Blog Contributor: Michael Papianou
Boston’s real estate market is among the most competitive in the United States, in elite company with places like New York City and San Francisco. In a study done by Redfin in 2014, Boston’s own Jamaica Plane ranked fourth in most competitive neighborhood for home buyers. Those local to Boston know that JP is not alone on this front. Other neighborhoods like South Boston and Charlestown are leading the charge as well. In light of this information, it might be surprising to learn that national home ownership fell to 63.4% in 2014, which is the lowest since 1967 (Salomon, Sayjay). On a local level, a theory to support a fall in homeownership would be the large number of students and recent graduates living in Boston who are less likely to purchase a home as cities with a higher average resident age.
(Schwencke, Ken) http://www.boston.com/real-estate/news/2015/07/31/boston-renters-are-stuck-vicious-spiral/rF6u9F1nnzogPZb3q9SG0O/story.html#sthash.cY1Q4Jwn.dpbs
This information is not to say that there are thousands of people out there who are making the mistake of renting homes while they should be buying. The useful takeaway here is that an abundance of renters in the city have driven monthly rates to a place they’ve never been before.
Understanding the rental market is crucial in understanding the sales trends because they are directly tied together. A great number of people who buy property will eventually rent it out, especially in urban environments. Thus higher rent correlates to higher property values (among many other factors). The average rent in South Boston is a staggering $3110 a month according to Rent Jungle. By the same study a one bedroom apartment costs $2085 as a citywide average.
The numbers below reflect prices and sales in what we would call Boston proper. That’s everywhere in Boston that’s not technically considered its own city. That’s areas like the North End, West End, Beacon Hill, Back Bay, the Financial District, the Theatre District, Downtown Crossing, Seaport, Fenway, and the South End.
Original Data Courtesy of the Warren Group
According to the census bureau there are currently 655,884 residents in the city of Boston. In contrast with 2010’s 617,594, the population increased by 6.2%, a fairly substantial difference. Since the year 2000, the total change has been a positive 9.6%. Essentially what we’re seeing here is a steady upward trend of Boston residents. So what does this mean, and how long can it continue?
While we can’t know for sure how long this trend will continue, we can at least examine Boston’s physical capacity for population growth. The article listed below provides comparisons of Boston’s size, population, and population density to several other cities. In short, we see that Boston is fairly dense, but still far short of population per square mile boasted by several other cities. By the study’s indications, Boston has 645,966 residents. The city limits contain a total of 48.3 square miles. That’s .3 miles larger the Paris, France. Why is this significant? Well, when you consider that the geographically smaller French city weighs in with a total population of 2,273,305, our seemingly dense population is put in check. That’s more than four times the density of Boston. What does this mean? With a continued level of development and a gradual shift towards bigger, taller apartment and condominium buildings which we’ve been seeing recently, the population could continue to grow in our nation’s first major city. This implicates that rent may continue to rise or at least remain similarly competitive in the coming years.
This assertion of potential for population growth and development serves to provide a level of optimism about the safety of property values as it relates to the future. Of course this information alone remains largely insufficient in attempting to prove the worthiness of a property investment. Among the most valuable techniques for a buyer would be to look at the appreciation of property both during the time of the recession, and times of great economic prosperity.
In order to really understand whether or not investing in Boston’s real estate is a good idea, we must have an idea of how financial indexes have performed comparatively. This will give us an idea of how investments in the past have performed comparatively. Below is a representation of the Dow Jones Industrial Average over the last ten years. The Dow is a financial index including 30 of the largest American companies, and is an excellent representation of the overall state of the U.S. economy.
Dow Jones Industrial Average: Last 10 years, Source: Macrotrends.net.
Link to original source: Dow Jones Industrial Average Last 10 Years
Naturally, the Dow fluctuates a lot more than an individual property value. There are countless factors that drive prices up or down for specific company stocks on a daily basis. The shaded region shows the effects of the recession, and not-so-coincidentally is also a great representation of how the housing market was effected in that same time period. Let’s compare this graph to how home values have fared in Boston since 1990.
Below is a representation of the S&P 500’s performance since 1990. Source: Macrotrends.net.
The bad news is that investment, including real estate, will always involve risk. The once widespread belief that property value will always go up is now a distant memory, especially for those effected by the housing crisis. With that being said, those who know the ins and outs of the mortgage industry now speak with a great deal of confidence in our revised system. Gone are the days of widespread sub-prime lending and mortgage bundles being sold off with misrepresented risk. Economic catastrophe is never going away, it only changes form. For now, we can be sure that the mortgage lending industry stands on more legitimate ground then any time in recent memory.
Salomon, Sanjay. “Boston Renters Are Stuck in a Vicious Spiral.”Boston.com. The New York Times, n.d. Web. 19 Aug. 2015.
Troy Martin. “The Most Competitive Neighborhood for Home Buyers in 2014.” Redfin.com. N.p., 22 Dec. 2014. Web.
“Find Apartments in Your Area.” Average Rent In Boston, Boston Rent Trends and Rental Comps. Rent Jungle, May 2015. Web. 19 Aug. 2015.
Bostock, Mike, Shan Carter, and Archie Tse. “Is It Better to Rent or Buy?”Nytimes.com. New York Times, n.d. Web.