2023 Boston Real Estate Sales Review and 2024 Forecast

2023 Boston Real Estate Sales Review and 2024 Forecast

The steep decline in real estate deals in Boston coincides with the Fed’s decision to begin raising interest rates in early 2022. This is clearly the reason for the decreased demand in the Boston real estate market.

Boston real estate prices remain high but stable

Despite the clear trend of declining demand in Boston, real estate prices did not fall in line with demand. Boston’s 30-day media sales price for all property types has consistently hovered around the $800,000 mark over the past 24 months.

Providing real estate in Boston at a turning point

This can be explained by the very limited supply of properties for sale in Boston. We reported in last year’s property market report that the number of new construction units coming onto the market had slowed significantly under the new government, a trend that has not changed in 2023. Basic economics will tell you that prices remain stable when supply falls in line with demand. That has definitely been the case in Boston over the last two years.

As of early December, the total number of properties for sale in Boston was 1,214, a decrease of -10.14% compared to the same period last year. A look at total listings over the last five years shows a clear downward trend as the city struggles to keep up with housing demand.

Trends Affecting the Boston Real Estate Market in 2024

The biggest trend weighing on the Boston real estate market will most likely be low inventory. Clearly, low supply is primarily due to: poor national energy policies, supply chain disruptions, high wages, labor shortages, higher borrowing costs, cumbersome permitting delays and high affordability requirements for new developments. All of these factors together have led to rising construction costs over the last 24 months. Let’s briefly examine some of the challenges we face in increasing housing supply in Boston.

1. Rising construction costs prevent new supply from coming onto the market

If there’s one thing Greater Boston desperately needs right now, it’s new housing stock. This applies to both the real estate market and the rental market, because the low supply leads to high real estate prices and rising rental prices. However, the cost of new construction has never been higher for developers, as high interest rates, the cost of building materials, energy costs and even labor costs have skyrocketed since the pandemic. There is also the mathematical equation of adding too many affordable units to a development, destroying the viability of the project itself. After speaking to countless developers in the Boston area; There is general consensus that a 20 percent affordability requirement is simply unsustainable to secure large-scale development deals in today’s inflationary environment. This is a simple question of supply and demand. Since we have an unfortunate mix of several negative factors at play, the developers have been sitting on the sidelines.

Most developers we spoke to say affordability restrictions should either be lifted entirely or significantly reduced over the next 24 months to increase production. If the balance sheet doesn’t add up, most developers will wait for interest rates to fall, as we have seen over the last 12 to 18 months. In order to get the supply going again, a few factors have to change.

2. Boston’s demographics are changing

Recent reports have shown that Suffolk County’s population decreased by -3.4% during 2020-2022. Conventional wisdom suggests that this should lead to lower demand for housing, but that isn’t necessarily true in Boston. A closer look at who is moving in and who is moving out paints a different picture.

Data from the US Bureau of Economic Analysis shows us that the median household income in the Greater Boston area increased by 62.93% from 2010 to 2022. This is more than double the increase in Boston’s CPI (+28.39%) over the same period, showing that low-income people are moving away and high-income people are moving to Boston.

This makes sense considering Boston has been a hotbed of venture capital in biotech and medicine over the past decade. Pitchbook’s Venture Monitor has shown that Boston has remained the second-largest market for attracting venture capital over the past six years, bringing with it many well-paying jobs and employees who can afford higher housing costs. This has largely contributed to the demand for real estate remaining high despite the overall shrinking population in Massachusetts. The demand for proximity to well-paying, high-skilled jobs coupled with transportation has kept rental and sales prices high despite high interest rates.

3. Boston’s unemployment rate is at an all-time low

After a spike in unemployment during the pandemic, Boston’s unemployment rate has returned to near pre-pandemic low levels. The current unemployment rate is 2.5%, having risen to 15.8% in April 2020. One concern for this year is that a massive wave of layoffs in the metro area could negatively impact housing demand and property prices. That definitely wasn’t the case in 2023, when all the rumors about massive tech layoffs never came true. Overall, strong job reports are one of the biggest drivers of leasing and sales occupancy. The low unemployment rate in the Boston area makes it easier to fill the few available apartments and also leads to high sales prices.

Boston Real Estate Market Predictions 2024

Looking ahead to the Boston real estate market in 2024, there appears to be no long-term supply relief locally. After 11 rate hikes since March 2022, the Fed has planned three rate cuts in 2024, assuming inflation continues to fall. This will make it easier for developers to balance development projects on paper, which should mean more new building permits for Boston in 2024. Most developers we spoke to are aiming to reduce borrowing costs by around 2 percentage points in order to move the needle and get their projects off the ground. Some have already pointed out that material costs are falling, which is a good sign.

Still, some potentially positive improvements will not produce new housing units in the short term, so housing supply is expected to remain low through at least the first half of 2024. As interest rates fall, buyers who have been hesitant will rush back into the market. This will lead to an increase in home prices through 2024. Expect average home prices in Boston to increase 3-6% in 2024, barring massive layoffs.

The city needs to find creative ways to increase housing inventory next year. Their plan to convert vacant office space into residential units is a good start, but beyond that they need to make issuing new building permits to developers a high priority. Tax incentives could certainly help, but eliminating or reducing affordability requirements would also encourage more developers to move forward and start projects. Large development projects like Suffolk Downs’ will come to market in 2024, but we need more new similar projects to get off the ground. We will continue to monitor these trends as they develop.