth could stimulate renewed confidence in homeownership and with inventories of new construction at historic lows tighter markets may result nationally as low interest rates and weak prices have made homes more affordable than they have been for decades.  Locally in Boston, unemployment is lower than the national average and there are no new condominium developments under-construction in Downtown Boston, which is one of the reasons why we believe that there will be upward pressure on pricing.

The Federal Reserve continues to keep a watch on inflation and the economy nationally recovers from the great recession.  While there has been a recent rise in commodity prices worldwide, Chairman Bernake asserts, and most economists agree that this will boost inflation only in the short term.  Meanwhile efforts by the European Union to contain their debt crisis, centered in Greece, but extending to Ireland, Portugal and Spain, have driven investment out of the Euro and into U.S. Treasury notes.  The flight to Treasuries has lowered T-Bill yields and, as a result, loan rates in the U.S.

As interest rates remain low, unemployment in Massachusetts dipped.  The jobless rate fell last month to 7.8%, continuing a positive trend.  The local economy, focused on Education, Medical and Financial sectors, has experienced solid demand for their products and services.  Boston employers expect to increase payrolls by 2% this year, adding 49,000 jobs.  Improvement in the job market, and continued low interest rates are positive signs not only for the local economy but also for the housing market in Downtown Boston.