Residential Real Estate Market Update and Price Transparency
What is happening to Massachusetts residential real estate during COVID-19 and is it a seller’s or a buyer’s market?
Before discussing home prices in the Marina Bay, Squantum and Merrymount sections of Quincy, I want to emphasize that residential homes are not just a financial decision. Yes, the purchase of a home requires financial commitment and risk, but a home provides far more than just an investment. Determining the value of shelter, safety, comfort and a center for living are very subjective, but are often more important decision factors than the price of a home. Of course, homes have also been an excellent long-term store of value but trying to time the optimal point in time to buy or to sell remains an uncertain proposition, especially now when there is no way to know the duration of the threat of COVID-19 infection.
Recent activity in Massachusetts suggests that to date buyers have not been deterred by concerns about the duration or magnitude of the significant economic downturn. Clearly, sellers have deferred listing homes and it is reasonable to expect that will change to more, perhaps many more listings, depending on the course of the economic downturn. For this year through May 23 listings in Massachusetts are down 22.8% compared to the same period in 2019 according to the Multiple Listing Service. Average sale price, however, is up 5.0% and the average months of supply is now 1.7 compared to 2.6 last year. The number of homes sold is down 7.4% and average days to offer is 9.8% less than a year ago. Despite less activity, the market has favored sellers as the price of homes sold compared to the original list price is 112.6% compared to only 96.4% in 2019.
What is happening in my neighborhood since the onset of COVID-19 restrictions?
Home sales in my immediate area of the Marina Bay, Squantum and Merrymount sections of Quincy, MA from March 1, 2020 to May 22, 2020 were essentially equivalent on average to those in the same period in 2019. (March 1, 2019 is approximately when the risks of COVID-19 were widely recognized.) The listings, the average days to offer and the average selling price compared to listing price were basically equivalent to those of the year earlier period, according to reports from the Multiple Listing Service. This suggests two things: a relative scarcity of homes available for sale and the prominence of willing, qualified buyers. Neither I nor Berkshire Hathaway HomeServices Commonwealth Real Estate can predict what may happen in the future, but I want to provide facts to keep our clients and prospective clients informed. We can draw inferences about other facts from recent sales and can discuss them with you. I welcome any inquiry for regular updates on your neighborhood or area of potential interest.
Longer-term home prices in Massachusetts.
According to the St. Louis Federal Reserve report, the last peak in home price in Massachusetts was in the first quarter of 2006. Click here for graph of St. Louis Federal Reserve Bank House Price Index for Massachusetts Prices declined from that point by 17.5% until the second quarter of 2012 and had recovered to their prior high level by the first quarter of 2017. The latest data available in this survey is as of year end 2019. Had one bought in early 2006 the average house price appreciation through the end of 2019 was 16.3%. (I do not offer investment advice and cite the experience in the S&P 500 Composite Stock Index for perspective only.) The total return of the S&P 500 with dividends reinvested, but before any taxes, from January 2006 to the end of 2019 was 230.1%. Of course, some may recall that the S&P 500 total return with dividends reinvested was -46% from its top in October 2007 through its bottom in early March 2009—if one held one’s position, which was not necessarily the case for many. If one had timed the bottom of the Massachusetts housing market perfectly and bought in early 2012 and held through 2019, the appreciation of the survey index was 41%. Of course, unlike homes stocks do not offer shelter, physical comfort and safety.
National perspective and are we headed for a 2007 type decline?
It might be useful to recall that according to the St. Louis Federal Reserve Bank data, the last national housing market downturn in price started in April 2007 and declined 21.1% until May 2011 when it began to recover. Prices in the survey recovered to their April 2007 high in February 2016. So, for someone who bought at the peak in price, it took nearly nine years to recover. From February 2016 to February 2020, the latest information available for that survey, prices increased 21.2%. The longer-term history of house prices is encouraging, but certainly no guarantee that the future will trace the same path. Click here for the graph of St. Louis Federal Reserve Bank House Price Index for the US.
Are we going to experience another housing market crash such as that which occurred from April 2007 to February 2011? National statistics on home ownership are sounder now than they were before the 2007 crisis when many did not have sufficient equity to incentivize them to maintain their mortgage obligations. Homeowner Equity Over Time Homeowner equity is not just a function of a homeowner’s financial prudence, but of the value of homes and in 2007 it declined significantly when home prices declined. Much as we all may want to believe that the current Federal Reserve money creation and federal stimulus money at levels well beyond what anyone could have forecasted in February will stimulate an immediate economic recovery, it may well take longer that a few months or even quarters to recover. It seems reasonable to assume that the economy and employment should show evidence of a nascent recovery to have confidence that home values will remain near current levels. The decade long inventory shortage may shift to a surplus, thus favoring buyers, but one should buy when one is ready, not wait until the prices have bottomed. When and if a significant price decline occurs, it will seem that the decline will continue. It is always darkest before the dawn in financial and housing market bottoms. Timing a home purchase may involve costs that are not obvious. We can discuss this if you contact me.
Home Price Transparency
We can get prices of stocks and bonds on a continuous basis during market hours, but home price transparency is not as readily available publicly. Given the fact that homeowners do not normally plan to trade their homes the way they may trade stocks, such immediate price information may be unnecessary. However, most homeowners want to have a reliable indication of the level and direction of the potential market prices of their property. This is especially true given the COVID-19 impact on employment and the economy that has slowed dramatically.
There are a variety of familiar websites that report on residential home prices and listings. My website offers a convenient property search function as well and I will provide a complimentary, customized comparative analysis upon request. A good source of broad housing market price index data is the Federal Reserve Bank of St. Louis. Such data can provide useful insight to broad housing market activity, although the data are often presented with a lag of a month or more. Broad market conditions may be of interest to some, but more specific information is necessary for those contemplating the sale or purchase of a home. Even reports by zip codes may not be especially instructive to a homeowner or potential buyer interested in a specific location. In today’s fast moving COVID-19 environment, it is necessary to observe current home sales data for an indication of the state and potential direction of the market. We can provide the facts and perspective helpful to homeowners and want to keep expectations of home prices grounded solidly in current data. Our approach is systematic and disciplined, not based on algorithms, and is designed to capture a variety of qualitative differences.
For those today who are deferring a decision to purchase we can offer guidance and breakeven analysis of price assumptions in consultation with them. For sellers the same process may be helpful. Given the significant uncertainties of the path of the economy and employment now, we believe that a focus on facts and specific market dynamics, not guesses or forecasts, is essential. Supply and demand are influenced by many factors and what through today has been relatively firm buyer demand at above asking prices may change. Potential sellers may want to take note of this if they were deferring their decision to sell earlier in the year.
Given the changes necessary for spacial/social distancing and other restrictions on activity since early March coupled with the employment declines it is reasonable to assume that residential real estate activity will be impacted, perhaps significantly. Home price transparency and the timeliness of reports on listings and sales depend upon the location. We all have heard that the three most important factors in real estate are location, location and location. As we experience the unprecedented impact of the COVID-19 pandemic we should remain mindful of the potential for homeowner preferences regarding location to change. We have seen changes occur over a period of years as areas become more or less popular and the type of home preferences may change.
Massachusetts deemed real estate an essential business in March and our firm has continued to operate within all social distancing laws. Berkshire Hathaway HomeServices Commonwealth Real Estate’s offices have been active with listings and sales since the social distancing law by applying technology—and by astute marketing of homes.
For several years until early March there had been a relative shortage of home inventory in Eastern Massachusetts. Since the stay-at-home protocol in early March, it is certainly understandable that some sellers and buyers have deferred any decision until there is more clarity. We would suggest that those who have deferred stay abreast of the actual transaction activity to guide their decision. It is only then whether they can determine if it is a buyer’s or seller’s market.