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Are we in a real-estate market slowdown? Locally, not yet

Steve Poltorzycki, an Arlington resident writes about what he sells -- local real estate.

Steve 11118

Here's my newsletter recapping the Arlington residential real estate market through the end of 2018.

In this edition I’ll review and explore the implications of the market data, as per usual. As an added bonus I’ll take a look at how much substance there may be to all this talk of a real estate market slowdown that’s been reported in the press for the last six months or so.

This report consolidates the single-family and condo reports that I've issued in the past as separate reports. There's also a detailed dive into data and analytics related to the market slowdown question. So it's a bit longer than usual. If you just want to cut to the bottom line answer (are we in the middle of a real estate market slowdown?), here it is: not in Arlington, probably not in greater Boston, and looks like it might be nationally. 

If you have any comments or questions on this or any other real estate-related matter, please This email address is being protected from spambots. You need JavaScript enabled to view it.. I'd love to hear from you.

Real estate market slowdown?

Overview

You may have seen national headlines lately like “Housing Market Slows, as Rising Prices Outpace Wages,” (New York Times), “U.S. Housing Market Looks Headed for its Worst Slowdown in Years,” (Bloomberg Businessweek) or, more locally, “There Are Signs that the Boston Area’s Heated Housing Market is Cooling” (Boston Globe).

What’s going on? Is the market cooling off and about to turn into a buyer’s market? Are the days of multiple offers well above asking price with no inspection or mortgage contingencies behind us?

The story that these articles and dozens of others in a similar vein put forth boils down to this: Mortgage rates are up, making homes less affordable, yet home prices keep rising faster than wages, so fewer homes are being sold, it’s taking longer to sell them, there’s more price-cutting, and all this adds up to a real estate market slowdown.

Wait, home prices are up, yet the market is softening? Yes, say the pundits, but when prices rise faster than wages, this is inherently unsustainable, so if the downturn isn’t here yet, it will be soon, they say.

We all know that real estate is very much a local thing, and the market can vary widely from town to town, even in the same general geographic region. We’ll go into all this momentarily, but first, let’s unpack what is meant by the “real estate market,” because all this talk of a downturn is based on some basic economic principles about how markets work. 

Back to basics: Real estate economics simplifiedLaw of Supply

The interplay between supply and demand is the most fundamental basis of the economics of any market.

In the real estate context, supply is the number of homes available for purchase at a given time (also called inventory).

Demand refers to the degree to which buyers are willing to buy at a given price.

And price is the result of the interplay between supply and demand.

If real estate prices go up, the law of supply says that sellers will be motivated to put their homes on the market to get the benefit of price appreciation (supply increases). and when prices go down, supply decreases.

Law of Demand

And the law of demand says that when prices go up, buyers will be less likely to buy (demand decreases). And if real estate prices go down buyers will be more likely to want to buy (demand increases).

As price goes up or down in response to changes in supply or demand, this price shift in turn affects supply and demand, and this in turn affects price, and so on, iterating until equilibrium is reached.

This is all common sense, of course, and almost doesn’t have to be said. But in the real estate context, there are complicating factors to take into account that make the market behave in less than ideal, or efficient, fashion.

Unlike the manufacture of a commodity item, when demand for housing goes up, it is not so easy for suppliers of new homes to just rev up the manufacturing process and build the necessary new homes to meet that demand. For instance, in the greater Boston area in general, and in Arlington in particular, there aren’t enough empty buildable lots to meet demand. Plus there are zoning and other restrictions on “knock-downs” of existing homes (not to mention that it’s more expensive to buy a home and the land it’s on just to knock down the home than it is to buy a similarly desirable empty lot).

So virtually all of the supply to meet housing demand in the greater Boston area comes from the resale of existing homes. Existing homeowners are the “manufacturers” of the product desired by the market.

But a home is not just an investment to be bought and sold, but also shelter, one of the most fundamental human needs. Homeowners contemplating selling to take advantage of a rising market would still need to replace the roof over their heads. And to get a similar level of well-being, similar amenities, similar commute to work and school, the sellers (now buyers) would probably have to pay a similar price to what they would realize from the sale of their existing home. And very likely at a higher mortgage rate as well. This is called the “lock-in effect,” which inhibits sellers from putting their homes on the market, even when prices are rising and they could realize substantial gains.

And so, most of the homes coming are market are ones where the home-owning sellers have experienced some change in life circumstances (the need to move out of the area, dealing with a divorce, needing more space to accommodate a growing family, needing less space when children grow up and move out). But these kinds of life changes would drive them to sell their home in any event. For most, the price that can be realized on a rising market is not a sufficient reason to list their home for sale.

These considerations complicate the working of the laws of supply and demand.

Another complicating factor is that, unlike the stock market, where sellers can put their shares up for sale and find a willing buyer often within seconds, it typically takes weeks, sometimes months, to sell a home, and so there’s a time lag before essential market information is available to both sellers and buyers of similar homes. Couple this time lag with how emotional some sellers get about the value of their homes, and the result is that sometimes sellers find it a challenge to process and accept the feedback the market may be giving them about the asking price of their home. As a result, it may take some time for the asking price to be adjusted to better meet market demand.

And as that home sits on the market longer than anticipated, potential buyers may develop unrealistic expectations about how much of a discount they can receive for a home that is now viewed as stale (“It hasn’t sold in over three weeks. What’s wrong with it?”). And this results in the home taking even longer to sell.

So let’s take a dive into at what happened in the Arlington real estate market in 2018, looking closely at supply, demand, and price. Did the Arlington market experience a downturn, or is it poised for a downturn in the near future?

Supply inched up

There are two useful measures of supply. The purest measure of new supply is the number of new listings coming on market. But if those new listings get snapped up right away, then that increased supply will be meaningless for buyers. Buyers want to see more inventory “on the shelves” that they can choose from. So we also look at another measure of supply: months’ supply of inventory. This is a slightly complex measure that shows how long it will take to deplete the current inventory, based on the rate at which homes coming on market in the recent past were bought up. The shorter the months’ supply of inventory, the less there is on the shelves to buy. To put some context around this, the conventional wisdom is that six month’s supply of inventory represents a market in which the bargaining position of buyers and sellers is roughly equal.

New listings of single-family homes were up 9% in 2018 over 2017. New listings of condos were up 7%. As is evident from the charts, this level of new listings is quite consistent with the level of new listings coming on market in the last few years. Between single-family homes and condos, 607 new listings came on market in 2018. The average number of yearly new listings coming on market between 2013 and 2017 was 603. New supply has been steady. So not much news here.

 

One thing of note about Arlington single-family new listings is that there was a large jump in new listings in homes above the 2018 median price (about $800,000). New listings of these upper-end homes surged 49% as sellers sought to lock in gains. At the same time, new listings of single-family homes below the 2018 median price dropped 12%. Where, after all, are sellers of these homes supposed to go? Many benefit from low mortgage rates that they want to keep and they want to stay living in the town they are in.

And when we look at what is going on in the greater Boston area, the story is quite similar to that in Arlington. New listings ticked up from 2017 to 2018 in both single-family homes (up 3%) and condos (up 4%), but when we look at the total (SF and condo) new listings in 2018 (31,132) and compare them to the average yearly new listings between 2013 and 2017 (31,065), the difference is negligible. About the same number of new listings come on market, year after year.

How about months’ supply of inventory? As we all know, there is a considerable amount of seasonality in real estate. The bulk of homes come on market in spring and early summer, a very large chunk of them is bought up before the end of summer (as families get settled in before the beginning of the new school term), and then there is a smaller, but still substantial, spike in listings and sales in the fall. By winter, things have pretty much died down. We can compare months’ supply from year to year at any given month in the year, and it’s just as fair to look at the end of the year as at any other time of year. These charts depicts the months’ supply situation at the end of each year, which typically is at or near the low point of the year.

Keeping in mind that six months’ supply represents a balanced market, we see that Arlington single-family homes had less than one-half months’ supply at the end of 2018 (0.4 months). This was up a bit from 2017, but entirely consistent with years immediately prior to that. Months’ supply of condos did not change from year end 2017 to year end 2018, and here, too, there was less than one-half months’ supply (0.3 months). Arlington supply has had trouble keeping up with demand for some time now. Months’ supply of both single-family homes and condos has been at less than one month at year end each year going back to at least 2013. And the figure for other months in the year is not much higher.

In the greater Boston area, months’ supply was at around two months at year end 2017 and 2018 for both single-family homes and condos, with a small drop in months’ supply of single-family homes in 2018. There’s no evidence of a large slug of unsold inventory building up in the greater Boston market.

How about nationally? With the large number of data points here, more significance can be read into small changes year over year. There was an increase in both single-family and condo months’ inventory across the country, with single-family homes going from 3.1 months to 3.7 months, and condos from 3.4 months to 4.2 months.

So perhaps there is some small level of buildup of inventory going on in the country as a whole. But months’ supply is still less than six months, so a balanced market has still not quite been achieved. And, in any event, things are different in the greater Boston area.

Buyer demand stays strong

What about the demand side of things? There are three helpful measures of demand. There’s days on market, which is a measure of the time between when a property is listed and when it goes under agreement. The more demand, the shorter the days on market, as properties don’t stay on the shelves very long in the face of very high levels of demand. Then there’s the difference between the price at which a property sold and the original list price. If properties sell for more than their original list price, it’s fair to say there’s a high level of demand. Buyers don’t pay more than asking price unless they face stiff competition from other buyers. And lastly, there’s the number and magnitude of price reductions. Increased price reductions can be a sign of softening demand.

Arlington single-family and condo days on market were essentially unchanged from 2017 to 2018 (and 2017 was a banner year in the Arlington market), with only a slight decline in DOM for single-family homes (from 23 DOM in 2017 to 21 DOM in 2018). It should be underscored that 20 or 21 DOM is an extraordinarily short amount of time for a property to be on market. It was the shortest DOM of any nearby town, shorter even than in red-hot Cambridge (27 DOM single-family/26 DOM condo), Somerville (36/33 DOM), Medford (24/29 DOM), and Melrose (24/25 DOM).

Arlington single-family DOM

Arlington condo DOM

The upper end of the single-family market saw the biggest drop in DOM, from 26 DOM in 2017 to 22 DOM in 2018. Not a huge difference, but it still supports the conclusion that the market is particularly strong in Arlington’s higher end homes (couple this with the fact that there was a 55% increase from 2017 to 2018 in the number of single-family homes selling above $1 million).

In greater Boston, DOM either went down from 2017 to 2018 (from 51 DOM to 45 DOM for single-family homes) or, in the case of condos, stayed the same (39 DOM). Again, we see no evidence of the market softening in the Boston area. If anything, it’s a bit hotter.

Arlington SF

Arlington single-family homes and condos sold for well over original list price, with single-family homes selling in 2018 for 3.5% over original list price and condos for 5.0% over original list. In both cases this was down a little bit from 2017, but, still, 2018 was the second highest margin over original list in at least six years. This was a strong performance and reflects extremely high levels of buyer demand. For condos the 2018 margin (5.0%) was the highest among all 20 nearby towns, including hot markets like Cambridge (3.7%), Melrose (3.4%), Medford (1.6%). and Belmont (1.6%). And Arlington single-family homes were not far behind, with a 2018 margin (3.5%) topping all other nearby towns, except for Cambridge (5.3%), Melrose (4.8%), and Belmont (4.6%).

Arlington condo sale

The picture in the greater Boston area was slightly different in the details, but altogether similar in terms of general thrust. Single-family homes sold at around 1% below original list price in both 2017 and 2018, and condos sold for about 0.5% above original list price in both years. These margins were consistent with recent historical performance, and if anything, were an improvement over 2013-2016 performance. If we are looking for evidence of a downturn, we find none here.

One caveat should be noted about this metric. It relies on sellers (with the help of their agents) setting a realistic original asking price. Only then can we read any significance to the market showing a variance from that asking price. But in the hottest sectors of the market, it is quite common for sellers to set an asking price below what they expect the property to sell for in the hope that a lower than market value asking price will attract a larger pool of potential buyers who will submit multiple offers, thus creating a bidding war among the buyers and driving the final selling price to a point beyond what it would otherwise reach. Even with that in mind, it's still a useful metric, particularly when looked at to corroborate other metrics of demand.

Arlington condo units

There was a rise between 2017 and 2018 in the number of Arlington single-family homes and condos that sold after price reductions. In 2018, 23% of single-family family homes sold after price reductions, compared to 19% in 2017 (2017 was a six-year low). However, the average amount of the reductions decreased (slightly) in 2018, from 5.6% of asking price in 2017 to 5.3% of asking price in 2018, which indicates that the 2018 reductions, while more numerous than 2017, were smaller in dollar amount (in the aggregate). For condos, however, the average amount of the reductions increased (from 3.8% to 5.1%).

Some observations

The number of price reductions for single-family homes increased significantly for homes priced in the $1 million to $1.5 million range (that’s pretty much the upper end of the Arlington market—only 5 out of 277 homes sold in 2018 sold for over $1.5 million). The rise in the number of price reductions in the upper end homes is partly explained by the rise in listings in this price band.

But it could also be because some sellers of higher end homes, seeing how hot the Arlington market has been of late, became overly optimistic about the prices their homes would fetch. There is no magic formula for setting an asking price. Sellers, with the advice of their agents, decide what price to ask, and emotion often plays a significant role in the decision.

This phenomenon may also explain the rise from 2017 to 2018 in the average amount of reductions for condos. The condo market was otherwise quite strong in 2018, with more units selling than 2017, for a higher median price (5% rise) and for a higher average price per square foot (7% rise). In light of these other indicators of condo market strength, it looks like some condo sellers may have overshot the market when they set their initial asking price, leading to price adjustments to bring the price more in line with what buyers were willing to pay.

In greater Boston both single-family homes and condos showed an increase in the percentage of homes selling after price reductions, and an increase in the average amount of the reductions. While the change was not large (and in the case of single-family homes, the percentage of homes selling after price reductions was the second lowest in at least 6 years), this may be an early indicator of a growing headwind against continued sharp rises in selling price.Summing up the demand side of things, for the most part it looks like demand for Arlington homes was just about as strong in 2018 as it was in 2017, and 2017 was the best year in record. So no market softness here. However, in the broader greater Boston market one metric out of of three suggests some softening.

Prices set all-time records

When demand stays strong and supply does not increase to meet that demand, prices go up. That’s the interplay between supply and demand.The median price of Arlington single-family homes rose 7% in 2018 over 2017, and condos rose 5%. The median prices achieved were all-time highs. Prices have risen every year since 2012. There have been steeper year over year price rises in the past for single-family homes, but the rise from 2016 to 2017 was 6%, so the 7% rise from 2017 to 2018 does not show any recent market softening. And, taking a step back and looking at the last several years, Arlington single-family homes have risen in price by 55% since 2012, a rate of price rise that makes Arlington one of the hottest real estate markets in the Boston area.

Arlington SF median price

Arlington condo median price

The upper end of the Arlington single-family market showed particular price strength, with 27% of homes selling for over $1 million in 2018 (up from 17% in 2017). 

The 5% rise in condo prices, however, is less dramatic than some of the other year over year condo price rises in recent years (16% in 2014, 7% in 2015, 9% in 2016, 12% in 2017) so the rate of price rise clearly slowed in 2018. Given that condo prices rose 60% from 2013 to 2018 (versus 44% in the greater Boston area), it could be said that a mild price correction began to take shape in 2018 in the Arlington condo market.

On the other hand, the upper end of the condo market (like the upper end of the single-family market) showed strength in 2018, with the percentage of condos selling for over $800,000 rising to 25% (from 16% in 2017).

In the broader greater Boston market, the median price of single-family homes rose 5% in 2018 versus 2017, and condos rose 8%. These rates of price rise are in keeping with the rates of price rise in recent years and show no evidence of a slowdown.

National median prices rose in 2018 over 2017 as well (5% for single-family homes and 3% for condos). The single-family price rise is along the lines of the price rises in recent years, but the condo price rise is a bit less, suggesting that the national condo market may be seeing some early signs of softening.

It is useful to check the median price rise data against price per square foot figures. If there is not a close correspondence between the two it would suggest some price band is having an outsized influence on the results. Typically, the larger (and more expensive) the house the lower the price per square foot. A number of factors go into this, including house value to land value ratios, marginal cost, and so on, but the rule of thumb holds true.

Per square foot prices (and percentage of price rise in 2018 over 2017) for both Arlington single-family homes and condos are consistent with median price rises. There’s nothing screwy going on here. Prices are rising in pretty much similar fashion across all price bands.

Arlington square-foot price

Arlington condo square-foot price

And there’s a similar story in the greater Boston area, as the rate of price rise in price per square foot is consistent with the rate of median price rise. 

It is worthwhile to note that the average per square foot price for Arlington single-family homes ($439/sq. ft.) was lower in 2018 than in some neighboring towns, such as Cambridge ($776/sq. ft.), Belmont ($530/sq. ft.), and Somerville ($500/sq. ft.), and was in the same ballpark as those in some nearby upscale towns, such as Lexington ($422/sq. ft.) and Winchester ($416/sq. ft.). 

As for condos, the average per square foot price ($468/sq. ft.) was considerably lower in 2018 than in neighboring Cambridge ($776/sq. ft.) and Somerville ($626/sq. ft.) and not far off average prices in some nearby upscale Belmont ($459/sq. ft.) and Lexington ($427/sq. ft.).

This shows that, from a buyer’s point of view, Arlington single-family homes and condos are a good value in comparison to homes in some nearby towns, and, from a seller’s point of view, that the Arlington market will continue to attract buyers priced out of some neighboring markets. Many residents of Cambridge and Somerville have found Arlington an attractive place to move to when their growing families needed more living space and they could not afford what it would take to move up in size in their current towns.

Arlington square-foot price vs nearby towns

Arlington condo square-foot price vs nearby

Arlington home owners should be aware that the average size of single-family house sold in Arlington has been considerably smaller than in all other nearby communities that have higher median sales prices. It may be that the lower sales prices in Arlington are more due to house size than to other factors, such as location. In that case, it may be advantageous for owners of smaller homes in Arlington to consider investing in renovation and expansion projects that could pay off when the home is sold down the road.

There is one last measure to examine related to the interplay between supply and demand: number of housing units sold. Number of sales is driven by both the number of new listings (supply) and the ability of the market to absorb those new listings (demand). If the number of sales goes down, this could be just as much due to a reduction in supply as a decrease in demand. So it’s important to look at what is going on with new listings in determining the significance of changes in number sold.

The stories about market slowdown say that the number of housing units sold declined in 2018 over 2017.

As far as Arlington goes, that did not take place. The number of single-family homes sold in 2018 (277) was identical to the number sold in 2017. And the number of condos sold in 2018 went up 4% over 2017. The Arlington market (including the condo market) is still strong. It’s not softening.

Arlington condo square-foot priceSF vs homes sold

Condo units sold

But in the greater Boston area, the number of single-family homes and condos sold in 2018 went down 2% over 2017. And at the same time the number of new listings increased. So it would seem that the reduced number of sales in the greater Boston area may be a sign of softening. 

And there were a reduced number of sales nationally as well, with sales of both single-family homes and condos down 3% in 2018 over 2017. Here’s some support for those stories about market softening, though the 3% drop in 2018 was not nearly as steep as the 7% drop in 2017 over 2016 for both single-family homes and condos. One could just as easily argue that things improved in 2018 and the market is strengthening.

Economic fundamentals point to continued real estate market strength

Data related to the national, regional, and local economy, expected mortgage rates, and demographics point to a continuation of market strength in the greater Boston area, if not in the country as a whole.

Economic growth up: A slowdown of the economy could lead to a slowdown of the housing market, as buyers could have less to spend and might be reluctant to make a big purchase, such as a home, when their economic future is uncertain. But the latest numbers on hand (3Q 2018) show that national GDP grew 3.4%, which, along with 2Q growth rate of 4.2%, were the strongest back to back quarters since 2014 (and Q2 was the strongest quarter in about 18 years). And Massachusetts GDP grew by 5.9% in 2Q 2018 and by 3.3% in Q3. Although GDP in metropolitan areas is measured less frequently, all reports are that the economy in the greater Boston area is doing quite well, with no signs of slowing down.           

Unemployment rate down: It stands to reason that as jobs grow, the demand for housing will increase. The national unemployment rate at the end of December 2018 (seasonally adjusted, per BLS) was a very low 3.9%, down from 4.1% at the same time 2017. National unemployment rates were the lowest they have been since 1969. The unemployment rate in Massachusetts at the end of December 2018 was 3.3%, down from 3.5% in December 2017. And in the greater Boston area, the unemployment rate was and extraordinarily low 2.7% at the end of November 2018, versus 3.0% in November 2017.

Some signs are pointing up

Wage growth up: As wages grow, so does the ability of families to afford housing. National wages grew by 3.2% in December 2018 versus December 2017, the biggest jump since the financial crisis. And wages in the greater Boston area grew by 4.8% in December 2018 versus December 2017.

Consumer confidence strong: Consumer spending accounts for about 70% of the US economy, so consumer confidence (the degree of optimism by consumers on the state of the US economy that they express by spending and saving) is an important predictor of near-term economic growth. The Conference Board Consumer Index is a very well-regarded measure of consumer confidence. It showed a December 2018 consumer confidence level of 128.1 (baseline of 100 in 1985), up from 123.1 in December 2017, and at a level not seen since just before the 2001 dot-com recession. 

To sum up the story regarding current economic fundamentals: economic growth is up, the unemployment rate is down, wage growth is up, and consumer confidence is up. Things look quite good. And that’s particularly true in the greater Boston area. Much of the local economy is resistant to recession. People go to college pretty much no matter what, and the Boston area is thick with colleges. People get sick and need the kind of top-notch health care offered in Boston area hospitals and new pharmaceuticals developed in Kendall Square. Boston will still attract tourists. If the local economy stays strong, so will the real estate market.

Homes continue to be affordable

That’s right. Affordable. That’s not to say they’re not more expensive than they were before. Of course they are. In some areas of the country, like the greater Boston area, home prices have indeed risen faster than wages. It’s just that families continue to be able to afford some type of home that meets their needs. Maybe not as large as before, maybe not as close to work as before, but they can still buy one and pay the monthly carrying costs. Let’s look first at mortgage rates.

Mortgage Rates Up a Bit, But Are Still Near Historical Lows: Mortgage rates went up in 2018. The 30-year fixed mortgage rate went up a bit over one-half of one percentage point from the end of 2017 (3.99%) to the end of 2018 (4.55%). And the higher the mortgage rate, the less house a buyer can afford.

Chart

And it stands to reason that as rates go up, there should be downward pressure on home prices. That said, mortgage rate increases don’t automatically push home prices down. Lawrence Yun, Chief Economist at the National Association of Realtors points out that although interest rates rose about 2 percentage points in both 1994 and 1999 home sales then stayed flat or continued to go up.

It could be helpful to look at recent interest rate rises in historical context. The current 30-year fixed mortgage rate of 4.45% is close to a 50-year low.

Perhaps that is why indices of home affordability show monthly mortgage-related payments as a percentage of median income are well below prior peaks.30-year fixed

Indices show home ownership remains affordable

A reading above 100 in the NAR Affordability Index means that a family earning the median income has more than enough income to purchase a median-priced home. The most recent national index score was 147, down a bit from 2017 (158). Local scores are not generated as frequently as the national score, but the Boston metropolitan area score in 2016 was 134.

UBS (the well-regarded international bank) has taken a look at the Boston area and calculates that (as of December 2018) the monthly mortgage payment for a median-priced Boston area home was 29.6% of median income (the national number was 24.2%), suggesting that affordability is not as stretched as some headlines in the business press would have one believe.

Headwinds or tailwinds?

: For sure there will always be economic factors that either provide a headwind against the growth of the real estate market or a tailwind pushing it forward. For a number of years now, low mortgage rates have been a tailwind. Headwinds have included rising home prices (making homes less affordable), the new tax law (for buyers of upper end homes due to reduced deductibility of mortgage interest and local real estate taxes), and the recent uptick in mortgage rates. The popular press has made much of small changes in these factors, as seen in the headlines mentioned earlier.

But then there’s a strong tailwind that has come on lately: demographics. The peak birth year for Millennials was 1990, a group that has now turned 28 and just entering prime first-time home buying years. According to National Association of Realtors data, first-time buyers were responsible for 33% of sales in November 2018, up from 29% in November 2017.

First-time buyers are different from repeat buyers. First-time buyers have reached the time of their lives where there is some real urgency about buying a home. Their families are growing and they have run out of space in their small apartments. Rents are on the rise and hardly a viable financial alternative to home ownership, with monthly cash flow outlays equivalent to mortgage payments, but with no wealth building up and no tax advantages. Repeat buyers, on the other hand, can choose to wait. This demographic wave of younger buyers is particularly strong in Massachusetts, where, according to Massachusetts Association of Realtors data, first-time buyers made up 40% of all home sales in 2018 (versus the national figure of 33%).

A bubble about to burst? Any time there is a sustained run-up of prices in any market, concerns start getting raised about whether there is a bubble about to burst. And there is no doubt that we are in the middle of a major real estate boom. National existing home single-family median sales prices have risen 47% since 2012 (about the end of the last financial crisis). That is the third largest boom since 1913.

One of the previous booms was the run-up in prices before the last financial crisis (which began in 2008). Prices rose 72% between 1997 and 2006. There was a great deal of speculation in the market. Everyone started “flipping” homes. And the regulators seemed to be asleep at the switch. It all collapsed, of course, in 2008-2009, with home prices dropping 25% from their high in 2006 to their low in 2011.

The other major boom occurred between 1942 and 1947, particularly near the end of that period, where soldiers returning from WWII needed housing for their growing families, and the GI Bill helped things along by subsidizing home buying by veterans. Prices rose 58% and did not fall significantly after the boom ended.

The current boom seems more like the post-WWII boom, driven by economic growth, than pre-2008 crisis boom, which was driven by speculation and a high degree of deregulation. The current market is dominated by first-time homebuyers, with little demand by speculators. There has not been nearly as much construction of new homes as there was in the years leading up to the 2008 crisis. Lending institutions are keeping tight rein on underwriting standards. Household mortgage debt relative to income continues to be manageable. Job growth continues. Wages keep going up. If there is a market adjustment, it probably won’t be a huge bursting of a bubble, but rather a mild correction.

So, are we in the middle of a real estate market slowdown?

Short answer: Not in Arlington, probably not in the greater Boston area, but maybe a little bit nationally.

The stories behind the headlines quoted earlier said there’s a slowdown because price rises were slowing down, housing inventory was rising and not getting sold as fast as before, and demand was softening because rising mortgage rates were making homes less affordable.

But, as the old saying goes, “all real estate is local,” and as far as the local Arlington market goes, the trends talked about in these stories don’t apply. The rate at which single-family prices are rising has not slowed (though for condos, it has a little bit), Arlington inventory is extremely low and is selling faster than just about every town in the greater Boston area, and demand is sky high, with homes continuing to sell quickly and well above original asking price.

And, for the most part, the Arlington story is mirrored in the greater Boston area.

Nationally, however, there has been a modest decrease in the number of homes sold and some buildup of inventory, though prices rose in 2018 at the same rate as 2017 (except for condos, which slowed a bit). So it’s fair to conclude that there has been some softening of the real estate market at the national level.

Will this softening continue, and if so, will we begin to see it in the greater Boston area?

The usual caveats apply: no one knows for sure which way the market will go. But keep the economic fundamentals in mind, as they drive the market. The local economy is solid, people are still able to buy homes, and a very large chunk of the population, first-time Millennial buyers, need homes for their growing families.

Homes will continue to come on market and get bought. If prices rise too high, the market will adjust. If there aren’t enough buyers to afford the rising prices, the market will adjust and prices will correct. This might not be such a bad thing. Buyers will be less rushed (lately some buyers were buying homes sight unseen to get ahead of the competition) and less inclined to take on the level of risk than they did in the past (buyers were putting in offers without reserving the right to inspect the property, or were waiving mortgage contingencies). Buyers will have a little bit more bargaining leverage in negotiations.

And if, on the other hand, there are more buyers than homes to go around in the most desirable areas, buyers will recalibrate their expectations. Some “must haves” will get downgraded into “would like to have.” Buyers will seek out homes with fewer amenities, or that require some work, or that are located in less pricey towns. Millennials won’t stay on the sidelines for long.

Maybe the local market can’t keep going up forever. Nothing does. But it does not seem like it will end any time soon. In light of that, let’s explore some implications for sellers and buyers.

Implications for sellers

Sellers of single-family homes and condos in Arlington enjoy one of the stronger seller's markets in the Boston area. As discussed above, the fundamentals suggest the market will continue to be strong and that home prices will continue to go up. But homeowners thinking of selling may want to minimize the risk of a market downturn and sell sooner rather than later so as to lock in gains.

Certainly tailwinds, such as rising interest rates (which seem to have plateaued of late), a stock market correction, and local factors, such as a potential Proposition 2 1/2 override (raising Arlington property taxes in the face of an anticipated budget shortfall in 2020) and the large debt exclusion that will be needed to pay for the high school building project, could have a chilling effect on Arlington home prices (in the near term), though a new high school would likely make Arlington an even more attractive place to live, which could increase home prices down the road.

Nevertheless, it is more likely that prices will continue to rise, and as Arlington single-family homes begin to approach the price levels of Lexington, Belmont, and Winchester, towns whose median home prices suggest they are viewed as more desirable than Arlington, potential sellers of Arlington homes may want to think about whether it makes sense to invest in additions or improvements to their homes to make them more competitive against homes in these other towns. The average square footage of an Arlington single-family home is significantly smaller than the average square footage in these other towns, and some Arlington homes have not had the recent kitchen and bath updates that buyers have come to expect in Lexington and Winchester.

The same holds true for condos. While there is not much an owner can do to increase the size of their condo, they can certainly make sure that is has been updated and, when time comes to sell, that it is staged for maximum appeal.

Implications for buyers

Buyers looking for a home in Arlington will continue to face a seller's market, often with several buyers competing for the same property. Buyers need to be prepared to move fast and put in competitive offers with as few strings attached as feasible. But, despite rising prices and tight inventory, in 2018 Arlington single-family per square foot prices ($439/sq.ft.) were a relative bargain compared to Cambridge ($776/sq.ft.), Belmont ($530/sq.ft.), and Somerville ($500/sq.ft.). And the rate of price rise has slowed recently, which may indicate some softening of demand. This bears close watching as the spring market ramps up.

And if Arlington prices are too high, buyers may want to consider other nearby towns. In 2018 the median single-family home price in Bedford ($729,000) was 9% less than that in Arlington ($805,000), in Watertown ($670,000) it was 17% less, in Medford ($617,000) it was 23% less, in Waltham ($605,000) it was 25% less, in Burlington ($583,000) it was 28% less, and in Woburn ($499,450) it was 38% less.

In 2018 Arlington per square foot condo prices ($468/sq.ft.) were not as steep as those in Cambridge ($776/sq.ft.) or Somerville ($626/sq.ft.). And if Arlington prices are too high, buyers may want to consider alternatives such as Burlington, where the 2018 median price ($565,000) was 6% less than that in Arlington ($600,000), in Medford ($530,000) it was 12% less, in Watertown ($525,000) it was 13% less, in Waltham ($495,000) it was 18% less, in Bedford ($488,500) it was 19% less, and in Woburn ($440,000) it was 27% less. Prices were lower even in upscale Lincoln ($544,000), showing how far Arlington condo prices have come.

 Data were collected from MLS PIN, National Association of Realtors, Massachusetts Association of Realtors, Great Boston Association of Realtors,US Bureau of Labor Statistics (BLS), US Bureau of Economic Analysis (BEA), Freddie Mac, and Conference Board Consumer Confidence Survey. Data do not reflect private transactions. Berkshire Hathaway Home Services Commonwealth Real Estate and its sales agents make no representation as to the accuracy of the data and are not responsible for any actions taken as a result of use of or reliance on this information.


This column of information by Steve Poltorzycki was published Tuesday, Jan. 29, 2019. He is a Realtor® in Berkshire Hathaway Home Services Commonwealth Real Estate's Lexington office. Email him at steve at stevepolt.com if you would like to receive his real estate newsletter and see his website >> 

Read earlier columns here >> 

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