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"Local" Is The Keyword: Prices Continue To Strengthen In May And Inventory Continues To Decline

Rajiv Laroia, Principal, Laroia Realty Inc.
06/28/2007

Mortgage rates rise toward 5-year high: Surge adds to burden on already struggling real estate markets (Boston Globe)

Fed chief predicts economy will rebound despite housing woes (Boston Globe)

The Harvard Joint Center for Housing Studies states prices have just begun to soften, risky loans are just now hitting reset dates, and lenders are beginning to tighten credit standards (Annual State of the Nation's Housing Report for 2007).

Most Headlines are oriented toward the national market but remember real estate is LOCAL. I have repeatedly highlighted and discussed this reality in my earlier commentaries. While the softening market is real, the extent of the correction has varied from region to region and city to city. The slow down in the real estate market manifested itself in Palo Alto, CA as a decline in the multiple offers received by sellers on their houses (from 8-12+ offers to about 4 offers now). In Boston, MA, the correction has brought about a reduction in prices of about 3.5 % thus far (BackBay and Beacon Hill holding up better than Dorchester and East Boston).
 
MEDIUM TO LONG TERM OUTLOOK:  According to Harvard Joint Center for Housing Studies, the market(s) will eventually recover. "Once excess inventories and credit problems are worked out and balance is restored, ongoing demand for new and improved homes promises to lift the value of new construction and remodeling to new highs. Greater productivity will help raise real incomes for many while record wealth will allow households to spend more on housing. And, house prices will continue to move up. The influx of immigrants and their children has and should continue to drive household growth between 2005 and 2015 and, with the enormous increase in household wealth over the past 20 years, healthy income growth will help propel residential spending to new heights." The area's foreign-born population makes up 17 percent of all homebuyers, more than the nation as a whole, and  puts upward pressure on prices.
 
 MAY IS THE FIFTH STRAIGHT MONTH THAT RESIDENTIAL SUPPLY LEVELS HAVE GONE DOWN: The Massachusetts Association of REALTORS┬« (MAR) reported today that despite the drop in sales volume of single family homes in May relative to the same period last year,  prices continue to remain strong and inventory continues to go down from year ago levels.  The number of condominium sales remains virtually unchanged from the same time last year with prices going up, inventory decreasing, and supply at its lowest levels since August 2005.
The median selling price of a single-family home this May was $355,000, a slight 0.7 percent increase compared to $352,700 in May 2006.  Compared to April of 2007, median selling prices were up 2.9 percent.

Median selling prices of condominiums went up 1.4 percent in May 2007 compared to the same time last year ($286,000 in 2006 to $290,000 in 2007).  Compared to April 2007, the median selling price went up 5.6 percent from $274,650.
 
The inventory of single-family homes fell 20% from May 2006 levels (46,019 listings in 2006 to 36,875 listings in 2007) which translates into 9.5 months of supply in May 2007.  This is down from 11 months of supply the same time last year and down from 10.3 months of supply in April 2007.

The condominium market experienced an even greater drop, as inventory fell 24 percent from 22,555 listings in 2006 to 17,056 listings in 2007.  This translates into 7.8 months of supply, a decrease from 10.4 months in May 2006.  In fact, this is the lowest level since August 2005 when supply was at 6.3 months.  It is considered a balanced market when there is between 7.5 and 8.5 months of available housing supply.
  
HOME COSTS REMAIN HIGH: Even with the downturn in the real estate market, houses in the Boston area will continue to be remain high, according to a new report from Harvard University's Joint Center for Housing Studies. The median price of a single-family home in Greater Boston has dropped 3 percent in the current slowdown. At that price, a house costs 5.4 times the median household income. The standard for affordability is 3 to 3 1/2 times median household income, according to the Harvard center.
"House prices would have to fall a spectacular 35 to 44 percent -- to the $224,000-to-$262,000 range -- before being affordable to a broad segment of the population, as they were in the mid-1990s in the aftermath of the previous housing-market correction."

That downturn had a much greater effect on improving housing affordability than the current one. For example, at the peak of the recent real estate boom, in 2005, the median home price in the area was 5.6 times median household income, and has since fallen only to 5.4 times median income. In the late 1980s, house prices peaked at 4.5 times household income, and then plunged to 3.2 times income in 1994.

 STEADY ECONOMIC GROWTH: According to Federal Reserve Chairman , Bernanke, the economy, in coming quarters, will advance "at a moderate pace, close to or slightly below the economy's trend rate of expansion." Some economists put the economy's trend, or normal growth rate, at around 3 percent to 3.25 percent.
The Fed meets next on June 27-28 and many economists predict policy makers will again hold a key interest rate steady at 5.25 percent, where it has been for a year. But, thus far, the housing market's problems haven't spread through the broader economy in a significant way, Bernanke said.

Massachusetts' economy is expected to continue growing at a pace that will exceed the national growth rate. Presently, real estate projects in Boston valued at $3-4 billion are either under development or in the proposal stage. 

(Rajiv Laroia, CPA, MBA, is a Massachusetts licensed broker and a member of the National Association of Realtors (NAR) and the Greater Boston Real Estate Board. Additionally, he is the Chair of the Real Estate Committee of Massachusetts Society of CPAs and serves on the Finance Committee of Massachusetts Association of Realtors (MAR). )

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