I have news for all the sky-is-falling types yearning for a California-style home price collapse.
It’s not going to happen here.
Yes, home prices are falling in the Bay State, with even traditional strongholds from the downtown Boston condo market to elite suburbs such as Weston and Wellesley finally starting to feel the pinch.
But there are some key differences between what happened here during the late great real estate bubble and the speculative madness that seized once-hot housing markets in parts of California, as well as Las Vegas, Miami and Phoenix, to name a few others.
Not only did we not overbuild here, we probably didn’t build enough – a major problem in and of itself, but which also ensures we won’t see the housing catastrophe the Golden State is now reeling from.
Won’t Be So Bad
A good gauge to where the market is headed can be found buried in the recent New England Economic Partnership report. While the prediction of a longer recession here made headlines, the report also offers a forecast on where home prices are headed.
Prices will continue to fall through this year and into 2010, the report forecasts. But we are looking at a modest falloff of another 5 percent or so – not the 20 percent to 30 percent plunge off a cliff some doom-and-gloomers are promoting.
“They are apples and oranges,” said Alan Clayton-Mathews, a UMass professor and economist and one of the authors of the recent New England Economic Partnership report, of the Massachusetts and California markets. “Prices fell so much in those regions because of overbuilding and speculative building. We didn’t have that here.”
Even in a downturn, the Boston area is still a tough place to buy a house, with million-dollar fixer uppers still to be found in the priciest ZIP codes.
Yet back during the bubble days, some Golden State markets – the Bay Area for one – made our inflated home prices look like a bargain. And after the bubble burst, some of the once high-flying California markets fell hard and fast.
Home prices in the San Francisco Bay area fell 41 percent over the past year, bringing the median sale price down to a stunning $304,000. That’s down from a peak of $665,000 back in 2007.
By contrast, the decline of home prices in Boston and across much of the state has been more like a steady draw down than a precipitous plunge.
Bay State home prices have declined roughly 22 percent from their peak in 2006, marking one of the longest and shallowest declines of any major metro area during this epic, housing downturn.
However, a popular read on this, especially in the overheated real estate blogosphere, has been to do some quick math and come to the conclusion, based on the California model, that Boston area prices have another 20 percent to 30 percent to fall before hitting bottom.
Nice try, but dead wrong.
Just take a look at a key statistic: new home construction.
The Golden State was churning out housing at an unbelievable rate during the peak of the market, with a stunning 208,000 new housing starts in 2005, according to the Construction Industry Research Board.
And when the housing bubble burst, the speculator-owned homes and condo units were the first to hit the foreclosure heap.
As many as half of all homes sold now in some California markets – and in various Sun Belt cities as well – are foreclosures.
Back here in Massachusetts, prices soared, but relatively little got built.
The 12,000 or so new home permits that got issued each year during the housing boom was small even by anemic Massachusetts standards, with four times that getting built here during the go-go years of the 1980s.
There simply are no sprawling tracts of half empty and foreclosed subdivisions in Natick or Weymouth to drag down prices.
And while we’ve had our share of foreclosures, they are still heavily concentrated in poor urban neighborhoods and our older industrial cities like Brockton, Lawrence and Fall River.
Our high and (at times) outrageous home prices, especially here in the Boston area, are not headed off the cliff. Rather, they are just taking a breather.
