With all of the volatility in the stock market and uncertainty about the Coronavirus (COVID-19), some are concerned we may be headed for a downtown Boston condo crash. The feeling is understandable.
There are many reasons, however, indicating this Boston real estate market is stronger than 2008. Here are some dramatic differences.
1. Boston real estate mortgage standards are higher now
Boston real estate
During the housing bubble in 2008, it was NOT difficult to obtain a mortgage. Today, it is tougher to qualify. The Mortgage Bankers’ Association releases a Mortgage Credit Availability Index which is “a summary measure which indicates the availability of mortgage credit at a point in time.” The higher the index, the easier it is to get a mortgage. As shown below, during the last national housing bubble, the index skyrocketed. Currently, the index shows how getting a mortgage is even more difficult than it was before the bubble.
2. Boston condo prices are not soaring out of control.
Boston real estate
Below is a graph showing annual real estate appreciation over the past six years, compared to the six years leading up to the height of the housing bubble. Though price appreciation has been quite strong recently, it is nowhere near the rise in prices that preceded the crash.There’s a stark difference between these two periods of time. Normal appreciation is 3.6%, so while current appreciation is higher than the historic norm, it’s certainly not accelerating beyond control as it did in the early 2000s.
3. A shortage of Boston real estate listings for sale
Boston real estate
The months’ supply of inventory needed to sustain a normal Boston real estate market is approximately six months. Anything more than that is an overabundance and will causes prices to depreciate. Anything less than that is a shortage and will lead to continued appreciation. As the next graph shows, there were too many homes for sale in 2007, and that caused prices to tumble. Today, there’s a shortage of inventory which is causing an acceleration in home values.
4. Boston real estate became too expensive to buy.
Boston real estate
The affordability formula has three components: the price of the home, the wages earned by the purchaser, and the mortgage rate available at the time. Fourteen years ago, prices were high, wages were low, and mortgage rates were over 6%. Today, prices are still high. Wages, however, have increased and the mortgage rate is about 3.5%. That means the average family pays less of their monthly income toward their mortgage payment than they did back then. Here’s a graph showing that difference:
5. People are equity rich, not tapped out.
In the run-up to the housing bubble, homeowners were using their homes as a personal ATM machine. Many immediately withdrew their equity once it built up, and they learned their lesson in the process. Prices have risen nicely over the last few years, leading to over fifty percent of homes in the country having greater than 50% equity. But owners have not been tapping into it like the last time. Here is a table comparing the equity withdrawal over the last three years compared to 2005, 2006, and 2007. Homeowners have cashed out over $500 billion dollars less than before:
During the crash, home values began to fall, and sellers found themselves in a negative equity situation (where the amount of the mortgage they owned was greater than the value of their home). Some decided to walk away from their homes, and that led to a rash of distressed property listings (foreclosures and short sales), which sold at huge discounts, thus lowering the value of other homes in the area. That can’t happen today.
Boston Real Estate for Sale & The Bottom Line
If you’re concerned about a Boston real estate for sale crash, take a look at the charts and graphs above to help alleviate your fears.
