3 Reasons Boston’s Housing Market is Tight

Where Do You Fit in the Picture?

With limited homes for sale over the past five years, Boston’s real estate markets are increasingly competitive and expensive—similar to other in-demand cities like Los Angeles and Seattle.

Here, three reasons home buying options remain limited, competition stiff and prices high. If you’re relocating to the area—or if you’re here and looking to upsize or downsize—where do you fit in that picture?

(1) Boston’s Housing Shortage

With its sought-after universities and growing medical and tech industries, the Boston area is a magnet for new residents.

At the same time, Boston and surrounding cities—including Brookline, Newton, Cambridge and Somerville—are largely built out, with little room for major expansion. Though the City of Boston is three-quarters toward a goal of building 53,000 new units by 2030, it’s unclear whether that will alleviate our inventory challenge.

Due to the increasingly high cost of land, and residents pushing back on zoning allowances—in part, over concerns about gentrification—much of the new construction that does get completed is high end.

Limited new construction leaves intense demand for existing housing—whether it’s a two-bedroom condo in a three-unit building or a three-bedroom single family anywhere near public transportation.

(2) Rising Rents

Why is the buying demand so strong? The lack of housing actually began with rental properties. Even during the recession in Boston, a limited supply of rental housing allowed landlords to continually increase rents without consequence.

Though the rental market is beginning to slow down (to just a 2.3% increase in 2016), rents are still markedly high compared with other cities. Boston has the third highest rental market, behind New York and San Francisco.

Given the lack of mid-priced rentals in Greater Boston, renters at all price points seek to flee the ever-expensive rental market. Especially for renters coupling up or growing a family, getting a work promotion, joining incomes, or having a baby will compel them to find a way to buy—usually calling on family money to help.

(3) Low Mortgage Rates

The third factor in this cycle is the cost of purchasing. As of 2012, coming out of the recession, conventional mortgage rates have never been as low as they have remained these past several years. That means unprecedented buying power.

For an interest rate of 4.25% (and rates have dipped to as low as the mid-3% range) and a loan of roughly $500,000, every $10,000 borrowed amounts to about $49 in a mortgage payment. With simultaneous competition from other eager buyers, a buyer who’s getting financing understands that increasing their offer price by another $20,000 will cost them about $100 per month extra in monthly payment.

Faced with the alternative of high rent with no ownership control, buyers are often purchasing properties at 10% to 20% above listing price at any given time in the year. Thus, home prices have been on a continuous increase—in some locations increasing by as much as 5% in a matter of months.

Back to Low Inventory

Low inventory leads to lower inventory. With limited options for where and what to purchase, buyers continue to use creative strategies to win out on a purchase. But this competitive environment also affects would-be sellers.

If a homeowner is looking to sell their home and buy another in the area, their sale is practically guaranteed to move quickly and largely on their terms, and with an attractive sale price. But where would that leave them in purchasing?

In an atmosphere where even cash buyers aren’t guaranteed a win, many homeowners who would need to buy in these markets choose to stay put and not sell. That keeps potential inventory from coming to market.

Further, if a homeowner who is looking to buy elsewhere can manage to keep their current home and rent it very profitably, they’ll likely opt not to sell it. That allows them the leverage of purchasing when they are ready, and to keep their current property as in investment—something they could not purchase as affordably now as they did years prior.

Strategies to Win Your Goals

If you’re relocating to the Greater Boston area—or if you’re here and looking to upsize or downsize—where do you fit in this picture?

There are sane ways to achieve your goals, but first you’ll need to situate your priorities within the current market. Four out of five of my buyers go under contract on the first home they submit an offer on—and not always (or only) by being the highest price. Thanks to thoughtful strategizing in advance about their means and needs—as well as their pain points and risk tolerance—we’re able to craft multi-layered, comprehensive offers (factoring in loan terms, timelines and other contingencies) that win sellers over.