By almost every measure, 2015 was a great year for residential real estate in the Bay State. Sales and prices were both up significantly – but what does that mean for 2016? Rising rates, a less-painful winter season and an economy that continues to improve will all play a role in the months ahead.

According to data from The Warren Group, publisher of Banker & Tradesman, 2015 sales of single-family homes were up 10.5 percent from 2014, after a slow start due to severe winter weather. The median sale price rose 4.7 percent year over year to $340,000, within striking distance of 2005’s record high of $355,000.

Though good fortune favored cities and towns inside Route 128 and was unevenly distributed beyond that, on balance, the year was so strong, it left some wondering if we are experiencing another bubble.

According to Freddie Mac, the answer is no.

Using a tool it calls the Multi-Indicator Market Index (MiMi), Freddie Mac combines four economic indicators (purchase applications, payment-to-income ratio, employment and the number of borrowers who are current on their mortgage) with proprietary data to create an index value for real estate markets.

In the January report, Massachusetts scored an 84.4 on MiMi, earning it an “in range” rating, which is defined as being “within its long-term normal range and may be considered stable.” The report says this is largely due to low unemployment and increases in purchase applications over the last three months. A score of less than 80 is rated “weak;” over 120 is rated “elevated.” The U.S. as a whole scored an 82.5. Massachusetts’ highest MiMi rating was in April 2005; the state then had a score of 122.6.

Where Will The Deals Be In 2016?

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Some markets have bounced back more quickly, while others have already surpassed their previous peak prices of a decade ago. There are still “bargains” to be found, particularly in 20 cities and towns clustered in three areas where median prices have yet to reach 80 percent of their 2005 highs:

• In North Central Mass: Athol, Ashburnham, Fitchburg, Gardner, Orange and Templeton.
• In the Blackstone Valley: Boylston, Clinton, Hopedale. Mendon, Milford, Millbury and Worcester.
• Near Buzzards Bay: Fall River, Halifax, Hyannis, New Bedford, Rochester, Somerset, Wareham and Westport.

The cities and towns where median sale prices are currently 20 percent or more above their 2005 peaks won’t surprise anyone. They are: Arlington, Bedford, Belmont, Brighton, Brookline, Cambridge, Charlestown, Concord, Jamaica Plain, Lexington, Needham, Newton, Somerville, South Boston, Wellesley and Winchester.

All Eyes On Interest Rates 

Historically low mortgage interest rates have clearly helped fuel the fires of the red-hot Eastern Massachusetts markets. So when the Federal Reserve raised short-term rates 25 basis points in December and signaled similar additional hikes in 2016, some wondered if that would be enough to cool the flames.

Jonathan Smoke, chief economist for Realtor.com, pointed out that mortgage interest rates have dropped significantly since the Federal Reserve raised rates in December, bringing them back down close to historic lows.

“Mortgage rates are 50 basis points lower than they were at the end of December and this is the year they were supposed to go up,” Smoke said. “Concerns about the global weaknesses are essentially making the U.S. debt markets even more attractive to people around the world and driving rates down. It’s telling consumers that now is the time to act.”

Raj Sharma, managing director of Merrill Lynch’s private banking and investment group, concurred, adding that although the Fed indicated there would be three small rate hikes in 2016, he expects they won’t come that quickly.

“Our economists think it will be a slower process,” Sharma said. “The Fed does not want to exacerbate the fragile world economy. Our sense is that rates will be lower for longer. We think the March increase will be put on hold and there will be two increases later in the year.”

Sharma said raising rates could hurt the economy but would strengthen the dollar, which would make American goods very expensive in China and elsewhere. And Europe and Japan continue to lower rates, he said, making it more difficult for the U.S. to raise them.

Sharma said rates could go up in response to a rise in inflation, but he doesn’t see that happening soon.

“The Fed’s stated objective is to keep inflation at about 2 percent,” he said. “If inflation comes back because of all this easy money, they’ll be forced to raise rates. But there’s no sign of inflation; in fact there’s signs of deflation, like oil prices. Our general sense is that rates are not going to go up in a hurry. Rates have actually come down in the last few weeks.”

Inventory Was Tight, Now It’s Tighter

According to the Massachusetts Association of Realtors (MAR), inventory was down 20.2 percent, to 14,875, between December 2014 and December 2015.

There are essentially three major factors affecting consumer confidence that are preventing people from putting their homes on the market, Smoke said, and to the extent these factors improve, inventory increases will follow. The most important one: home values.

“With regard to home values, we estimate that Boston is fully recovered,” Smoke said. “We’ve hit an important inflection point in the cycle. More people are feeling like it’s a great time to sell. Other markets that were the hardest hit will continue to be tight.”

Though credit requirements relaxed slightly last year, further relaxation would allow prospective buyers with good – not perfect – credit scores to qualify for loans.

“The tight credit conditions are not just holding back potential demand, but supply as well,” Smoke said. “We’ve had no material change in the credit score of closed mortgages. I’m not as optimistic on this front, but it’s not getting worse.”

Smoke said the strength of the job market also impacts consumer confidence and to the extent that it improves, local markets should also improve. Finally, he said that as the construction of new single-family homes picks up in 2016, inventory should increase.

One slight blight on the spring market may be the uptick in foreclosed homes in the state. Since the regulatory reforms of 2012 and 2014, the amount of time it takes for a property to work its way through the foreclosure pipeline has increased from, on average, 30 days to nearly five quarters. Massachusetts foreclosure petitions began to pick up significantly in the beginning of 2015 – five quarters later puts those properties directly into the spring market.

Smoke, however, believes those properties will have little effect on inventory and that the market will easily absorb them.

Low inventory may have the largest impact on this spring’s market; the expense and difficulty of building homes here has long been a challenge in the Bay State. To address that issue, the Massachusetts Association of Realtors (MAR) and the Greater Boston Real Estate Board are teaming up to promote legislation that changes zoning laws to incentivize more building. However, even if the legislation passes, it will be several years before it has a significant impact on inventory.

Annie Blatz, 2016 president of MAR and branch executive for the Brewster, South Yarmouth and Yarmouth Port offices of Kinlin Grover, noted that Massachusetts is “bucking the nationwide trend” of oversaturated markets with softening prices and an abundance of inventory.

“With regard to inventory, it will continue to be a challenge,” she said. “However, we’ve seen 3 percent growth in first-time homebuyers and we anticipate that demand will be up in 2016. One of my agents just had a first-time homebuyer in her 60s. She had been renting the same house for 25 years.”