Between a pandemic likely to cause another big cultural shift and an inventory shortage unlikely to end, conditions are building for big run-ups in home prices.
Worried yet about another housing bubble?
I am.
Massachusetts home prices shot up 11.4 percent in 2020, with the median sale price hitting a record $445,000 according to The Warren Group, publisher of Banker & Tradesman, and we may well be on track for another double-digit jump in 2021.
That’s hefty, especially since Greater Boston home prices have rising steadily for most of the past decade.
Ok, it’s unlikely we will see an exact repeat of the last housing bubble.
After all, history isn’t like a rerun of a TV show, even if there are reoccurring patterns.
Each age, each decade, has its own peculiar dynamics, and the kind of rampant mortgage fraud that fueled the last bubble – complete with no–documentation loans – is not a factor in the current run-up in housing prices.
But there are some worrying signs.
Paychecks Haven’t Kept Pace
First off, is the pace at which home prices are rising.
The 11.4 percent increase Massachusetts home prices clocked in 2020 was nearly triple 2019’s 3.9 percent gain and double 2018’s 5 percent increase.
Zillow is now predicting another double-digit surge in home prices in 2021 – 10 percent nationally and nearly 10 percent in the Boston area as well.
That seems more in line with reality than some of the happy talk predictions for 2021 from the major real estate groups, which are predictably predicting a return to a more normal – though still high – rate of growth in the 5 percent range.
Seems unlikely, after a several months of torrid growth, that suddenly, just in time for the new calendar year, home prices will now automatically level off.
Rather, it seems more likely that we have entered into a new and riskier phase of the current real estate cycle.
The last time we saw double–digit price increases statewide and in the Boston area was in the run-up to the housing crash in 2008, with increases of anywhere from 10 percent over 16 percent.
Between 1999 and 2005, the median price of a home in the Bay State nearly doubled, from $174,900 to $295,000, according to a study by the Citizens Housing and Planning Association, which used numbers from The Warren Group.
But, if we are talking about a potential housing bubble, we need to look beyond home prices to paychecks, and whether buyers are stretching their finances in order to land a home in a market where bidding wars are the norm.
Prices rose three times faster than median incomes in Massachusetts from 1999 to 2010.
Well, guess what? Home prices rose more than twice as fast as wages during the three years heading into the pandemic, jumping 15 percent while paychecks grew only 7 percent.
And that gap likely only grew exponentially in 2020, when Massachusetts home prices posted double–digit gains even as unemployment spiked and paychecks zeroed out for hundreds of thousands across the state.
More Irrational Exuberance?
There are some other similarities with the housing bubble of the mid-2000s, though, since they deal with broader societal and market attitudes, they are likely a bit harder to pin down.
A cultural shift in the aftermath of the shocking 9/11 terror attacks helped fuel the early 2000s’ housing bubble by creating a craving for the comforts of home – the ultimate security – in a time of fear and uncertainty.
Fast forward 20 years and clearly the pandemic has triggered some sort of subterranean societal shift once again, with an intense desire on part of buyers for the more space and a nice big yard as well.
Sure, some of what’s driving the current home sales surge is clearly practical – if I am going to have to stay cooped up in my house 24 hours a day, I might as well have a place I truly love. And mortgages are probably as cheap as they’ll ever get.
Yet it’s also not hard to see a yearning once again to make home a place of safety and refuge in a scary, unpredictable time.
Now, you don’t have to guess what happens when you graft such deep emotions onto that old “irrational exuberance” about the performance of markets in general, including real estate, after a long run-up in prices.
The 2008 meltdown, which saw both stock and real estate prices crater, has since faded from the public consciousness, while the pandemic, as devastating as it has been for millions of workers, has boosted home prices while also failing to do anything to bring stock prices down to earth.
Scott Van Voorhis
That feeling of invulnerability – that there is no real reason to worry about home prices going down in a substantial way – is likely even stronger in the Boston area, where a shortage of housing has kept prices artificially high for decades now.
There are other, more anecdotal signs of potential bubble trouble ahead, from the huge run-up in Bitcoin prices – a mini-bubble if there ever was one – to a friend’s story of a client determined to mortgage her modest home to buy real estate in Florida.
Your guess is as good as mine how long the current explosion in home prices will last.
But like all things subject to market cycles, end it must.
Plan accordingly.
Scott Van Voorhis is Banker & Tradesman’s columnist; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.
