According to housing data recently released by Standard & Poor's, U.S. home prices fell for the 17th month in a row with most regions showing the effects of the housing slowdown. The report for Massachusetts is mixed, but in general the housing market has shown some stability. This is in part due to a stable local economy. According to the Massachusetts Benchmarks Current Economic Index, the Commonwealth's economy grew by 4.7% during the first quarter of the year, which is faster than the national average. This is the highest growth rate here since the second quarter of 2003. The report further indicates that 5,000 jobs were added in the first quarter, well above the pace of 3,000 for that same period in 2006. Accordingly, the greater Boston market may have a reason to be optimistic for the rest of 2007. The employment gains are particularly encouraging given that there is a re-emergence of industries critical to demand for commercial real estate.
While there is some evidence that the state's housing market has bucked the national slowdown, there are still continued reasons for concern. Overall, housing remains mostly a buyer's market, and above-average home costs and a higher cost of doing business may limit population growth. Also, according to a report by the Mortgage Bankers Association, nationally, more home owners entered the foreclosure process during the first three months of 2007 than during the record-setting final quarter of 2006. The Massachusetts market is not immune. There were more than 2,000 petitions to foreclose issued in Massachusetts in March 2007, double that from March 2006. Finally, the collapsing sub-prime mortgage market may continue to weigh down the market. According to data provided by MLS, homes purchased in the last few years with sub-prime debt represents approximately 10%-15% of all home loans. Although this is much less than the national average, if defaults continue, the market will weaken.
Each market throughout Massachusetts has responded differently to the latest economic situation. In the rest of this article we will take a closer look at the Metro Boston market. According to the National Association of Realtors, the median existing home sales price in metro Boston in the first quarter of 2007 ($387,400) was 8.1% lower than in the second quarter of 2006, with the median condo price falling 3.9% to $292,700. The data indicates that the median sales price would be greater except for a lower number of sales of smaller and cheaper units. According to the Boston Globe, condo sales fell 8% in Boston, and newly built or renovated units are selling faster than old buildings that need costly repairs or refurbishing.
According to Reis, the construction boom in the 185,648-unit Boston apartment market continued in the first quarter of 2007, with another big year for completions expected. Condo development has been booming as well, even as the for-sale housing market continues to weaken. The added supply of apartments may not bode well for the market as occupancy rates in the metro market have been declining. Vacancy in the Boston area's investment-grade multi-family market was 5.9% in the first quarter of 2007, Reis reports up 40 basis points from the prior quarter and 80 basis points from the first quarter of 2006.
The condominium market remains a wild card. A total of 543 condos were completed during the first quarter, according to Reis, with 4,612 units remaining under construction at quarter close. How many will sell, how many will be rented, and how many might be sold to investors and then rented remains to be seen. In 2004 and 2005, in contrast, the condominium boom was depressing rental vacancy by removing inventory via conversion, with 1,547 and 1,720 rental units converted to condominiums in those years, compared to just 352 in 2006. Unlike in other markets, however, conversions have not stopped completely here; 125 units made the switch in the first quarter of 2007.