Boston Real Estate Market Fall & Winter Forecast 2022

It’s clear from the data that Boston’s real estate market is showing early signs of cooling. This should come as no surprise considering the economic uncertainty we’re facing. Poor fiscal and energy policies have resounding consequences on housing markets, some directly and some indirectly. Here are 5 trends to look out for that will have an impact on real estate prices for the balance of 2022.

RISING INTEREST RATES CURBING HOUSING DEMAND

Inflation is showing little signs of slowing down according to the most recent CPI updates from the US Bureau of Labor Statistics. The consumer price index is up 9.1% since last June and the Fed is eyeing another rate hike to try to get it under control. Some are saying it might be the biggest rate increase in decades. As the Fed continues to raise interest rates, it will continue to price many buyers out of the real estate market in Boston, which will counteract price growth. Inflation’s effects on the housing market are not limited to just interest rates.

THE TRICKLE DOWN EFFECT OF POOR ENERGY POLICY

The price of diesel fuel holds heavy implications for housing markets. The year-over-year change in the price of diesel is +84.9% as of May 2022. As a result, the price of construction materials are rising by significantly larger margins than the +9.1% increase on consumer products. When diesel prices rise, so does the cost of shipping large heavy construction materials. With the extra cost of shipping tacked on to the final price tag, it increases the costs of building and maintaining properties for developers and property owners. Development companies are now paying significantly more to build new housing in Boston, which will in turn work to push prices even higher for new construction in the short-run.

LABOR SHORTAGES IN MASSACHUSETTS

Another factor impacting development companies is the labor shortage that has been prevalent since COVID. Massachusetts’ labor participation rate of 66% is down by a percentage point compared to 2019 levels and is struggling to recover from when it plummeted to 60.5% in April of 2020. When developers cannot find laborers to work, new construction projects stall. The developer carries the costs of those delays in the form of loan payments and delayed cash flow, which eventually drives up the cost of new construction housing units when they hit the market. Labor shortages also slow the addition of new housing units to the city, which is desperately needed in Boston where housing inventory shortages have driven up real estate prices in recent years. This trend will continue to limit supply and push real estate prices high in the short term, as long as housing demand holds steady. In the long run, housing demand seems less certain.

RECESSION AND ITS EFFECTS ON HOUSING DEMAND

Aside from inflation, the biggest economic concern on everyone’s mind is the impending recession. Some would argue that we’ve already entered into the recession phase, which is an inevitable consequence of inflation and rising interest rates. If we’re seeing demand for Boston real estate dropping because of rising interest rates thus far in 2022, imagine the demand destruction that would occur if we see massive corporate layoffs and downsizing in Boston’s tech sector. We’re still in the early stages of the economic downturn, so it’s difficult to forecast if and by how much real estate prices may drop in the long run.

SUPPLY CHAIN DISRUPTION AND CONSTRUCTION COSTS

Since the onset of COVID-19, we’ve seen unprecedented supply chain disruptions across all types of industries. When harsh lock-downs closed ports in China and across the world, the global distribution of goods was frozen and cargo ships were backed up in nearly all major ports. This has impacted the construction industry significantly as shipping containers are still scarce and construction materials take up a large amount of container space.

When builders can’t get the materials they need to complete projects, it delays development of new housing. That will limit the supply of homes for sale, which pushes real estate prices upwards. It also adds to the costs of developers, which in turn gets passed down to the buyer.

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