Unless you are new to the area, you know Boston is experiencing an intense real estate market marked by low inventory and eager buyers. Sellers are in a fortunate position of having multiple offers with favorable terms and often above asking—and this has been the case for the past few years. How did we get here and what’s the impact of an ongoing seller’s market?
What led to Boston’s ongoing seller’s market
The ongoing seller’s market phenomenon took off in January 2012. The previous year had made the home-buying market feel like a ghost town.
In 2011, the economic recession fully visited Boston area real estate, leaving sellers in some of the most sought-after communities with listings that just would not budge. Given stiffening mortgage lending requirements and uncertainty about where home values would wind up, would-be first-time buyers were highly cautious and choosy: taking out mortgages primarily for locations that seemed sure to hold value over time, and only pursuing properties that were already renovated (that didn’t require their own cash to update). After months on market, many sellers sadly chose to pull their property off market by fall 2011 in hopes of bringing it back in spring of 2012.
An unusual convergence of factors
The winter of 2011 brought about three unprecedented elements at once:
- Mortgage rates plummeted: spurred by the Fed, the cost of borrowing for a home loan dropped to an unheard-of 4.5%. (Until that point, a highly attractive loan rate might have been mid-5% to mid-6%.) Just by virtue of loan prices dropping, a buyer could afford about $60,000 more than they might have earlier. Buyers had never in history had this kind of buying power.
- Rents began to rise: With a slow-down in new construction and renovations during the recession, and with more young adults heading into vibrant urban communities as the worst of it let up, landlords began to charge more for rent. As if it were in the air, renters could almost feel what was coming: landlords were signaling that rents going up come spring.
- The first unseasonably warm winter: With days as warm as 70 degrees, that winter didn’t harden in the long, snow-laden New England way, such that folks were out casually looking at whatever properties were available to see—and contemplating the possibility of buying rather than leasing again.
This alchemy meant that by mid-January, neighborhoods like Jamaica Plain began receiving multiple offers, and not just in the usual high-demand spots. In the lower-priced locations as well, buyers were taking chances and buying what they could, because they could afford the risk—it was as affordable as renting, and cheaper once you factored in the mortgage interest tax deduction.
As of spring 2012, a Jamaica Plain renter might be facing a rent increase on their two-bedroom from $1,500 to $1,800. They could instead get a two-bedroom condo for $300,000 with (5% to 20% down) and pay the same or less for housing.
The conditions that an ongoing seller’s market has set in motion
Boston has had a shortage of housing for several years. Increasingly, young professionals want to start their careers and families here, and new construction hasn’t kept pace (nor can it, truly—unless the already built-out city finds ways to increase density and affordability).
While the demand for available rentals remains intense—for long-time residents to new college students and medical fellows—landlords can charge steeply for the precious housing stock they have to offer.
And with interest rates still historically low—as low as in the 3% range at times—many who have the means to buy (whether based on their own or family assets) are trying their darndest to do so.
With so many aiming to buy—and often needing to land a home before their lease ends, a baby is born and/or a new job starts—competition for what’s available is fierce. Given that buyers can afford a high amount (relative to what they’re putting down), even if it costs them more per month than they’d be paying in rent, they’re willing to buy security: no rent increases (but very likely home value increases) for a home they actually want.
But they have to put a lot on the line. Just offering an attractive price doesn’t mean much. In the most sought-after communities, a buyer ought to expect to pay at least 10% and as much as 25% above the listing price for a home—by virtue of sheer number of buyers and limited homes for sale.
A sale price has little to do with what a seller wants to get for it, and all to do with what a buyer is willing and able to pay for it at a given time. The buyer’s demand (need) is what determines the price, and the stakes are high given the cost of housing as a renter. Over time (over three straight years as of this writing), this demand has not let up.
Buyers have had to put more on the table to distinguish themselves from their competitors. That has meant offering the seller everything you can think of and are able to:
- no discussion over inspection issues (or no inspection at all)
- no discussion over financing or appraisal issues (or no financing contingency at all)
- allowing the seller to remain in the property after closing (at little or no charge), so the seller might have a smoother transition as they figure out their next move.
And so on.
Why are there so few properties coming to market if a seller can get a whopper of a price? Well, what’s the point of a whopper of cash if it can’t guarantee you a purchase that you would need for your family or work situation?
With the fray of buyer demand out in the market, if they haven’t planned strategically, some sellers who aim to buy end up renting, ironically.
Between 2013 and 2014, every one of my seller clients had either already relocated from Massachusetts entirely, or were relocating from Boston to a less pricey community (or state) upon their sale. That’s who could afford the risk of selling in such an intense market.
It’s not unusual for homeowners to receive a letter in the mail from a couple or their agent asking if they would consider selling. For those ready to retire to a more affordable region like the South, that can be a good fit. And some buyers have had success this way, with single- and multi-families alike.
Reviewing an array of offers is actually a complicated situation for a seller to be in:
- how to distinguish among offers
- how to ethically choose the most worthy buyer that you feel a connection to
- how to decide who can give you the most flexibility and control that you need as you try to buy or move into your next place.
Photo: Boston Skyline, courtesy Massachusetts Office of Travel & Tourism via Flickr (Creative Commons License 2.0)