A Skeptical Look at those singing “Happy Days are Here Again.”

As I told you Tuesday, FNC is my new favorite valuation system. Especially here around Boston, where house condition is a key factor in valuation, FNC gives me the best information.

The latest FNC Residential Price Index™ (RPI) shows that the recovery of U.S. property values has continued through November—the ninth consecutive month of price gains driven largely by rising homes sales and moderate economic growth.  This is consistent with the chorus of economists and Realtors® singing “Happy Days are Here Again.”

The national survey numbers are on their chart. Notice the bubble lines on the three levels of composite indexes that FNC creates. They are pretty pronounced. The songs of joy are because of the little tail of blue above the zero shaded blue year-over-year data. This indicates that the real estate market has hit bottom. The thing I like about FNC is that it is also remarking on the “why.” As in “why are we seeing a recovery in prices?” They report:

“An imbalance between rising demand and limited supply continues to be an important factor for sustained price momentum. While signs of market recovery have instilled confidence and driven up demand as potential homebuyers take advantage of low prices, the supply of homes for sale has been constrained due to rising homeowners’ expectations about a continued price increase in many fast-rising markets.”

Increased demand and limited supply is not good for my clients, the buyers. So my song is “Ain't Nothin' Gonna Break my Stride”  (Ain't nothin' gonna to break my stride. Nobody's gonna slow me down, oh-no. I got to keep on movin' Ain't nothin' gonna break my stride. I'm running and I won't touch ground. Oh-no, I got to keep on movin'…)

And now for a little fun with numbers. Go to the FNC data page. On the Filter bar, choose “All Northeast Region MSAs” Date range: January 2000 to January 2013. Then hit the green “Compare” button on the right. 

First look at Boston Metropolitan Statistical Area (MSA) compared to all the Composite Indexes above. Boston looks much less like the hump of a camel. The Boston bubble was edgier. In places without winter and places without such a huge concentration of college-affiliated employment, the seasonality is not as big a factor. So, when a composite is created, the edges wear down. The shape of the Boston area curve - going up from 2000-2006 -- has been described as an “inverted S curve.” The prices were highest in the spring market and again in the fall market. Since we hit the top, in 2005 and again in 2006, the curve has gotten more chaotic. So has my life as a Buyer’s agent. (“Ain’t nothin’ gonna break my stride…”)

The Northeast data is limited to New York and Boston. Look at Boston MSA compared to New York MSA. Boston rose faster, but not as high. Boston hit bottom sooner and has been bouncing along the bottom for the past three years. New York hit bottom in 2011, a full two years later. You can tell that these guys are from the South, since they are claiming Washington DC and Baltimore in the Southern region. Add them in and take a look. You’ll see that Boston had a pretty mild bubble compared to Northeast and Mid-Atlantic cities in this Index.

The Mid-West region had no profound bubble, except for Minneapolis. In the South, the bubble was muted in Atlanta, the Texas cities, Nashville, and Charlotte. In the West, Denver didn’t have much bubble at all. California went nuts; quite the camel hump. Southwest cities went up, and then fell much harder, due to overbuilding. 

What does this tell me? That this will be a year of high demand. A year when buyers and their agents will need to be at the top of their game to get offers accepted with reasonable terms. (“Ain’t nothin’ gonna break my stride…”)

The inventory problem

The biggest problem that my clients and I faced since the end of the real estate bubble has been the housing stock around Boston. The housing stock in Massachusetts, by and large, is old: not Colonial-era old, rather, Industrial Revolution-era old. Large tracts of housing sprang up in cities and towns throughout Massachusetts between 1880 and 1930 or so. Much of this housing stock is still here. Much of it is sturdy, wonderful construction. Some of it was built poorly. Some is not aging gracefully. Some has been well looked-after. This makes condition a wildcard.
Not only is the housing stock old. Some is run down. Some has been renovated weirdly. So, when a well-renovated property shows up on the market, it is a strange and sought-after gem, if it is a desirable size and in or near a desirable location.
There is a mismatch between the housing stock in some areas and the people who want to live there now. Much of the housing stock near the Red line was built as two-family and three-family housing. To varying degrees, the two-family housing is morphing into condos since the 1990s. The number of single-family houses is relatively small. Looking at the 02144 zip code - which is West Somerville - there are 612 single family houses, 1254 condos, and 3272 two and three family houses in the Assessor’s database. Similarly, in the Central Square Cambridge zip code -02139 – there are 771 single family houses, a whopping 4489 condos, and 1688 two-family and three-family houses.
What has happened since the recession is that more of my clients are heeding my warnings about the costs of trading up. They are looking for a place that they can keep for the long haul, either as a “forever house” of as a future investment property. My clients are not the only ones. I am seeing a very sharp divide between properties that are in the “good location” neighborhood and towns and those that are in less popular spots. I also see more people rejecting properties that are too small or too run down. The marketing difference is profound between those that are potential “hot” properties and the rest of the inventory.

Factors that are leading to “hot” housing:
Mostly, owner-occupying buyers are buying for keeps. They are reluctant to compromise on location or size, since they are there to stay. Today’s buyers are not blind to history; they don’t want to be in the next wave of buyers stuck at the top of the market.
Locations: Close to subway lines, walking distance to town centers, within a half hour commute to Boston, houses in towns with a good school reputation.
Size:  Condos: Two-bedroom or bigger, two-level, those with good yards, those with two non-tandem spots. Houses: Three-bedroom houses with three real bedrooms (not a third that is really a study,) four-bedroom houses with two full baths. Multifamily: Two-family or bigger properties that are big enough to rent for a positive cash flow.

The Two-Wheeling Commute

The fatal accident between a bicycle and a tractor-trailer in Boston last weeks brings to mind that I think it is important to check out your commutes before choosing a neighborhood. Yes, job locations change. However, you should start in a new house with a decent commute to work and other common destinations that work for you.

Ruling a neighborhood in or ruling a neighborhood out is best done before beginning to see inside of houses. It is too easy to get hooked on a great house in the wrong spot, if you house-hunt house first and location-hunt second.

Boston also boasts of being the fourth most bikeable city according to Boston Magazine's on line BostonDaily. Somerville comes in number nine in at TheStreet.com.The attention to making cities more bike friendly has increased the number of people choosing to forsake car ownership or everyday car commuting.

The question came up about whether a bicycle is the fastest way to commute at rush hour. On May 14th, 2012 Livable Streets did a test of just that. They conducted a race from Davis Square to Kendall Square: one car, one bicycle and the Red Line MBTA. The race started at 8:30 AM. Who won? The bicycle, by nine minutes over the MBTA Red Line rider. The driver was last, coming in three minutes after the subway rider. It was closer than I expected. 

If I wanted to start an argument here, I would pit the car drivers against the bicyclists and vice-versa. I regularly hear from bicyclists about the crazy drivers. I hear, even more frequently, from drivers who wish bicyclists learned how to drive.  

I tell all my clients to check their commutes before buying, the bicyclists especially. I suggest that they do a commute from their intended purchase areas to work. If they also use a bicycle for food shopping or to go to friends, they should check out those routes as well. Planning a route with a map is not enough. Bicyclists need to test out the topography. It is hard to know, whether the not-so steep, but very long rise will be too much of a barrier on a daily basis. I also suggest that bicycle commuters find an alternative transportation to work, for the days of very bad weather.

Here are some resources:

Bikemaps

Streetsmarts

CarFree in Boston

The Boston real estate market and why we live here

We certainly don’t live here for the weather, the well-built transit or roadway system, or the comfortable cost of living! Are there other reasons that you are here, facing this housing market? Are you here for the natural beauty? Cultural options? The availability of jobs in your field?

During the real estate meltdown of the past five years, I have followed articles that attempt to explain why the market here is like it is. In 2008, The Atlantic gave this theory. (If you want to read it yourself, the discussion of how talent-attracting regions are economically robust begins on page two, paragraph two.)

In short, Boston and other places like it are “brain Meccas.” For Boston, the reason cited is the colleges. We have a lot of middle class, wealthy, and/or smart young people who come here for their college education. They think fondly of this place and many try to stay. Some come back. Some college educated people from elsewhere come here based on the buzz of their friends who went to school here or for a job.

Because there is a highly educated work force, there are jobs for that work force here. Those jobs pay well. It is a bit of a cycle. Skilled workers encourage the formation of specialized jobs with good salaries, this leads to housing and services for the workers to spend on. That well-paid work force drives the economy in areas like ours. It also drives up the cost of living.

Does this theory hold water in your experience? If not, why are we all here paying much more for our homes than people in Cincinnati, Nashville or anywhere in Texas?

The Atlantic article predicted that these robust economic centers would suffer less in the bubble-burst, which is what has happened, more or less in the Boston area. Don’t get me wrong; prices fell and I am not pretending they didn’t. Comfortable housing near the economic centers saw pockets of demand through the bubble burst. This softened the landing of falling prices. Areas that were second-choice locations fell harder. Overall, the Boston metro area had a better go of it during the crash than a lot of other places in the country (and Europe.)

I look around at the FNC site, to see how other urban areas have fared. I am content to be working here, near Boston.  I am also content to be living here.

Are you content with the real estate economy around Boston? Is there a market you think is doing better, living through the post-bubble years?