Like most Boston area residents, you're probably aware of the current housing situation around the region. For several years now, the market has been booming. At the same time, home inventory levels have plummeted. The scarcity of available real estate--especially moderately priced single-family homes--has contributed to ever-increasing prices and has produced a seller's market that's causing insanely competitive bidding wars, unbelievably high over-asks and lots of disappointed would-be home buyers. As always, Boston City Properties has kept its eye on the situation, and we're here to guide you through the inventory shortage so that you can snag the home that you want.
Inventory shortages are affecting major metropolitan areas around the country. It's hard to say if the situation in Boston is worse than elsewhere, but there is no doubt about it: Housing inventory is a big problem. Although the Massachusetts Association of Realtors has predicted that the market will cool down come winter, the truth is that no one is quite sure when or how the situation will be improved. In the meantime, prices--and offers--continue to rise.
Things have gotten so bad that Mayor Martin J. Walsh is spearheading an initiative that would create 20,000 brand-new units of middle-class housing around the area by the year 2030. The initiative would incentivize developers and builders with eased zoning restrictions, tax breaks and other perks. The plan seems solid, but it will be a very long time before its effects are seen.
If you are looking to buy a house or condo in the Boston area, you face an uphill battle. However, by being as informed about the situation as possible, you can increase the odds of finding--and getting--what you need. Read on below to dig deeper into the current housing inventory shortage in Boston and for useful, actionable tips for surviving the practically ubiquitous bidding wars that seem to occur whenever a house hits the market around here.
Facts About the Boston Real Estate Inventory ShortageFirst, let's begin by looking at a few cold, hard facts about Boston's current real estate situation. The Greater Boston Association of Realtors, or GBAR, recently released some pretty interesting facts about the shortage, including:
• After hitting an all-time record high sales volume of 1,903 units sold in July 2015, July 2016 saw only 1,596 units sell. This represents a drop of 16.1 percent over the course of a year. Still, sales for July 2016 were the fifth highest in the city's history. Condo sales in the area dropped by 17.4 percent over the same period.
• In July 2015, the median sales price for a single-family home in the area was $550,000. By July 2016, it had risen to $575,000, which represents an increase of 4.5 percent.
• Meanwhile, in July 2015, the median sales price for a condo in the area was $460,000. As of July 2016, it had risen 7.6 percent to $495,000.
• Inventory levels of single-family homes in metro Boston dropped from 3,706 in July 2015 to 2,850 in July 2016, which represents a decline of 23.1 percent. Condo inventory dropped by 23 percent from 1,893 available in July 2015 to 1,457 available in July 2016.
Pending sales of single-family homes in metro Boston dropped from 1,282 in July 2015 to 1,198 in July 2016, which represents a drop of 6.6 percent. Pending sales of condos in metro Boston dropped by 6 percent from 964 in July 2015 to 906 in July 2016.
According to the National Association of Realtors, state housing inventory has dropped year over year for 63 consecutive months, or for more than five years. The monthly average number of homes for sale in 2015 was the lowest in more than 10 years. In other words, this trend is hardly new. Inventory levels have been depleting steadily for at least five years now, which means that it will probably take at least that long to turn things around again. Given the variety of factors that's contributing to the situation, it seems unlikely to be sorted out any time soon.
Why is There a Housing Inventory Shortage in Boston?After considering the facts and statistics that are outlined above, anyone can see that Boston is in the throes of a major housing inventory shortage. In order to solve a problem, you must figure out what's causing it. Unfortunately, many things have contributed to the current real estate picture, so this isn't something can be solved quickly or easily. If just a few of these things were in play, the situation might not be so messy. But with all of them converging, we have the perfect conditions for a shortage of available homes and non-stop bidding wars.
Here are 10 reasons why the current housing inventory shortage is happening:1. Slow Construction - For several years now, new home construction around metro Boston has stagnated. This is especially true regarding moderately priced homes, as most new homes and condos that are being built are very high end. The sad fact of the matter is that there isn't nearly as much money in developing modestly priced homes as there is in developing expensive ones. Restrictive zoning regulations make the situation even worse, as developers are often unable to build the kinds of residential units that are in demand due to zoning.
2. Underwater Mortgages - Even though we have been safely out of the housing crisis and recession for some time, some homeowners are still feeling the pinch. Many homes are still underwater or close to it, having far too little equity for owners to realistically sell and buy new homes. As a result, many folks who would otherwise be ready and willing to sell are staying put in the hopes that prices keep increasing and that their equity builds. At the same time, of course, rising prices makes housing less affordable, so it's a catch-22 of sorts.
3. Finally Not Underwater - At the same time, because prices have rebounded so dramatically, many homeowners are at long last no longer underwater on their mortgages. While some have been eagerly awaiting this moment in order to list their homes, many are so relieved to finally be "in the black" that they want to stay put for now. Many hope to build a lot more equity in the next few years--if the market continues at its feverish pace--in order to make tidy profits later. There are also others, of course, who simply don't want to sell or move and are content to keep their no-longer-underwater homes for the foreseeable future.
4. Urban Family Living - Another trend that may not occur to many Bostonians involves the influx of young families into the city. This is borne out by data from the U.S. Census Bureau. For example, in 2000 in Beacon Hill and Back Bay, there were 559 children under the age of five. In 2010, there were 880 toddlers in that part of the city. In 2000, the South End was home to 1,209 toddlers; in 2010, the number had jumped to 1,779. Downtown Boston is no exception: The number of toddlers living there increased by 62 percent from 2000 to 2010. This is significant because traditionally, young parents head to the suburbs when starting families. Many aren't now, which creates even slimmer pickings for buyers.
5. Low Interest Rates - Mortgage interest rates continue to be incredibly low, which is prompting prospective buyers to turn out in droves. Of course, it doesn't do them a lot of good if there aren't any homes to buy. Still, lured by the promise of rock-bottom interest rates, many prospective buyers are more than willing to engage in bidding wars. This obviously makes the situation even more competitive and stressful.
6. International Investors - Local Bostonians aren't the only ones buying homes around the area. Attracted by insanely fast appreciation and those low interest rates that were mentioned before, foreign investors have been a force to be reckoned with in the Boston real estate market for some time. Many times, these investors are very liquid and can offer all cash for in-demand properties. As a result, they edge even more people out of the picture, making it even more difficult for people to find and purchase moderately affordable homes.
7. Booming Job Market - Foreign investors aren't the only ones with extra cash to throw around. The job market around the area has been booming, with the tech and bio-tech industries doing exceptionally well. This has attracted many young, well-heeled professionals to the area, and they have the resources that are needed to compete effectively in local bidding wars. Everyday folks with more modest incomes often can't hope to compete with cash-laden professionals who are more than willing to make offers that are drastically above listing price.
8. Scared to Sell - Even though there's no question about just about any home selling in metro Boston, many would-be sellers are afraid to make a move because they aren't sure that they'll be able to find new homes. Indeed, it's virtually impossible in Boston to sell a home and to line up another for a seamless transition. In fact, many folks find themselves homeless after successfully selling their homes for a lot of money and then being priced out of their target market by bidding wars or simply unable to find new homes due to the ongoing inventory shortage. There's no way to tell how many there are, but it's likely that hundreds of people are staying put for this very reason.
9. Seniors Unable to Downsize - Under normal market conditions, people approaching retirement age typically start looking to downsize now that they have empty nests. Around metro Boston, many seniors own large homes out in the suburbs. They're discovering, however, that downsizing is virtually out of the question, as smaller homes that suit their budgets simply aren't available. Like so many others, many seniors are staying in their large, suburban homes--homes that would be absolutely perfect for young families.
10. Disrupted Real Estate Cycle - Finally, first-time home buyers are faring worse than anyone else in Boston's fiercely competitive real estate market. They are at a major disadvantage for many reasons, so many are unable to buy homes in the area at this time. This means that they won't be selling those homes for bigger ones in a few years, and so on. The cycle that keeps the market going--and somewhat predictable--is being disrupted right at its start. This affects how many homes are for sale at any given time to a certain extent, and it's partly why Mayor Walsh is trying to get that initiative going.
One of the worst consequences of the ongoing--and continually worsening--housing inventory shortage in Boston is that fiercely competitive bidding wars have basically become par for the course. Needless to say, this is very stressful for buyers. It's stressful for sellers too because they are being bombarded with offers the instant that their properties go on the market. Even though sellers are making out like bandits, the current real estate climate isn't pleasant for them, either. Real estate agents are also working double time helping clients negotiate offers and contend with bidding wars.
These bidding wars are causing many buyers to make offers that are far above listing price. Indeed, more than two-thirds of homes sold through Redfin during the second quarter of 2016 received multiple offers. This has actually caused many sellers to deliberately list their homes below market, as it tends to create an even bigger feeding frenzy among potential buyers. Usually, homes that are listed way below market would be looked at askance by buyers and agents. These days, it's typically simply done to generate more buzz and to increase the odds of getting high offers.
In June 2016, around half of all listings for homes in the Boston area sold in just two weeks or less. In addition to being very competitive in terms of bidding wars, then, the current real estate market in Boston is insanely fast-paced. Anyone who hopes to get into the home that they want must be prepared to act quickly. Sellers are so overrun with offers so quickly that most would-be buyers are knocked out of contention from practically square one. The added pressure of having to act quickly makes it all the more difficult to navigate this very competitive market--especially when housing inventory levels are so low.
What to Expect When Making an Offer on a Home in BostonIf you can't hold off and absolutely must buy a home in metro Boston, what exactly are you in for? First, don't assume that sticking with a less popular area or with older, less luxurious homes will help; it won't. Based on accounts from around the area, the same situation unfolds whenever just about any property goes on the market.
The instant it is listed, it's not unusual for a home to receive multiple offers on the first day. Many times, listings explicitly say that interested buyers should attend an upcoming open house. At such open houses, dozens of people typically show up. Many of them already have offers, and many of those offers are well above listing price. Even worse, many of those offers are for cash, which holds a lot of appeal to sellers as it means that the deal is much more likely to go through. After all, the buyers don't have to deal with the loan-approval process.
According to the National Association of Realtors, in 2015, homes in metro Boston sold for a median $46,000 above listing price. This is higher than the state median of $39,000 and even the national median listing price of $40,000. Those figures are actually fairly modest when compared to some of the offers that have been made in recent years. The highest over-ask, or offer above listing price, was $675,000. Not too long ago, a condo that was listed for $15 million ended up selling for $15.4 million after the highest offer of $400,000 above listing price was accepted. These are extreme examples, but they reflect the current climate of the Boston real estate world.
First-Time Buyers Have it the WorstFew things are as exciting as buying your first home. Considered a rite of passage by many, it's increasingly becoming beyond the reach of young buyers around metro Boston. Indeed, first-time buyers have it really bad when it comes to the housing inventory shortage and bidding-war climate. For one thing, they typically have lower incomes than older folks, so they have a harder time being approved for mortgages and for being able to afford homes in Boston. As prices keep increasing, this is becoming more and more of a problem.
This is especially unfortunate because so many young professionals have been flocking to Boston lately. Indeed, in 2015, first-time home buyers accounted for 40 percent of all home buyers in the state. Nationally, they only account for 30 percent of all buyers, so it's safe to say that Boston has a lot of young people looking for homes to buy--and, many times, ending up very disappointed. Another issue that first-time home buyers face is that they usually don't have a whole lot to put down on a new home, as they don't have one to sell. As mentioned previously, when first-time buyers struggle to buy homes, the entire real estate market cycle gets thrown out of whack.
Tips for Dealing with Bidding Wars for Boston Homes for SaleNobody wants to be involved in a bidding war when trying to buy a home. Buying a home tends to be stressful in general, and throwing the uncertainty of multiple offers and a bidding war into the mix makes it even worse. Still, stressful though it may be, people succeed in buying homes in Boston every day--even under these circumstances. Usually, they are assisted by skilled real estate agents who know what they are doing. Boston City Properties can connect you with such professionals. In the meantime, here are some tips for successfully getting through a bidding war for homes in metro Boston:
• Don't Get Too Attached - This one isn't easy, but you have to try not to get attached to any home that you want to buy. This is a good rule of thumb no matter what the market is like, as there's no telling what an inspection will reveal. Real estate deals aren't certain until closing is over and the keys are in your possession. Given how competitive the situation is in Boston, it's even more important not to get your heart set on any given property. Otherwise, you will get your heart broken again and again.
• Show Up with an Offer on the First Day - Under normal circumstances, this would be overkill. However, if an open house is scheduled, waiting for it to arrive is a huge mistake. Instead, have your agent alert you to new listings as soon as they appear, and get over to check them out the same day. Be prepared to make an offer then and there. In this case, don't waive the inspection contingency, or you could have an unpleasant surprise later.
• Stay in Touch - If you make an offer on a home that is just perfect and you are outbid, all may not be lost. Even if the winning bidder offered cash, deals fall through all the time. If you were second or even third in place, there might still be hope. With this in mind, have your agent stay in touch with the sellers' agent. The sellers' agent may then alert your agent if the deal falls through, so that you can jump in with your offer. This is all very unlikely, but it's still worth a shot.
• Have a Lender and Loan Ready to Go - You must be able to demonstrate that you can make good on the deal, but having a generic pre-approval letter isn't enough under these circumstances. You need a lender at the ready to issue an approval letter for the property in question. For this to happen, you should give the lender everything that they need for a pre-approval, and you should select a loan ahead of time. When the time comes, your lender should be able to produce a pre-approval letter that is specific to the situation at hand--and that will help you stand out.
• Have Proof of Funds - Whether making an all-cash offer or to demonstrate your ability to make your down payment, you should have proof of funds ready to go before making any offers. At the absolute minimum, be willing to put down at least 20 percent on any home that you consider, and remember that many buyers will offer a lot more than that. Ideally, you should be able to show that you can cover the difference in the event that the appraisal falls through. Put together a financial information document outlining your salary, job history, bonuses, 401(k) balance and where your money and other assets are stored.
• Give Your Very Best Offer the First Time - People are often advised to start with a lower offer and to increase it later in the event that it is beat by someone else. This is a bad move in Boston's current real estate market, as so many additional offers may flood in that you won't get a chance to make another offer. Therefore, put forth your absolute best offer first, or you run the risk of being out of consideration right from the start.
• Reduce or Eliminate Contingencies - This one can backfire, so proceed with caution. In this type of climate, buyers who are willing to forego some of the usual contingencies may have a leg up on the competition. If you have enough cash to cover the difference, consider waiving the appraisal contingency. However, be very careful about waiving escape contingencies for the mortgage or home inspection. One way to get around the latter is by having an inspection performed on the property between the open house and whenever offers are made. Since that's often the same day, however, this strategy may not work out.
• Offer a High Earnest Money Deposit - More and more buyers are attempting this one. Consider offering a larger than usual earnest money deposit to demonstrate your commitment to buying the home. Remember, though, that you can lose the deposit if you're not careful. Be exceptionally diligent about meeting deadlines and providing the necessary paperwork and forms when they are needed, or you could end up losing your deposit and your chance to buy the home.
• Figure Out the Sellers' Motivations - Another great tactic is to determine the sellers' motivations for selling and using that information to your advantage. Your agent is the one who has to handle this part, but it's usually not very difficult. They can contact the sellers' agent to find out why they are selling. Depending on the answer, you may be able to formulate an effective strategy. For example, if they are primarily motivated by making as much money on their house as possible, you can be fairly certain that going the extra distance by, say, waiving contingencies probably won't work. On the other hand, if the sellers are relocating imminently and facing a time crunch, you may have more to work with.
• Offer to Help the Sellers However You Can - Find ways to sweeten the deal to make your offer stand out. After all, not all sellers are purely motivated by financial gain. Some just want a smooth, easy time. A good technique is to state in your offer letter, "will settle on sellers' schedule," so they know that they can schedule closing to suit their needs. You could also offer to let them rent the house after it sells for free for one month or take other steps to accommodate their situation.
• Have a Home Inspector Ready to Jump - Line up a reliable home inspector before you start looking for homes for sale in earnest. Having the ability to perform an inspection at the drop of a hat might enable you to make a non-contingent offer. When looking for an inspector, emphasize that you need them to be willing to drop what they're doing to perform inspections. Better still, if you know someone who is a professional home inspector or have a good relationship with one, see if they'd be willing to go to open houses with you. They can casually inspect the house at the same time.
• Consider Using an Escalation Clause - This is a fairly controversial suggestion, as it takes some of the control away from you. However, you might consider using an escalation clause, which is an addendum to a purchase offer that authorizes the buyer's agent to offer a specific amount above the best offer that the sellers receive. Without having to consult you, then, your agent can counter the best offer with one for a specific amount that you agree upon beforehand.
• Skip Extras Unless They're Absolutely Necessary - Finally, keep your offer as simple as possible by omitting things like help with closing costs and home warranties unless they're absolutely needed. Sellers don't want to make concessions to buyers even under normal circumstances, so this is a good strategy.
At Boston City Properties, we understand how frustrating it can be to buy a home in Boston even under good circumstances. In the present situation, things are even tougher. With our help, however, you're sure to find what you need before too long. We're here when you need us, so give us a call today.
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