Many first-time home buyers who are completely new to the housing market are shocked to discover how competitive the market is. Properties within 10-15 minute walk to the T are getting 5-30 offers. Multiple offer situations are to be expected for Cambridge, Arlington, Somerville, Brookline, downtown Boston, Malden, Medford, Newton, Watertown and other surrounding suburbs. In more competitive neighborhoods, 30%-50% of these offers are cash buyers or buyers who waived all contingencies.

To many realtors who have been in the business for decades, this red hot real estate market is one of the hardest they have ever seen. True, Boston has traditionally been a seller’s market for decades. In fact, investors who have been investing in Boston for decades will tell you that certain markets, such as downtown Boston, Brookline or Cambridge, have always been more or less seller’s market.

Although by today’s standards, properties purchased 10 or 15 years ago seem incredibly cheap, the purchase price at the time of purchase 10 or 15 years ago was actually expensive back then, taking into account inflation, housing appreciation and the relationship of home prices to wages. In other words, to the people who were buying in Boston 10 or 15 years ago, the purchase price was still considered relatively high to them given their buying power. Despite the trend of high prices relative to buying powers, properties have continued to appreciate steadily for the 10-15 years that followed.

This buying power can be explained using a term called “housing affordability index.” The Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data. That is to say, the housing affordability index indicates the typical home buyer’s ability to purchase a home, and we as investors can use this index to measure whether the houses in a given region are overpriced or in a bubble. If the housing prices are below the index that suggests the housing is at bubble risk, then there should be plenty of room for price growth. As income rises, the affordability of home buyers increases also, which boosts housing prices.

Home affordability indices are different in different time periods. However, for the current housing market in Boston, the home affordability index actually suggests that, Boston real estate is fairly valued despite common perception that the city is expensive. Let’s look at the following chart:

This chart suggests that despite common perception, Boston is fairly valued. Being expensive is not the same as being bubbly if inflation-adjusted prices are still below 2006 peak. Based on this chart, we are nowhere near the bubble or over-valuation like San Francisco, Hong Kong or London. We can expect the Boston real estate market to experience relatively stable growth compared to cities that have reached over-valuation.

To understand this counter-intuitive fact better, let’s look at the demographics that are buying in the most expensive neighborhoods in MA.

In the city there are plenty of high income earners with six figure income. The labor market of Downtown Boston or Kendall Square are full of biotech, medical or financial professionals that easily make six figures. That’s say we get a household of two wage earners who each make 100k with no student loans (many of them got PhDs which means they went to grad school for free). With a combined household income of 200k and 25% down payment, they can easily afford a $1 million condo.

If the typical home buyers that look at neighborhoods like Back Bay, Fenway, Brookline and Cambridge are six-figure earners, it is safe to say that $1 million condos in these neighborhoods are well within the affordability of the buyer profiles in these pricey neighborhoods.

The fundamental fact of the Boston market remains: low inventory and little land to build (especially so in the metro centers).

Zoning laws and scarcity of land prevent an over-development of housing in the metro centers. The median Boston income is higher than the national median, and much higher in the metro centers. On top of that, you get international elite buyers and institutional investors who are drawn to the region's famous education, cultural, and economic scenes. There are other factors like population growth, especially in the high income segment that has occurred in the past 5 years.

Given the low supply and a high number of homebuyers with high buying power, we can easily see why Boston has consistently been such a seller’s market for decades. In fact, the more such properties are in demand, the more reluctant sellers want to sell. Rising rent and rising home prices make the sellers want to hold on to their properties even more. Why get rid of your golden goose? With inventory already so scarce, and sellers holding on to their properties, it’s not hard to imagine why buying in Boston continues to feel like bidding for a rare artwork at an auction!

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