Is there going to be a Massachusetts Real Estate Market Crash?
Is there going to be a Real Estate Market Crash?
Is there going to be a real estate crash in Massachusetts like we saw in 2008? Time will tell, but let’s look at the data so we can make an educated prediction about the future of our real estate market rather then just throwing around guesses while relying on national data.
Hey, it’s Jeff Chubb with the Chubb Homes Team. If you have any questions about your own specific situation or are thinking about buying or selling a house, then you can find my information in the description below. Love talking real estate and would love to talk to you friend to friend about your goals. You can also schedule a time to talk with me at: BookChubb.com
The most important thing to remember when it comes to real estate is that real estate is local. What is going on here in Massachusetts is different then what is going on in California. And what is going on in specific markets within our state are going to be different as well. So, for example, what is going on in Brockton Homes For Sale may just be a lot different then what is going on in Cohasset Homes For Sale.
To figure out where we are headed, let’s first take a look at the past. Specifically, data on the 2008 real estate crash. The Average home sale price in Massachusetts in 2005 was $434,095. It would dip slightly in 2006 to $430k then go up slightly in 2007 to a hair under $432k to hit its low point in 2009 at $359,443 to rebound in 2010 with an average sale price of about $381k. So that would be a little more then 17% drop in home prices from the peak in 2005 to the low in 2009.
Let’s also keep in mind that this was the worst recession since the great depression and a housing caused recession at that.
All markets are based on supply and demand. When supply goes up and demand goes down, then you can see some price corrections.
Let’s first take a look at inventory levels leading up and during this time period. In 2005, the average amount of homes on the market was 19,076. This would go up to 26,817 in 2006, then hit a peak of 27,203 in 2007. The inventory retreated down to 25,000 units in 2008 and down to 20,000 units in 2009. This means that inventory increased by nearly 43% from 2005 to 2007.
Meanwhile we saw 47,368 homes close in 2005, then down to a hair under 41k units in 2006. Pretty large decrease in sales between those two years which also correlates to the amount in increased inventory. Sales went down by close to 6,500 units year over year while inventory went up by 7,700 units year over year. In 2007, we would see another minor correction to 39,668 and then saw another large decrease in sales in 2008 coming in at 34,664 units sold. From the peak to the low point, we saw a 27% decrease in the number of sales in Massachusetts.
We have three different types of markets. In order to figure out what type of market we are in, we use a metric called months of inventory. An equal market where neither buyer nor seller have pricing advantage is between 5 to 7 months of inventory, a Seller’s market where the seller has pricing power is from 0 to 5 months and a buyer’s market when a buyer has pricing power is anything more then 7 months.
In 2005 we had 4.83 months of inventory on the market compared to the peak of 8.87 months of inventory we had in 2008. Think of Months of Inventory as a temperature gauge of the market and thereby home pricing. The lower the number of months, the hotter the market. The more months, the colder the market!
So that is where we were in the past. Now let’s take a look at where we are today.
If I was to be the biggest pessimist and bear on our real estate market, the number one market metric that I would be pointing to is the Affordability index for a buyer here in Massachusetts.
Homes have gotten expensive. And while getting more expensive, they have outpaced the wage growth in our area. It’s called the home price to earnings ratio. The average price to earnings ratio in Boston has been 7.5 times. In other words, a house cost 7.5 times more than the average person made a year. When they started keeping track of this data in the beginning of 2011, it was 6.7 times. Today based off of this data, home prices are at 9.3 times higher then Annual earnings.
Take a look at Worcester where the average is 6.2 times. We were at 7.6 times in 2007, then jumped down below the average line to only to go back above the average from 2014 to 2016. Then we dipped below again to begin to spike in the Fall of 2020 to shoot up to 7.6 times today. Hmmm, I wonder what could have caused this to spike in 2020…
I also think it is important to note the time period from 2016 to essentially the summer of 2020. Because this will be very important for later... Prices continued to increase, but the Home Price to Earnings Ratio continued to decrease. And this is because wages were increasing!
As I mentioned earlier, if I was arguing on the side that housing prices were going to fall, then this would be the most important metric I would look at. This growth can’t continue. People are literally being priced out of houses. Right?
If you aren’t buying a house, then the way I see it is that you have two other choices. Either you are renting a house or living at your parents! Living in a box that is rent free is most likely not an option.
There is no question that buying a house has gotten more expensive, but what about renting? Rental rates are going up as well. Some even use the term “surging” to describe rental rate increases. And this kind of makes sense since the cost to rent a property would be tied to the price of that property and said carrying costs. Landlords will also look to keep rates up with inflation as their costs will continue to increase as well.
According ApartmentAdvisor.com, the median rental price for a one-bedroom apartment in the state of Massachusetts has gone up over 12% SINCE March! Why are rates going up? Well for one, because they can. Vacancies are at all time lows. And two, because of inflation. These landlords know what is going on and will see an increase in the costs of their expenses. They also can read what’s going on in the market and after many taking it on the chin for the last couple years… Are going to make back a little of what they lost.
The point is, yes. The price to buy a house is going up, but so are rental rates. The best way to say it is that all housing is getting more expensive. You can’t just look at one market and not factor in the other as most aren’t planning on living on the couch in the basement and the cardboard box gets very drafty in the winter.
As we identified in the 2008 downturn, one of the ingredients for a pricing correction is that you need supply to go up significantly. Let’s take a look at our current supply of houses on the market as well as some other factors that could play a huge key role in market supply.
We currently have around 5,000 Single Family homes on the market in the state of Massachusetts. As a reminder, we had on average 19,000 Single Family homes on the market in 2005. So, we are roughly sitting a quarter of the amount of supply available to buyers when compared to 2005 and less then a fifth compared to inventory levels in 2007.
Yes, it is expected that inventory will increase. Not only do I expect it… I pray for it! But consider this, if we saw the same increases in inventory that we saw from 2005 to 2007, then that 5,000 units would be a little over 7,000 units. Inventory tripling would bring us to inventory levels that we saw in 2013… Which was a pretty great year in the real estate world.
Remember how we were talking about the market temperature gauge earlier with Months of Inventory. Today, we have less then 1.5 months of inventory on the market in the State of Massachusetts. Again, this is compared to the 4.83 in 2005. And to see the market that we saw in 2008 when we had 8.87 months of inventory on the market, then we would need to see months of inventory go up by nearly 600%!
It’s like we were going 150 miles an hour on the highway. The market has slowed and now we are going 130 miles an hour. This is all compared to going 25 miles an hour in 2008. We have a lot of slowing down to do before we go from 130 down to the 25 when prices start declining.
So, the question becomes, will the inventory levels double, triple or quadruple in the next year or so…
I love data, so let’s look at some data. We continue to have limited supply in Massachusetts because we can’t really build that much. At least not like you can in the Southern part of the country. This is a very established region of the country with limited amounts of land for housing expansion.
This chart really shows how little building is being done in the New England Region. Most of the building is being done in the South. When we also look at Single Family and Apartment permits from June 2021 to June 2022, then we see that in Boston we had 17,045 permits for a population of nearly 2.8 million people. This is compared to a similar sized market like Phoenix that had nearly 51,600 permits for a population of 2.3 million.
Don’t get me wrong, there are a lot of cranes showing a lot of building in Boston… But it is nothing like we are seeing in other parts of the country.
I think it is safe to say that we will not see any significant increases in inventory come from additional builder supply in our market.
A big driver of the market last go around was in Foreclosures and Short Sales. We call these distressed sales. The mortgage/real estate melt down of the past was caused by a lot of risky loans with lower borrowing standards. We called these subprime mortgages. So, what is different this time around?
The loans that banks have been giving to borrowers this go around has been a lot higher of quality. You can see that the amount of loans that banks have given for buyers with a credit score under 620 has gone down significantly. Since 2008, banks have been lending responsibly. There have been no NINJA Loans. The Term NINJA loans refer to No Income, No Job, No Assets. That is right, people were able to get mortgages by stating their income and stating that they had a job and additional assets. This is how janitors were able to buy multiple houses on speculation. They would put a house under agreement that was about to be built and would sell it right when it was completed before the first mortgage payment was owed. This all worked great while the market was going up, but the second the market started stagnate, then go down… That is when the house of cards fell. That is when the foreclosure crisis started and the tailspin began.
We don’t have these systematic issues like we did last time. Massachusetts currently ranks the 39th for foreclosure activity which is pretty impressive being that we are the 15th most populated state. Of the close to 3 million homes, 335 went into foreclosure in the month of June. The counties with the most foreclosure per housing unit from highest to lowest were Hampden, Berkshire, Franklin, Plymouth then Worcester. Here are all the current Massachusetts Foreclosures For Sale .
The other piece of data that points to whether a foreclosure crisis will happen or not is that homeowners are sitting on a record amount of equity. While I couldn’t find any specific Massachusetts data on exactly how much home equity we are sitting on, I can tell you that as Americans we are sitting on more than $3.8 Trillion in equity. And that in the first quarter alone, Massachusetts homeowners picked up $62,000 in equity gains on average.
Massachusetts homeowners are sitting on a LOT of equity. Currently only 1.5% of Massachusetts homeowners are in a negative equity situation where they owe more than their house is worth.
I feel comfortable in saying that I don’t see inventory levels increasing to an amount where we are tripling or quadrupling inventory from either new builds or distressed homeowners. This leaves current homeowners needing to sell.
Everything relies on the economy. And I mean everything. If the economy was to tank, then we will definitely see more homeowners look to sell their property in order to protect the equity they have made rather than allow for the bank to take it. But I don’t see that level being so out of balance where it makes our inventory quadruple. That would need to be a major, MAJOR economic event. Like grab your helmet and pray economic or world event… One where you aren’t necessarily worried about the equity that you have parked in your house.
I also have not heard anyone talk about this… And there is no data, but I think there is an additional unspoken market dynamic that needs to be considered… It’s all the homeowners that are locked into their homes with historical low rates. They will not have the same motivation to step up to a new and larger home while interest rates remain higher. This will then restrict the supply. This restriction in supply I believe could make up for any additional supply that comes to the market from distressed sales.
Why? Imagine this. You are a homeowner who bought a house for $500,000 putting $50,000 down and are locked in at 3%. This would mean that their principal and interest payment would be about $1,900 a month. Now let’s say they sold their house for $750,000 and wanted to upsize up to a home that would cost $1 million. For fun, let’s say they still owed $375k which would mean they would be putting down $375,000 on the new house and financing $625,000. At 6%, that would make their new principal and interest payment of $3,747 vs. the $2,635 at a 3% rate.
I believe that homeowners locked into their “good deals” will stay in their houses longer and are going to be more apt to stick it out until they are busting at the seems or might be more inclined to do add on to their current home. I say this from personal experience as I look at my own personal situation and this is my wife’s and my case.
If there is not going to be any huge change in supply, then we would need a huge change from the demand side of the equation in order for there to be more then a market balance, but an imbalance to trigger home price depreciation.
What would have to happen in order to get demand to shrink to such an extreme level? A world-wide pandemic? Oh wait, that happened and demand and prices skyrocketed! So, we can cross that one off the list of possibilities.
The only way demand shrinks is based off of an economic shock from the pain inflicted from increasing interest rates. Interest rates are not tied to the Federal Funds rate. I know that I have said this a ton of times, but it’s important to know. The rates are however influenced by them. In other words, just because the FED increases their benchmark rate by 100 bps, that does not mean mortgage rates go up 1 percent. A better correlation for interest rates is off of the 10-year treasury bond. The 10-year bond yields are set through a bidding process. When confidence is high, prices for the bond drop and yields rise. When confidence is low, it works the other way.
So, now that we understand the mechanics, what type of interest rate shock would it take to get mortgage rates to rise to a point where it would halt the Massachusetts real estate market? It’s a great question and one that I don’t have a firm answer for. It is estimated that housing contributes 15 to 18% of our total GDP. So as interest rates go up to battle inflation, it will slow the growth of the economy. That is the entire point of increasing interest rates! This reduction in growth will affect jobs and consumer spending and thereby home sales. And there is your tailspin as housing is 15 to 18% of our economic output!
What I can say is that I don’t see interest rates going up to the 15 to 18% like we saw in the early 80s. According to a housing survey released by the New York Federal Reserve, they anticipate interest rates to reach 6.7% by the end of the year and 8.2% by 2025. Others, including the National Association of Realtors believe that we will start to see rates go down towards the end of 2023 and stabilize around 5.5%. The Mortgage Bankers Association expects rates to average 4.8% by the end of this year and decrease to an average of 4.6% by 2024. I personally believe that interest rates will be higher then the NAR and MBA organizations are touting.
No one knows. They are all just guesses. But what we do know is that the FED will keep increasing rates until inflation is squashed. And they need to do this quickly. Once they squash inflation, they will start easing slowly to start stimulating the economy and take us out of the recession.
Speaking of inflation… Would you believe me if I told you that Inflation could actually help the fundamentals of the real estate market. Wait, what? Yes, if home prices start leveling off and wage growth continues for even a short period of time, then that will help the affordability index that we spoke about earlier. In a way, housing will become less expensive IF housing prices level off and IF wage growth continues through the devaluation of the dollar. We saw this in the Home Value to Earnings ratio in Worcester which we had talked about earlier.
Back to the million-dollar question. Will home prices in Massachusetts crash? No. I just don’t see it in the current economic environment that we are in.
I do however believe there will be some markets that end up giving some of their gains back, but I do not believe that most towns in Massachusetts will have a price correction. Which markets you ask? I would say the markets that saw 20% or more appreciation each year over the last couple years are the ones that are most likely to see some pricing corrections.
But as I said earlier… It really is all based on the economy. How bad of a recession will we go into? Will the FED need to be more aggressive or go beyond the 2023 timeline that they are currently citing? But even then, those are national metrics. What happens in our local economy and how strong will is stay as it weathers the storm? Which industry is most impacted? Is it technology? Manufacturing? Our state’s exposure to some industries is less then others.
Today’s unemployment rate in Massachusetts is 3.8% compared to the unemployment rate of 4.5% in 2007. I believe that the Massachusetts economy is a pretty diverse economy with health care, bio-tech, tech, manufacturing, finance, education and a strong service economy. I continue to believe that this diversity of industries will help us perform better then many other areas that are solely reliant on one type of industry.
And with this talk about a recession… I think it is again important to mention that the 2008 recession was a housing caused recession. It makes sense that the asset class that started the recession is the one that bares the biggest brunt of an asset correction. It’s also important to remember that a recession and decreased housing prices do not necessarily corelate. As a matter of fact, we have only seen home prices go down twice in the last five recessions! Once in 2008 and the other time was in 1991. We all know what happened in 2008, but the other housing price recession was only a correction of 1.9%. Not exactly earth shattering.
I don’t pretend to be the smartest guy in the room and am always trying to look at history in order to gauge where the future is headed. And everyone always jumps to 2008 because frankly that is the last historic memory they have. It just so happens that the most recent historic memory happens to be one of Real Estate’s worse economic episodes. That was a Triple A credit rating event that historically only happens once in a lifetime. The last time a Triple A event happened before was in the great depression. Historically speaking, we shouldn’t see another one of these in our lifetime.
Comparing our data today to that of 2005 through 2008, there are not a lot of similarities. Our inventory is low and the decreases in seller supply has gone toe to toe with the decrease in demand. Like I said earlier, from where I am sitting right now, I just don’t see any economic events that will shock the market to an extent where it forces a flood of inventory that comes to the market in OUR market.
Again, this is a video that talks specifically about Massachusetts home values and the Massachusetts market. There are other markets around the United States that I believe are quite frankly screwed.
In markets that saw 30, 40, 50% year over year appreciation growth and markets that saw huge institutional buying like Atlanta, Phoenix and Charlotte… If that is you, then I believe you are in a rough ride. Houses for instance that were on the market in Florida for $1,000,000 pre-covid and just recently sold for $4,000,000 that are second homes none the less… You could be in for a bumpy ride.
But in Massachusetts, our market fundamentals are strong. As I said earlier, I believe there will be markets in our state that do have a slight pricing correction. But for the most part, my prediction is that we will see market prices stabilize in the zero to three percent appreciation range. Some will perform better. Others will perform worse. But it’s my opinion that all will outperform the equity markets.
To that point, I believe that the Real Estate asset class will be one of the best performing asset classes in the next couple years. And I know it will be one of the best long-term performing asset classes. I would recommend to take a look at this video that I did that compares a $50k investment made in the stock market vs one made in Real Estate in the year 2000 and see what happens in the 20 years that money is put to work. I will also mention that the 2008 pricing correction was even in this time period! And that the returns are still eye opening and just incredible.
If you are wanting to build wealth, then there is no better investment then real estate. Period.
Do you have any questions or comments about this market data and the market conditions?
If you want to talk about your own personal real estate needs and goals, then please feel free to give me a call at 617-480-2600 or email me at [email protected].