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Behind Supply and Demand in Massachusetts

Here is the latest installment of Bates By the Numbers, a weekly feature by broker David Bates that drills down into the Hub's housing market to uncover those trends you would not otherwise see. This week, David looks at what it costs to buy a bigger Boston condo. (Last week, he revealed the fastest sales in the Hub.)

Every time my wife got pregnant she told me, "We need more space. We're moving."

Five years later I had a great wife, three kids, and a lot of moving experience. LOL.

The point is that certain life changes often directly result in real estate decisions being made, and housing supply and demand being created.

According to reports from the Massachusetts Department of Vital Statistics, each year the residents of the commonwealth celebrate and mourn around 75,000 to 81,000 births; 50,000 to 60,000 deaths; 36,000 to 42,000 marriages; and 14,000 divorces. How many of these life changes provoked real estate changes? In some cases, "For Sale" signs and "Real Buyers" popped up as a direct result of each life change. In other cases, maybe there was reason to wait or nothing happened at all.

Other "life change equals real estate change" events are precipitated by the larger economy as well as one's personal economy.

When unemployment is expanding, home buyers leave the market, and when firms are hiring, home buyers enter the market. So when Massachusetts unemployment rose from 150,000 (2008) to 302,000 (December 2009), perhaps as many as 150,000 buying groups left the market . But when Massachusetts added 75,000 jobs (December 2009 to October 2012), some portion of the 75,000 new hires entered the home buying market.

When the Dow is plummeting, few who are heavily invested in it will want to take on the new debt necessary to buy a new home. However, when the Dow is rocketing, giddy investors may want to pay cash for their new home. So when the Dow plunged from 13,930 (October 2007) to 9,325 (October 2008), the local real estate market lost thousands of potential buyers. However, when it rose from 9,725 (October 2009) to over 13,000 again (October 2012), the real estate market gained buyers and sellers.

The economic number that might have the largest impact on supply and demand in the real estate market, however, is the interest rate banks charge for home loans.

To get an idea of how this directly affects the market, consider this: In October 2008, the average mortgage interest for a 30-year fixed was 6.04 percent, but in October 2012 rates can be found for 30-year, fixed-rate mortgages at 3.75 percent. If someone had been thinking about buying a $400K home with a 20 percent down payment, the monthly principal and interest for such a loan at 6.04 percent would have been $1,927, but at 3.75 percent the P and I would be only $1,482—$445 a month less. It's like the home was put on sale for 20 percent less! Everybody loves a sale, right?

Additionally, the lower payment means the affordable qualifying income (25 percent of income) for the home drops from $92K to around $71K, so more people qualify to buy the home. What's more, someone selling a $400K house can easily afford a much more expensive house—maybe close to $520K with 20 percent down—for the same payment. Which quality of life is better, living in a $400K home or living in a $520K home—30 percent more home—for the same monthly payment?

· Our Bates By the Numbers archive [Curbed Boston]