The Best Places to Live 2006: Buyer's Market
The “softening” of the real estate market in Massachusetts spells welcome relief for buyers used to paying through the nose for a shack. But you’ll want to read this before buying—or selling—a home right now.
Jane Roper and her husband, Alastair, weren’t exactly planning on going house-hunting in the fall. Back then, they were sitting pretty in a rented apartment in West Medford while the winds of Katrina were lashing Louisiana, gas prices were skyrocketing, and consumer confidence was plunging. Not exactly the best time to be looking for a house. And not the best time for the landlord to come and tell them he might be selling—and, by the way, not to slam the door on their way out.
Rather than go through the hassle of finding another apartment and throwing away more money on rent, the 31-year-old ad copywriter and novelist and 32-year-old musician decided it was time to buy. “It was kind of a good kick in the pants for us,” Jane Roper now says. That kick, however, became more like a hearty pat on the back when they started looking at properties and realized there were benefits to being alone in the market. “Nothing was moving. Things were just dead,” Roper says. “We saw houses that would drop $10,000 per week just waiting for buyers.”
The young couple found exactly what they were looking for in a single-family Dutch colonial on the Medford/Somerville line. Not only did the house have a full yard and an attractive, open layout; it was just a 15-minute walk from the coffee shops and clubs of Davis Square. Originally listed at $399,000, the house had dropped in price not once, but twice by the time they looked at it, first to $379,000 and then to $369,000. That was still a stretch—but what did they have to lose?
“Our Realtor was, like, ‘I wouldn’t offer anything less than $10,000 below the asking price,’” says Roper. “We kind of held our breath and made a really low offer.” After a round of haggling, the couple signed papers in January for $348,500—a savings of more than $50,000 below the original asking price. “We felt like we got a really good deal,” Roper says. “We were psyched.” In the end, in fact, it was their real estate agent who they felt sorry for. “She was kind of lost. She had just become used to seeing everything go up, up, up, and she wasn’t sure how to coach us. She was, like, ‘I’m a stranger in a strange land. Everything’s changing.’”
That might be the understatement of the year when it comes to real estate. Suddenly, the world is looking up for buyers. But the new rules of the market have created a world of confusion for buyers and sellers alike. In fact, all parties can do well—as long as they adjust their expectations.
FOR A HOMEBUYER who just arrived from 2004, an experience such as the Ropers’ would seem more like a peyote-induced vision than a real-life real estate transaction. After all, the last time a buyer was “psyched” about the price he or she paid on a home in Massachusetts, a Democrat was president, the World Wide Web was just getting noticed, and only doctors and drug dealers carried cell phones. After a solid decade of rising home prices, the best a buyer could say was that, well, he could still afford the occasional dinner out.
Then came the news in March that for the first time in 116 months, the median home price in Massachusetts actually fell two-tenths of one percent, from $340,000 to $339,450 from the same period the year before. At the same time, the number of homes sold saw its fourth straight monthly decline, falling 21 percent between December and January—the largest one-month drop since 1995. Had the bubble finally burst?
Not exactly, says David Wluka, president of the Massachusetts Association of Realtors. “I’ve been talking with reporters for the last six months about the bubble,” he says when I ask him about it. “I’m sick of talking about the bubble.” In Wluka’s eyes, and in the eyes of many other market watchers, the real estate slowdown is a “correction,” not the kind of freefall that Massachusetts last witnessed in the late 1980s, when the real estate market saw as much gambling as a Las Vegas casino.
So what happened? Well, gravity, for one. “We can’t set a record every year, can we?” says Richard Fedele, president of Summit Mortgage, the state’s second-largest privately held mortgage lender. Add to that the consumer anxiety around the hurricane and the worsening news from Iraq this fall, both of which spooked many of the people who had been thinking about entering the market. “I don’t think there was a fall market per se,” says Fedele.
In war, it’s been said, the problem is that generals are always fighting the last one. The same could be said of real estate. The fact is, the slowdown this year is far, far less dramatic than the one 20 years ago. Back then, the steep rise in housing prices was fueled by speculators looking for a tax-free place to invest. “Plumbers were buying condos left and right as investments, figuring it was an easy way to make money,” says Tim Warren, CEO of the Warren Group, which tracks home sales. Changes in the tax code in 1986, however, put an end to the frenzy—not soon enough to prevent a massive sell-off when the economy soured, but in time to ensure that such speculation wouldn’t happen again.
By contrast, the appreciation throughout the 1990s was mostly caused by people actually buying homes for themselves—at a time when there simply weren’t enough of them to go around. So, even though home supply is now increasing due to new construction, there isn’t the same danger of a sudden flood of new homes coming onto the market. “We’re clearly seeing a softening in the market, but softening isn’t the same as collapsing,” says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard. “Home prices are sticky; they don’t fall that easily except when there is substantial overbuilding or steep economic declines.”
Warren cites one recent study that predicts the market might go down slightly, say by 1 or 2 percent by the middle of next year. He speculates that it could go down another 2 to 4 percent in 2008 and 2009. But buyers who are hanging on and waiting for a sharp decline in prices may be waiting in vain. “It’s probably not going to go beyond a couple of years and things will slowly rebound,” Warren says. The one thing that could change all this? The economy, stupid. “If I had to watch one number, it would be jobs,” says Retsinas. Adds Warren: “People have to pay for these homes. If a significant number of people lose their jobs and are forced to sell their homes, that could have a downward effect on things.”
Unless that happens, however, analysts say buyers can take advantage of the moderating prices and feel confident their own investment won’t crash-dive once they close.
DESPITE SUCH ASSURANCES, buyers don’t seem to be racing to whip out their checkbooks. Take Kate Kendall and her husband Dave Akeson. The two are renting an apartment owned by Kendall’s father in Brookline and looking to buy a home in the Route 128 area so they can be close to the city but also not far from Akeson’s job in Boxboro. Even though they already have their 20 percent down, they’re in no rush to spend it. “We’ve been watching the market come down a little bit, which has made us happy,” says Kendall. “We’re probably going to wait a bit longer to see if prices come down a little more.” Even though their budget is in the $400,000 range, they’ve been looking at houses with asking prices of up to $500,000. “We just have the breathing space to really look and find something we want,” says Kendall. “We just don’t feel like it’s a crunch right now. It’s kind of a luxury.”
Regardless of what the experts say, many homebuyers are gambling that prices will continue to go down. “Massachusetts is one of the few states that lost residents last year,” reasons Dave, another potential homebuyer who has decided to wait for now. He speculates that rising interest rates will hurt homeowners who took adjustable-rate mortgages or other more risky mortgage products in the past few years, adding to the already record number of foreclosures—and to the supply on the market. “I think this summer is going to be a housing bloodbath like we had back in the late ’80s, early ’90s,” Dave says. “I don’t think this is going to be a slow decline.”
But those rising interest rates may be an equally strong reason for buyers to get into the market sooner rather than later. After all, when it comes down to it, most homebuyers looking at a 30-year mortgage on a house they’ll sell in 10 years might as well be paying with Monopoly money. The only number that really matters is the monthly mortgage payment. “You are better off jumping on today to get the great rate,” says Fedele, the mortgage banker. “If the purchase price goes down but the interest rates go up, you might be paying more on a monthly basis.” Inside the industry, lenders calculate that a one percent rise in interest rates is about equal to a 10 percent drop in purchase price, he says, adding: “And what if interest rates keep rising and the 10 percent decline in price never comes?”
LEST BUYERS get too punchy from the deals that are out there, it’s important to remember that this area still has some of the highest real estate prices in the country. Despite the new softness in the market, home prices in some communities stubbornly continue to rise, thanks to good schools, transportation, and location. In 2004, only one Greater Boston community, Weston, had a median home price of more than $1 million. Last year, three others—Lincoln, Brookline, and Dover—joined it. Another 12 towns now have median home prices of over $700,000.
Moving back to Boston from Connecticut, obstetrician Ben Hamar and his wife, Vanessa Allen, a social worker, were looking for a place to live that was close enough to Boston so Hamar could rush into the city for emergencies, but that would still provide good schools for their two children. The couple closed last month on a three-bedroom house in Newton originally listed for $935,000, but which they were able to negotiate down to $850,000—a drop that would have been unthinkable a year ago. Any way you slice it, though, it was by no means a bargain. “I’m comfortable paying what we’re paying, [but] it’s a lot more money than the house would have gone for just a few years ago.” Even at that price, the house needs work—a fact Hamar is betting will work in his favor in the end. “We’ll be able to put some money in, and, if we ever wanted to sell the house, we’ll get that money back.”
For buyers who aren’t as handy—or aren’t as willing to wait until the market’s next inevitable upswing—it’s best to buy in a neighborhood that will hold its value. (See accompanying pull-out chart to compare how each town’s median home prices have fared over the last five years.) It was location that helped Nancie Freitas, a fortysomething VP of an e-mail marketing company, settle on the house. After all, while Freitas was happy to see home prices dropping, it also made her worry that those prices could continue to fall after she and her husband, Paul Priola, bought. In the end, it came down to a choice between two houses: a ranch in Newton that was in perfect condition but in a less desirable neighborhood, and a Cape that “needed a little lipstick and rouge” but was just a few blocks from Needham Center. They ended up choosing the house in Needham, negotiating the price down from $580,000 to $562,000. “We decided that location was going to speak louder through time than the condition of the house,” Freitas says. “We plan on turning it around pretty quickly, so we were interested in retaining its value.”
For couples with children or who prefer a quieter community, the game is often to find an affordable house in a suburb with the best access to the city. Young homebuyers who can’t afford to buy in Weston, or even Wayland, are going father afield, to Natick or Hopkinton. Those who can’t afford Winchester are heading out to Chelmsford or Tewksbury. And those who can’t afford Milton are snapping up homes around Brockton and Bridgewater. In the past five years, the towns that have held their values best are those on the South Shore, which has better access to the city than towns to the north. In the past year, the areas of hottest appreciation have drifted even farther from Boston, describing a semicircle roughly following I-495 from Franklin in the south through Hudson and Marlborough in the west and to North Andover in the north. Median home prices in towns in the inland North Shore, which has larger house lots and less direct access to the city, however, have remained mostly flat.
AND IF YOU’RE trying to sell? Some strategies are obvious: “At the very least, walk through the house as if you were a buyer,” says Wluka. “Three years ago people would forgive some things because they wanted the house so badly. Now the buyer has more choices, so you are not the only game in town.”
The other advice professionals give may be harder to swallow: Don’t shoot for the moon. “If the Realtor says I don’t think we should list it for $350,000, they should think about what the Realtor is saying,” says Warren. “Properties that sit on the market for a while get stale and unattractive. That invites unrealistic bids, where buyers are saying, ‘Let’s see how desperate they are.’” Despite the cost, a good real estate agent can help find that price point where a property will sell without going too low. A good place to find one is to see which open houses in your community are packed with people—a sure sign that the listing agent is doing something right.
Experts predict that those open houses will be crowded again this season; buyers, they say, will return like robins at the start of spring. “I think we’ll see a tremendous spring market. There is a huge amount of pent-up demand,” says mortgage banker Fedele, who says his company now has more preapproved buyers than ever. “As [buyers] start to understand that Armageddon isn’t happening, they’ll come back,” says Wluka. Still, he says, “sellers have had to go through a learning curve.”
Given how changeable the market is, it may take some time for buyers and sellers to figure out again what works. For the past few decades here in Boston, we’ve all become used to cycles of booms and busts with epic highs and startling lows. We’re less used to what a normal market looks like. The hardest lesson to take away from current trends is that, at least for the time being, it’s not about making money or gambling with prices or interest rates. It’s about finding places to live.
Jane Roper and her husband, Alastair, weren’t exactly planning on going house-hunting in the fall. Back then, they were sitting pretty in a rented apartment in West Medford while the winds of Katrina were lashing Louisiana, gas prices were skyrocketing, and consumer confidence was plunging. Not exactly the best time to be looking for a house. And not the best time for the landlord to come and tell them he might be selling—and, by the way, not to slam the door on their way out.
Rather than go through the hassle of finding another apartment and throwing away more money on rent, the 31-year-old ad copywriter and novelist and 32-year-old musician decided it was time to buy. “It was kind of a good kick in the pants for us,” Jane Roper now says. That kick, however, became more like a hearty pat on the back when they started looking at properties and realized there were benefits to being alone in the market. “Nothing was moving. Things were just dead,” Roper says. “We saw houses that would drop $10,000 per week just waiting for buyers.”
The young couple found exactly what they were looking for in a single-family Dutch colonial on the Medford/Somerville line. Not only did the house have a full yard and an attractive, open layout; it was just a 15-minute walk from the coffee shops and clubs of Davis Square. Originally listed at $399,000, the house had dropped in price not once, but twice by the time they looked at it, first to $379,000 and then to $369,000. That was still a stretch—but what did they have to lose?
“Our Realtor was, like, ‘I wouldn’t offer anything less than $10,000 below the asking price,’” says Roper. “We kind of held our breath and made a really low offer.” After a round of haggling, the couple signed papers in January for $348,500—a savings of more than $50,000 below the original asking price. “We felt like we got a really good deal,” Roper says. “We were psyched.” In the end, in fact, it was their real estate agent who they felt sorry for. “She was kind of lost. She had just become used to seeing everything go up, up, up, and she wasn’t sure how to coach us. She was, like, ‘I’m a stranger in a strange land. Everything’s changing.’”
That might be the understatement of the year when it comes to real estate. Suddenly, the world is looking up for buyers. But the new rules of the market have created a world of confusion for buyers and sellers alike. In fact, all parties can do well—as long as they adjust their expectations.
FOR A HOMEBUYER who just arrived from 2004, an experience such as the Ropers’ would seem more like a peyote-induced vision than a real-life real estate transaction. After all, the last time a buyer was “psyched” about the price he or she paid on a home in Massachusetts, a Democrat was president, the World Wide Web was just getting noticed, and only doctors and drug dealers carried cell phones. After a solid decade of rising home prices, the best a buyer could say was that, well, he could still afford the occasional dinner out.
Then came the news in March that for the first time in 116 months, the median home price in Massachusetts actually fell two-tenths of one percent, from $340,000 to $339,450 from the same period the year before. At the same time, the number of homes sold saw its fourth straight monthly decline, falling 21 percent between December and January—the largest one-month drop since 1995. Had the bubble finally burst?
Not exactly, says David Wluka, president of the Massachusetts Association of Realtors. “I’ve been talking with reporters for the last six months about the bubble,” he says when I ask him about it. “I’m sick of talking about the bubble.” In Wluka’s eyes, and in the eyes of many other market watchers, the real estate slowdown is a “correction,” not the kind of freefall that Massachusetts last witnessed in the late 1980s, when the real estate market saw as much gambling as a Las Vegas casino.
So what happened? Well, gravity, for one. “We can’t set a record every year, can we?” says Richard Fedele, president of Summit Mortgage, the state’s second-largest privately held mortgage lender. Add to that the consumer anxiety around the hurricane and the worsening news from Iraq this fall, both of which spooked many of the people who had been thinking about entering the market. “I don’t think there was a fall market per se,” says Fedele.
In war, it’s been said, the problem is that generals are always fighting the last one. The same could be said of real estate. The fact is, the slowdown this year is far, far less dramatic than the one 20 years ago. Back then, the steep rise in housing prices was fueled by speculators looking for a tax-free place to invest. “Plumbers were buying condos left and right as investments, figuring it was an easy way to make money,” says Tim Warren, CEO of the Warren Group, which tracks home sales. Changes in the tax code in 1986, however, put an end to the frenzy—not soon enough to prevent a massive sell-off when the economy soured, but in time to ensure that such speculation wouldn’t happen again.
By contrast, the appreciation throughout the 1990s was mostly caused by people actually buying homes for themselves—at a time when there simply weren’t enough of them to go around. So, even though home supply is now increasing due to new construction, there isn’t the same danger of a sudden flood of new homes coming onto the market. “We’re clearly seeing a softening in the market, but softening isn’t the same as collapsing,” says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard. “Home prices are sticky; they don’t fall that easily except when there is substantial overbuilding or steep economic declines.”
Warren cites one recent study that predicts the market might go down slightly, say by 1 or 2 percent by the middle of next year. He speculates that it could go down another 2 to 4 percent in 2008 and 2009. But buyers who are hanging on and waiting for a sharp decline in prices may be waiting in vain. “It’s probably not going to go beyond a couple of years and things will slowly rebound,” Warren says. The one thing that could change all this? The economy, stupid. “If I had to watch one number, it would be jobs,” says Retsinas. Adds Warren: “People have to pay for these homes. If a significant number of people lose their jobs and are forced to sell their homes, that could have a downward effect on things.”
Unless that happens, however, analysts say buyers can take advantage of the moderating prices and feel confident their own investment won’t crash-dive once they close.
DESPITE SUCH ASSURANCES, buyers don’t seem to be racing to whip out their checkbooks. Take Kate Kendall and her husband Dave Akeson. The two are renting an apartment owned by Kendall’s father in Brookline and looking to buy a home in the Route 128 area so they can be close to the city but also not far from Akeson’s job in Boxboro. Even though they already have their 20 percent down, they’re in no rush to spend it. “We’ve been watching the market come down a little bit, which has made us happy,” says Kendall. “We’re probably going to wait a bit longer to see if prices come down a little more.” Even though their budget is in the $400,000 range, they’ve been looking at houses with asking prices of up to $500,000. “We just have the breathing space to really look and find something we want,” says Kendall. “We just don’t feel like it’s a crunch right now. It’s kind of a luxury.”
Regardless of what the experts say, many homebuyers are gambling that prices will continue to go down. “Massachusetts is one of the few states that lost residents last year,” reasons Dave, another potential homebuyer who has decided to wait for now. He speculates that rising interest rates will hurt homeowners who took adjustable-rate mortgages or other more risky mortgage products in the past few years, adding to the already record number of foreclosures—and to the supply on the market. “I think this summer is going to be a housing bloodbath like we had back in the late ’80s, early ’90s,” Dave says. “I don’t think this is going to be a slow decline.”
But those rising interest rates may be an equally strong reason for buyers to get into the market sooner rather than later. After all, when it comes down to it, most homebuyers looking at a 30-year mortgage on a house they’ll sell in 10 years might as well be paying with Monopoly money. The only number that really matters is the monthly mortgage payment. “You are better off jumping on today to get the great rate,” says Fedele, the mortgage banker. “If the purchase price goes down but the interest rates go up, you might be paying more on a monthly basis.” Inside the industry, lenders calculate that a one percent rise in interest rates is about equal to a 10 percent drop in purchase price, he says, adding: “And what if interest rates keep rising and the 10 percent decline in price never comes?”
LEST BUYERS get too punchy from the deals that are out there, it’s important to remember that this area still has some of the highest real estate prices in the country. Despite the new softness in the market, home prices in some communities stubbornly continue to rise, thanks to good schools, transportation, and location. In 2004, only one Greater Boston community, Weston, had a median home price of more than $1 million. Last year, three others—Lincoln, Brookline, and Dover—joined it. Another 12 towns now have median home prices of over $700,000.
Moving back to Boston from Connecticut, obstetrician Ben Hamar and his wife, Vanessa Allen, a social worker, were looking for a place to live that was close enough to Boston so Hamar could rush into the city for emergencies, but that would still provide good schools for their two children. The couple closed last month on a three-bedroom house in Newton originally listed for $935,000, but which they were able to negotiate down to $850,000—a drop that would have been unthinkable a year ago. Any way you slice it, though, it was by no means a bargain. “I’m comfortable paying what we’re paying, [but] it’s a lot more money than the house would have gone for just a few years ago.” Even at that price, the house needs work—a fact Hamar is betting will work in his favor in the end. “We’ll be able to put some money in, and, if we ever wanted to sell the house, we’ll get that money back.”
For buyers who aren’t as handy—or aren’t as willing to wait until the market’s next inevitable upswing—it’s best to buy in a neighborhood that will hold its value. (See accompanying pull-out chart to compare how each town’s median home prices have fared over the last five years.) It was location that helped Nancie Freitas, a fortysomething VP of an e-mail marketing company, settle on the house. After all, while Freitas was happy to see home prices dropping, it also made her worry that those prices could continue to fall after she and her husband, Paul Priola, bought. In the end, it came down to a choice between two houses: a ranch in Newton that was in perfect condition but in a less desirable neighborhood, and a Cape that “needed a little lipstick and rouge” but was just a few blocks from Needham Center. They ended up choosing the house in Needham, negotiating the price down from $580,000 to $562,000. “We decided that location was going to speak louder through time than the condition of the house,” Freitas says. “We plan on turning it around pretty quickly, so we were interested in retaining its value.”
For couples with children or who prefer a quieter community, the game is often to find an affordable house in a suburb with the best access to the city. Young homebuyers who can’t afford to buy in Weston, or even Wayland, are going father afield, to Natick or Hopkinton. Those who can’t afford Winchester are heading out to Chelmsford or Tewksbury. And those who can’t afford Milton are snapping up homes around Brockton and Bridgewater. In the past five years, the towns that have held their values best are those on the South Shore, which has better access to the city than towns to the north. In the past year, the areas of hottest appreciation have drifted even farther from Boston, describing a semicircle roughly following I-495 from Franklin in the south through Hudson and Marlborough in the west and to North Andover in the north. Median home prices in towns in the inland North Shore, which has larger house lots and less direct access to the city, however, have remained mostly flat.
AND IF YOU’RE trying to sell? Some strategies are obvious: “At the very least, walk through the house as if you were a buyer,” says Wluka. “Three years ago people would forgive some things because they wanted the house so badly. Now the buyer has more choices, so you are not the only game in town.”
The other advice professionals give may be harder to swallow: Don’t shoot for the moon. “If the Realtor says I don’t think we should list it for $350,000, they should think about what the Realtor is saying,” says Warren. “Properties that sit on the market for a while get stale and unattractive. That invites unrealistic bids, where buyers are saying, ‘Let’s see how desperate they are.’” Despite the cost, a good real estate agent can help find that price point where a property will sell without going too low. A good place to find one is to see which open houses in your community are packed with people—a sure sign that the listing agent is doing something right.
Experts predict that those open houses will be crowded again this season; buyers, they say, will return like robins at the start of spring. “I think we’ll see a tremendous spring market. There is a huge amount of pent-up demand,” says mortgage banker Fedele, who says his company now has more preapproved buyers than ever. “As [buyers] start to understand that Armageddon isn’t happening, they’ll come back,” says Wluka. Still, he says, “sellers have had to go through a learning curve.”
Given how changeable the market is, it may take some time for buyers and sellers to figure out again what works. For the past few decades here in Boston, we’ve all become used to cycles of booms and busts with epic highs and startling lows. We’re less used to what a normal market looks like. The hardest lesson to take away from current trends is that, at least for the time being, it’s not about making money or gambling with prices or interest rates. It’s about finding places to live.