With the excess of free time that can be afforded to oneself due to a lack of power caused from the Blizzard of 2013, I started to ponder: what will the Massachusetts real estate market would look like at the end of 2013? Hence, here my thoughts on where I see the market headed this year.
This is a guest blog post from Bill Tierney, an internet savvy REALTOR who covers the South Shore real estate market for William Raveis Real Estate in their Scituate, MA office. Bill can be reached via email at William.Tierney@Raveis.com or by phone at 781-545-1533. Bill has been a licensed real estate agent since 2004 and has extensive experience.
Where is The Consumer
It has long been my opinion that the volume of real estate transactions rise and fall with consumer confidence, and the bottom line figure on one’s personal financial statement. Or said differently, if one is confident in one’s career prospects, and one’s bank statement is not dwindling, then one is more apt to make large life decisions such as purchasing real estate. Hence, an increased confidence level equates to increased levels of real estate activity.
While I am far from an economist, I do think if I were to forecast what the Massachusetts Real Estate Market would look like at the end of 2013, then I should review the economic forecast for the balance of the year. It should also be noted that economists are people I have been known to poke fun at since they have the luxury of tweaking their opinions on a regular basis.
With that said, I am looking at an economy that is seeing a significant improvement in the unemployment rate, a historically low cost of borrowing money (sometimes known as interest rates) and strong corporate operating environments. Combine this with some high averages on the various capital market indices such as The Dow Jones Industrial Average, and you start to see a picture that leads to higher level of confidence in major life decisions, such as contemplating a real estate transaction. When one watches the nightly news, or reads a recap of the day’s events on their mobile device, it is increasingly hard not to see headlines of strong sales from the automakers, home builders, the National Association of Realtors, technology companies and so forth. These are all good signs of positive economic life.
Real Estate Outlook, it is Supply & Demand
How does this all translate to the Massachusetts real estate market? As I noted above, it is all about confidence. This confidence appears to have some sustainability, barring an unforeseen geo-political event. So in my humble opinion, we have the confidence in the economic environment, so what does the Massachusetts Real Estate Market look like for 2013? I can answer this using the data I have collected from talking to friends and colleagues from other William Raveis Real Estate offices throughout the Commonwealth of Massachusetts.
What I am finding is that we have quickly found ourselves in an inventory starved market. Once again, buyers, armed with confidence, are back in the market. However they are quickly finding a dearth of choices from which to pick. In most markets there are plenty of homes on the market, but many are stale listings, that are either over-priced or book-ended. By book-ended, I mean they are the lower priced or higher priced properties that require a unique buyer for that particular property. The middle of the market, where the bulk of real estate transactions occur, is simply starved for inventory.
In simple economic terms, an increase in demand, with supply constant or falling, bodes well for price. Said differently, with a noted increase in demand due to the confidence of buyers reappearing in the market added to a lack of inventory, or supply of homes for sale, this leads one assuming that a more positive pricing environment as arrived. Once again we find ourselves in an improved real estate environment whose arrival was neither hyped up, nor celebrated. Or if this was celebrated and hyped, nobody tapped me on the shoulder to remind me of such.
Should Real Estate Prices Soar?
So, with increased demand and low inventory of housing supply, home prices should soar. This would be true if all other real estate variables held constant. However, only in economics do some variables get held constant. There are two other factors that will dampen a sharp rise in real estate variables. The first of which is the cost of money, or interest rates. Typically a stronger economy leads to higher interest rates. This has usually been the case in prior economic rebounds throughout history. I do foresee interest rates moving up from their nearly current historic lows. But interest rates need to be put in perspective. With the rate on a 30 year mortgage currently in the three’s, a sharp movement up in rates, let’s say a 50% spike (albeit highly unlikely), would correspond to interest rates in middle to upper four’s. This would still be considered an attractive interest rate by most accounts, from a historic point of view.
Supply will be the boogeyman that will moderate a large spike in home values in 2013. What the Massachusetts Real Estate Market will look like for 2013 will be one of improved pricing, and increased transaction activity. However, supply will increase with the improved pricing as we will see sellers who have yet to be able to sell their home since these sellers have a higher cost basis from making real estate purchases at the height of the bubble in the prior decade. It is these seller’s whose unforeseen supply will moderate the supply and demand aspects of the real estate market. When these sellers, those that purchased late in the last real estate cycle, can finally sell properties that have had valuations below purchase cost, or near their break-even levels, this will cause a supply increase that will soften demand.
To sum up with the Massachusetts Real Estate Market will look like for 2013, we will see transaction volume at levels not seen in half a decade, and much improved pricing. Pricing is a local market by market phenomenon. I do see us seeing pricing at levels much improved from recent memory, but far from a runaway market. Interest rates, and the phantom supply noted above will keep the market stable, healthy and balanced.