Market “softening”

Schools across the commonwealth have been back in session for only about a month, but at least one report card has already been issued. And for Greater Boston, it may be a tough one to explain to parents – or anyone else who may be seeking housing.

According to a report issued last week, housing construction in the Boston area has lagged during the last several years, leading to a sharp spike in prices and rents. In fact, the area has produced a little more than half of the housing that it needs to meet demand.

The study, the “Greater Boston Housing Report Card,” is a follow-up assessment of how the region is faring when it comes to housing production. It follows the release of a groundbreaking report in 2000 that called for the production of 36,000 new housing units over a five-year period.

Prepared by Northeastern University’s Center for Urban and Regional Policy, the report assessed housing in 161 communities in the Greater Boston region and revealed that home prices surged 50 percent in three years, while median rents jumped 39 percent in the last seven years.

While the number of households grew to more than 129,200 during the 1990s, the number of housing units increased to 91,567.

“Our production did not keep up with the need,” said Barry Bluestone, director of Northeastern’s CURP, who was one of four authors of the report. Bluestone presented the report findings to a packed audience last week at The Boston Foundation, one of the sponsors of the report. The Citizens’ Housing and Planning Association was also a sponsor.

“We’re producing [housing] at about half the rate that we did in the 1980s,” said Bluestone, who was also one of the authors of the report released two years ago, titled “A New Paradigm for Housing in Greater Boston.”

The lack of housing units to meet demand created a harsh “imbalance” that pushed home prices and rents up. As rental vacancies fell to below-normal rates – as low as 2.7 percent – rents skyrocketed. According to the report, the median rent paid in the Boston area increased from $744 in 1995 to $1,035 in 2000, an average jump of 6.8 percent each year. Rents are rising so fast that, according to the report, households earning the area’s median income can afford to pay the median rent of a two-bedroom apartment in only two of the 20 cities and towns in the heart of Greater Boston. What’s more, communities that were traditionally more affordable and housed lower-income people – like Everett, Revere and Malden – have seen their prices rise faster than some of the other communities in Eastern Massachusetts.

Thomas Callahan, executive director for the Massachusetts Affordable Housing Alliance, said the findings weren’t shocking. However, Callahan said that the report’s finding that the number of building permits issued last year, 10,158, was actually lower than the 11,719 permits issued in 1999 was “mildly surprising” and disappointing.

“It underscores how difficult the road is to get to the point where we’re producing enough units,” said Callahan.

Callahan said the findings also highlight how critical it is for nonprofit and for-profit developers as well as suburban communities to do their part in getting more housing built. That can be difficult, according to developers, because communities, particularly suburban towns, continually reject housing development.

In his own town of Milton, Callahan has urged a developer of an upscale condominium complex to set aside at least seven units for lower-income households.

“These battles are going to be fought town by town, development by development,” he said.

Correction Coming?

In terms of housing production and meeting the goals set in the 2000 report, the region has fallen short. Only about half of the annual production goal of 15,660 housing units – market-rate, subsidized and student units – was met between 2000 and 2002. Communities within the Interstate 495 area experienced the most growth in single-family housing in the 1990s, with towns like Hopkinton, Bolton and Franklin leading the way. Nine cities in Greater Boston, including Lowell and Brockton, saw their housing supply decline.

Aaron Gornstein, CHAPA executive director, said that based on building permit data he expected housing production in Greater Boston to have been higher.

“Given the anti-growth sentiment, you would think we’re being deluged with housing development,” said Gornstein.

The report did feature some positive news in terms of production. Multifamily housing production, defined as buildings with five units or more, increased from 973 to more than 2,700 between 1997 and 2001. But according to Bluestone, that was still not enough.

In addition, the number of dorm units increased from 256 produced in 1999 to an average of nearly 500 annually since then, said Bluestone. While the increase is significant, it’s still below the goal set in the 2000 report that called for the creation of 1,500 new student housing units annually.

“Production is occurring. It’s still not occurring fast enough and it’s not occurring at the level that the [New Paradigm report] said was needed two years ago,” said Edwin J. Shanahan, chief executive officer of the Greater Boston Real Estate Board.

The report comes just as some local real estate brokers and property owners are dealing with a softening rental market. Apartment vacancies are up and property owners within Boston are offering incentives like rent-free months to attract tenants.

Given the softening rental market – in both upscale and mid-range apartments – the vacancy numbers and rents will likely be different next year, said Shanahan.

“We’re seeing indications of a further softening in the market,” said Shanahan, pointing to job insecurity and layoffs that make workers more cautious about moving.

Despite job layoffs and the overall sagging economy, home prices have continued to rise. But even that’s not expected to last much longer. Many real estate experts are predicting a “price correction” – not necessarily plunging sales prices – in upcoming months, particularly if interest rates start to go up.

The estimated median sales prices of single-family home in Greater Boston rose more than 50 percent during the last three years – from $198,500 in 1998 to $298,350 in 2001 – according to the report.

By 2001, households earning the median income in their community couldn’t afford the median-priced single-family home in 112 communities, the report revealed.

Even though an average rent of $1,700 for a two-bedroom apartment and a $290,000 price tag for a single-family home sounds high, the rent and price still is not enough to cover a developer’s building costs, according to developer Patrick Lee.

Lee, who is executive vice president of Trinity Financial, was one of the speakers in a panel after the report findings were presented. Given the time-consuming and costly permitting process, and the high construction costs associated with union laborers, even if the land was provided free to the developer, the $1,700 rent would not be adequate for a builder to recoup his development expenses, Lee said.

Meanwhile, production of low-income subsidized housing dropped off since 1990 as the state continued to slash funding. The Greater Boston area has more than 146,000 subsidized housing units, which represent nearly 9 percent of the total year-round stock. Boston, Cambridge, Lowell, Lynn, Brockton and Lawrence contribute half of that number.

Comprehensive permits, issued under Chapter 40B, the state’s so-called anti-snob zoning law, have been used for about 15 percent of the affordable units that have been developed in the region since the law’s passage in 1969.

“One of the messages that comes out of [the report] is the need to preserve [Chapter] 40B because that is the vehicle that is helping to produce housing,” said Shanahan.

Gornstein echoed that point and said that there are various factors that could influence whether housing production increases in the next year or two, including the economy and priorities of the state’s next governor.

“It really depends on how the projects in the pipeline, which include many multifamily projects, fare in the next year or two,” he said. “If there is continued opposition and lawsuits to hold up affordable housing development, those [production] numbers will be the same next year or the year after … If the units move forward in the next year or two and are under construction then I think we will see a healthy increase in affordable housing production under Chapter 40B.”

Report: Greater Boston’s Housing Production Lags

by Banker & Tradesman time to read: 5 min