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Boston is not facing another housing bubble

Posted on May 21st, 2015

The economic recession of 2008 brought on in large part by the bursting of the housing bubble still strikes fear in the hearts of many people. The housing bubble and the problems it created not only warned Real Estate professionals about the dangers of speculation in the housing market, but also has left those in real estate worried about when the next housing bubble will occur.

Everyone has been looking for signs of another housing bubble starting to form. In recent months, there have been frequent reports that tell us that we are all ready in the midst of another housing bubble, with companies such as Smithfield and Wainwright’s newest studies issuing early warnings of bubbles forming in many cities including Boston. These dire warnings are making people who are considering buying a house in Boston nervous about doing so. However, such warnings may be premature creating unrealistic fears in the eyes of the house buying public.

Is Massachusetts Real Estate Market Out of Proportion?

The Smithfield and Wainwright study is based on a comparison of the cost of house of sales and rents to that of the underlying value of the property or the replacement cost. In making this comparison, the study attempts to show that Boston house prices are far higher than what it would cost to replace them or what the study refers to as the fundamentals.
According to this study, the Massachusetts real estate trends are quite discouraging. In their study, Smithfield and Wainwright found that at the bottom of the post bubble period house prices in Massachusetts were just 17 percent. Today, that percentage has jumped to 32 percent or almost doubled.

According to an article in the Boston Globe, David MacPherson, an economist for Smithfield and Wainwright stated that the while the percentage of housing costs over replacement costs were not yet as high as they were in 2006 in Boston Real Estate, they are headed in that direction.

What About Supply and Demand?

However, before Boston or Massachusetts as a whole starts jumping on the housing bubble band wagon, there is one thing they need to consider and that is the law of supply and demand. The last housing bubble was not caused by people demanding certain types of housing or even housing in general. It was created by pure speculation where the cost of housing skyrocketed due to easy lending practices and risky investments, causing the cost of housing to leap way ahead of the fundamentals. Such is simply not the case in the Boston Real Estate market today.

While we agree that the since 2013 the cost of single family homes or Boston house prices have risen 18.8% and Boston condo prices have risen 22.8%, the rising prices are not due to unfounded speculation. It is due to rising demand for housing in the area as the latest Boston Real Estate figures shows that the availability of single family homes has dropped a whopping 38.2% and the availability of condos have dropped over 44%.

So what we are seeing is that the cost of housing rising due to a growing decline of available housing in Boston and the surrounding areas. Boston Real estates agents have fewer properties to sell and more buyers are willing to pay higher prices in order to have a place to live. What you now have is not a housing bubble, but a seller’s market where the demand for housing in Boston and other cities in Massachusetts is higher that the supply.