A kinder, gentler housing correction
The so-called bursting of the housing bubble is likely to take shape in Massachusetts as more of a gentle shrinking of an over-inflated housing balloon over the next year or so, say local realtors and economic experts.
The Massachusetts Association of Realtors is projecting that 2005 will turn out to be another record-breaking sales year for single-family homes and condominiums - even surpassing the banner sales of 2004. But John Dulczewski, the association’s director of communications, says it is "logical and to be expected" that the housing market will return to a more normal pace in 2006. That idea is supported by the steady increase of housing inventory in the past nine months, he notes. Home prices have been increasing at a more modest rate instead of the double-digit jumps of recent years.But neither MAR nor area brokers and economists foresee a dramatic correction in the housing market of the bubble-bursting variety near-term or down the road in Massachusetts.
More equal and realistic market
Edward Levine, 2005 president of the Worcester Regional Realtors Association and vice president of Fine Properties in Worcester, says housing inventory is striking an "equilibrium" with demand. Home sales are declining somewhat, Levine says, but only to a more "reasonable level" after months of a sellers’ market in which homeowners were seeking unreasonable prices for their properties.
According to figures from MAR, there were 41,176 single-family homes and condominiums on the market in November, compared with 45,005 in October. That represents a 7.6 month supply, which, Levine notes, is within the 7.5- to 8.5-month window considered to represent a balance between supply and demand. In November of 2004, single-family homes were on the market an average of 5.7 months with a 34,524 inventory - meaning the balance was tipped in the seller’s favor.
MAR also noted that Nov. 2005 brought a more modest rate of increase in home prices. The average home price increased 2.3 percent compared to Nov. 2004, marking the eighth straight month of single-digit home-price appreciations, according to Dulczewski. Prior to that, between April 2004 and March 2005, 11 out of 12 months had double-digit appreciation in the median home selling price on an annualized basis.
Dan Robertson, who took over as president of the Worcester regional association on Jan. 1 and is sales associate at Coldwell Banker Residential Brokerage in Westboro, says that, while the National Association of Realtors has predicted a 4 percent decline in real estate sales for 2006, he expects Massachusetts may face a bit steeper descent. He says inventory is "way up" in some areas, partially due to a building boom and a spate of condominium conversions. But, he adds, even if real estate values are off by 20 percent in 2006, "we’re still going to be at an all-time high."
"I suppose it’s hard to continue to break records," adds Bruce Taylor, president of Whitinsville-based ERA Key Realty, noting that prices may level off with the added inventory creating more of a balance between supply and demand. But, he says, bubbles don’t enter into the equation. "Everybody keeps looking for something wrong in the housing market. I started reading about the housing bubble breaking three years ago," Taylor says. He even attributes the reduced sales from September, October and November, in part, to the devastating hurricane season that affected the national psyche.
Taylor says the increase in people putting their homes on the market in 2005 has resolved a "dire inventory shortage" of single-family properties that existed in previous years. In 2002 and 2003, he noted, there were multiple bidders on single-family homes, driving prices up. The short supply abated somewhat in 2004, Taylor says, and with the current inventory increase, prices are now beginning to "normalize."
Prices may even come down "slightly" from projected rates homeowners may be looking for, Taylor says, but not significantly. "Nobody’s taking a bath on houses," he says. "It seems we’ve reached that balance." The question, Taylor admits, is "is it going to tip one way or the other?"
Increased activity
But Taylor expects a rebound in the market judging from high activity his brokers are now seeing. "I think the consumer is coming back to the real estate market right now," he says, adding, "We’re seeing so much activity now; it’s way above the seasonal norm."
And Donna Brooks of Leominster-based Boss Realty Group is also seeing unseasonable homebuyer activity. So much so, she says she’s doubtful they’ll be a housing market correction at all beyond the usual winter slowdown, though she thinks one is needed to address affordability.
Brooks does expect the increased inventory to help regulate runaway pricing to a degree. But, she adds, prices are still staying high for the time being. One key factor, she notes, is the high cost of building material as supplies are being diverted to rebuild hurricane-ravaged areas in the South. That, coupled with high land costs and increased regulations, are what convinces Brooks that even with high housing costs and some loss of state population, that housing demand will continue to outstrip supply.
"I would like to see a mild correction but I think that’s a bit optimistic," Brooks says.
Robertson notes that his 50-broker office in Westboro also had a "blockbuster December" despite the usual seasonal slowdown. He expects sales to remain strong in 2006, despite moderating prices.
Affordability still a problem
According to Michael Goodman, director of economic and public policy research at the Donahue Institute of the University of Massachusetts, the flattening of housing prices will ease the pressure on what he says is an unsustainable level of housing costs in the state.
Housing prices have for several years outstripped per capita income in Massachusetts, he notes. Normally, median housing costs should be five or six times annual median income levels, according to Goodman. In 1989, prior to the real estate bust of the early 1990s, the median price of a house in Massachusetts was 7.6 times the median annual income, he points out. In the second quarter of 2005, he says, that cost had climbed to 8.5 times the annual median income, which stood at $43,690 in Q2, compared to a housing cost of $378,758.
The supply of homes in the state has long lagged demand, contributing to price increases, Goodman adds. With more homebuyers getting into the market due to the "democratization of credit" with such features as low down payments and interest-only loans, demand has climbed still further in recent years, he points out. And although the state’s population declined between 2003 and 2004, the number of single households in the state has increased. At the same time, Goodman says, there haven’t been that many new units added due to land costs and regulatory constraints.
In the late 1980s and early 1990s, housing costs realigned with income through a correction that saw home prices drop by 11 percent. But, Goodman says, "that doesn’t mean that will happen" in this market. If housing prices stay flat and personal income increases, he says, that could get the state back into balance.
"On average, I would suspect a fairly soft landing," Goodman says. "Maybe instead of a bubble, it’s going to be a balloon."
Micky Baca can be reached at mbaca@wbjournal.com.
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