Housing market conundrum

Boston’s housing market may be red hot, but other parts of the state are wrestling anew with an old problem: foreclosures.

The number of foreclosures initiated by lenders in Massachusetts climbed nearly 60 percent in the first five months of 2015 compared with a year earlier with the biggest increases in depressed markets. The increases are being driven by lenders pushing through their backlogs of delinquent loans after new rules governing repossessions were ironed out, said banking groups and housing advocates. (Boston Globe July 1, 2015)

For personal and business reasons I have performed some due diligence in the markets west of Boston. While foreclosures are normal in all economic cycles it was surprising to see several foreclosed properties for sale in Wellesley MA and other high end communities. This begs the question what is going on.

house sold

It is my perception we have a sea change taking place. The current field of buyers are different than in yester year. New is in old is out. Simple Ikea is in antiques are out. Spending time fixing up your home and working in the yard is out Condo living is in.

In a rising tide you would expect increased pricing to fix underwater homes. This appears not to be the case in communities outside of rt 128 (95) Wellesley and Weston excluded. You have limited inventory in towns west of route 128 yet prices appear 20% below historical highs. From my personal experience many buyers looking in “A” towns west of Boston cannot afford the towns and the lack of demand is pushing prices down. Those with the disposable income to afford these homes are not buying outside 128 in large numbers unless it is close to work.

Prices down 1.5% in MA yet Cambridge up 35%

cambridge ma

Boston.com July 1, 2015, “Houses and condos were similarly expensive this spring. Even though the median sales price of single-family homes across Massachusetts fell 1.5 percent this May, home prices in Greater Boston continued to rise, with Cambridge’s median home price leading the way—jumping more than 34 percent to $1.3 million.

We appear to have a change in buyer profiles from a decade ago. People are getting married later in life or living alternative life styles and prefer to live in communities with a night life. People are buying condos in Arlington, Somerville, Watertown upwards of a million dollars for under 1500 sq ft of living space. Homes west of Boston with 4000 sq ft of living space sit on the market longer in similar price ranges.

In a conversation with one realtor, sellers are urged to reduce the size of the home in the listing. Let me explain. Over the last decade many people have built media and game rooms in the basement. These are well appointed rooms well finished for the most part. Today’s buyers want smaller, think less maintenance. This appears to follow a trend that has taken place after major real estate corrections. It took place in the 30s, 90’s and 2000s as well. Mac-mansions will be back but when is the question.

New is in old is out – what happens in 10 years

wellesley home

New home modest neighborhood

wellesley neighborhood

homes in this neighborhood – older and much smaller.

In Wellesley you have developers paying $900,000 for a lot in neighborhoods with homes priced anywhere from $800,000 to $1.2 million. They are erecting 5 bedroom homes that sell for $2.4 million. What has happened to buying a fixer upper and making some money. Gone with the wind I am afraid.

Neighborhoods within town used to mean something. That appears to have vanished sort of. In Wellesley they are building larger homes on tear downs in neighborhoods with more modest abodes. The new home has a pending sale as it not finished.  Do neighborhoods mean anything anymore.

In ten to fifteen years the new home will need a new kitchen / baths.  I know you think I am nuts with this comment but believe me it is a common theme regarding kitchens not being brand new. Do these “new” homes loss their value in ten or fifteen years because of the old kitchens.

Full employment but less disposable income

I believe you have a change in income levels and business. In the tech boom you had a number of start-ups that resulted in many people making mid six figures. Those days are gone. Mass is reporting employment levels equal to those prior to the great recession yet many people I speak to are making much less than before. In a Boston Globe article on July 8, 2015 “Weekly earnings last year, in fields from food preparation to management, were below 2007 levels when adjusted for inflation, according to an analysis of Labor Department and Census Bureau data by the Center for Labor Market Studies at Drexel University in Philadelphia. Of the 22 occupations tracked by the Labor Department, 17 did not reach pre-recession pay levels”

My personal view is that many professionals are making less. With fewer middle market companies existing today than ten years ago the economy has less need for professional services from audits to executive search. We have seen a period of consolidation. Fewer local auto dealers to jumbo dealerships with multiple brands under one umbrella. The big eight audit firms is down to four, law firms are consolidating at high rate, banks are consolidating, hospitals are consolidating and drug companies are consolidating. This consolidation eliminates a number of high paying jobs that ripples through the economy. We are left with a shrinking top 2 – 4% of earners being replaced with a larger middle class. Yes they are employed but the opportunity to create wealth is dwindling for the masses.

I see it as a change in jobs from multiple “C” suite jobs to just a few. Today’s startups create an app or drug and sell to a strategic creating wealth for VC firms and a few individuals but no mushrooming effect. Income is down from CPAs to investment bankers. The number of large CPA firms and law firms is down. The number of jobs in bio labs is up, app developers are in demand, and service jobs aplenty. Will these types of jobs drive the US economy yes and no. The government data might look good as the masses are employed but the life style of many continues to tumble down as the tier one of wealthy increases but tier 2 and 3 continues to slide off the cliff.

What happens to prices when:

  • When interest rates return to more historical norms what happens to housing price
  • Does the home value differential inside of route 128 remain,
    • do the houses outside this area increase
    • or do we have a bubble within route 128
  • Will personal income and economic growth increase to pre great recession levels
By | 2017-03-06T12:04:50+00:00 July 9th, 2015|business advisory|0 Comments

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