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History Lesson in Supply and Demand for Greater Boston

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 deep dives into historical trends in the Hub housing market. (Last week, he wrote about condo addresses in terms of sales.)

The price of housing, like most goods, is determined by supply and demand; and perhaps no organization has spent as much time looking at the supply and demand for housing in Greater Boston as the Boston Foundation, an organization which espouses that "the Commonwealth should see housing development and housing affordability as both a moral obligation to its residents and an economic necessity for a prosperous future." I spent several hours reviewing their "2012 Housing Report Card," which was released in November [PDF].

In 2000, a study of housing in Greater Boston showed a vacancy rate of below 1 percent for single-family homes and 3.1 percent for apartment rentals. To prevent a huge hike in home prices, and establish normal levels of vacancy (2 percent for single-families and 6 percent for rentals), the study recommended that 78,300 new homes (single-family, condominium and apartments) needed to be constructed in the area between 2001 and 2005.

Between 2001 and 2005, Greater Boston produced only 60,843 new homes however. The lack of an adequate amount of housing contributed to the median price of a single-family home in the region rising from $198,000 in 1998 to $407,276 in the fall of 2005. While area rents were somewhat flat early on, since 2003, the average effective rent increased every year but one. Today, rents are at an all-time high and rental vacancy is well below the 6 percent the report cited as normal.
The high cost of housing in Greater Boston contributed to 60,000 more people leaving the state than coming to the state between 2001 and 2005. Many who emigrated from the region were in the 20- to 34-year-old age demographic and chose not to live in a city that had been identified as "the most expensive place to live in the country."
In 2005, 26,127 condominiums traded in the Greater Boston region. For the next six straight years, however, the annual number of condo transactions went down, and, in 2011, only 12,269 condos closed in the region, 53 percent fewer than in 2005. The annual number of single-family sales in the region peaked with 35,444 transactions in 2004. From 2008 through 2011, the transaction count has been averaging around one-third fewer transactions annually.

Although the recession provoked much of the drop in annual transactions, Greater Boston home prices were less affected by the recession, receding around 17 percent, compared to many other U.S. cities, where homes lost between 25 percent and 60 percent of value. Part of the reason was the lack of supply.
As the economy recovers and natural supply and demand is created from demographic changes, the Housing Report Card advises that to meet the estimated demands of those entering the home-buying market between now and 2020, Greater Boston needs to double or triple the current level of new home construction. Many obstacles, however, stand in the way of achieving an adequate amount of housing and affordable housing in the region, including extremely restrictive zoning; the high cost of land acquisition and construction; and decreased government funding for housing. As a result, writes Paul Grogan, C.E.O. and president of the Boston Foundation, "It will take a new level of cooperation among policymakers, local officials and the non-profit and private sectors."

My aside: the lack of inventory in Boston real estate is not a new story; it's one that in many ways has persisted and will continue unless much more housing is created.
· The Greater Boston Housing Report Card 2012 [Boston Foundation]
· Our Bates By the Numbers archive [Curbed Boston]