What’s going to happen with Boston real estate? In the coming weeks, months, and years, is it going to go up, down, or sideways? Is it time to buy or sell?

One thing’s for sure: No one knows. No one has a crystal ball, and there are countless factors that can affect property values.

However, in this article we’ll summarize the most salient points that most economists are talking about, and discuss what we think might happen with the Boston real estate market.

Boston, MA Real Estate Market Values over the Past Ten Years

• 2011: $400k
• 2012: $400k (+/-0%)
• 2013: $410k (+2%)
• 2014: $440k (+7.5%)
• 2015: $480k (+9%)
• 2016: $515k (+7.5%)
• 2017: $550k (6.7%)
• 2018: $610k (10.9%)
• 2019: $615k (+1%)
• 2020: $625k (+2%)
• 2021: $660k (+5.6%)

There’s a popular maxim that reads “the best predictor of future performance is past performance.”

When it comes to certain investment classes, this idea has been thoroughly debunked — but it largely holds true for certain areas in the real estate market. After all, the three biggest rules for real estate are location, location, location — and Boston still regularly ranks as one of the best cities to live in in the United States, and the world:

• Boston comes in at #13 according to BestCities.org
• The US News and World Report puts Boston at #18 in Best Places to Live in the US.
• Deutsche Bank ranks Boston as #1 in terms of “Quality of Life” in the US, and #8 in the world.

That doesn’t mean Boston will grow at the same rate as previous years. In fact, we think there’s some reason to believe that the days of fast growth are behind us — and there’s even the possibility of a looming crash.

All-Time Low Interest Rates Are Driving Up Prices — But Boston’s Growth Lags Behind the Average

To anyone even remotely involved in real estate, this shouldn’t come as a shock.

Interest rates are at decade-lows. According to Freddie Mac, one of the nation’s largest federally-backed mortgage companies, the rate for a 30-year fixed mortgage is at 2.8-3.0%. The average over the past 30 years has fluctuated anywhere from 3.5-6%.

However, the median sales price for all homes in the United States is up 14.3% year-over-year, while the picture in Boston looks a bit more bleak: only up 2.9% year-over-year. Personally, at Boston Appraisal Group, we’ve noticed a significant price decline in the downtown market, which could possibly signal an incoming crash.

Why might this be?

Great Migration Spurred by the Work-at-Home Movement

Some people have predicted that, due to the pandemic, work-at-home might just become the new normal. Two-Thirds of Massachusetts office workers said they would prefer to keep working at home even after the pandemic. With more people working at home, that might drive less business toward the city center.

After all, if you could buy a house for $200k in the suburbs 45 minutes away from Boston and the same house would cost you $800k to live in the city, if you’re working from home, it simply doesn’t make sense to shell out another $600k (unless you really want to lock in a big loan on a low interest rate).

A Lack of Migration into Big Cities

But even more importantly, while small numbers of residents might be moving out of Boston to the less-expensive suburbs, there’s another problem: more people aren’t moving in to take their place. Policy Economist Stephen D. Whitaker asked the question, “Did the COVID-19 Pandemic Cause an Urban Exodus?” in a recent research study. He tracked migration patterns using an anonymous survey that tracks Americans with a credit file (which includes 9 out of 10 Americans).

In and around the Boston area in particular, there’s a 15% change in outflow, meaning that 15% more people are moving out of Boston than they usually would, but also a 20% decrease in inflow (so 20% fewer people are moving into Boston than normal). The result? A 36% total decrease.

Many big cities, including Boston, have relied on a steady inflow of migrants to drive growth. But with lockdowns forcing many people at home and a workforce that’s gotten used to the idea of working from home, it might mean that the Boston real estate market isn’t poised for the same growth that it’s seen over the past ten years.

Conclusion: Boston, Massachusetts Real Estate Market Analysis

Over the past ten years, Boston market values have only gone up. If you bought a house in Boston in 2010, it’s increased by nearly 60% in value YTD. That’s one great investment.

But past performance is no indication of future success.

With interest rates at decade-lows, housing across the United States has been having its best year in a long time, but Boston real estate isn’t quite seeing the same level of gains, and that could be due to a number of factors.

At Boston Appraisal Group, we’ve noticed a downtrend in some of the sale prices in the downtown market, and we think it could — in part — be attributed to the overall migration patterns of the city in general: some people are moving out, but, even more importantly, fewer people are moving in, causing a 36% decrease in total migration.

Whether or not that indicates a coming crash is anyone’s guess. It’s also entirely possible that, as people become vaccinated, they start pouring back into big cities, eager to spend their savings on all of the world-class restaurants and cafes that an award-winning city like Boston has to offer.

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Boston’s real estate market is booming. This spring, sale prices for condominiums and single-family homes in the city reached all-time highs while its median rent is among the highest in the country.

Unsurprisingly, both long-time and would-be residents are being priced out of the city. As a result, some affected parties are already pushing for the reintroduction of rent control — Massachusetts outlawed this policy statewide in 1994, but the housing crisis has encouraged revisiting this practice.

But is rent control the solution to the current housing shortage in Boston?

Boston’s Housing Market Is Struggling to Keep Up With Growing Demand

According to a study released by the National Low Income Housing Coalition, the typical Massachusetts renter would need to earn $33.81 per hour to be able to afford a 2-bedroom apartment. Meanwhile, the average renter’s hourly wage stands at $20.72.

This disparity shows that Massachusetts, especially Boston, is facing an undeniable shortage of affordable housing, with many residents being priced out of the market. A controversial study estimates that 43 evictions take place daily in Massachusetts. Although this number seems grossly inflated, affordability remains a concern for the state’s current and potential inhabitants. Homelessness is on the rise statewide, partly due to the increase in housing prices.

Interestingly, this scarcity of affordable housing hasn’t deterred new residents from flooding Massachusetts’s real estate industry. The State is currently struggling to keep pace with the intense demand for new apartments, with Boston pulling in more people than it can accommodate. That’s because the city has a dynamic job market and also attracts a large number of students, many of whom want to remain after graduating, contributing to the escalating rent. Besides, some blame the growth of the “internet-based service firms” (IBSFs), like Airbnb, for the surge in rent prices and unit shortage.

The Boston City Council will be up for election in November 2019. A result of the housing shortage, expected rent hikes have provoked increasing unrest among residents, and there is a passionate debate over reinstating rent control.

Despite being voted out by a statewide ballot initiative in 2004, rent control was a popular measure in the places where it was enforced: Boston, Cambridge, and Brookline. Gentrification is now reaching into former working-class neighborhoods like the South End and Jamaica Plains. A bill proposing restrictions on the eviction of seniors without just cause is already underway.

Alternative Solutions to Rent Control

Rent control is not a straightforward solution. Its opponents recall many of the issues that lead to its elimination 25 years ago. Without the incentive to maintain their property, landlords would defer maintenance indefinitely. Not only would buildings themselves decrease in value, but entire neighborhoods could suffer from neglect.

Due to the perceived limited return on investment, builders would shy away from constructing new multi-family buildings. Additionally, tenants would hold on to their units to keep the favorable rates, further reducing the number of apartments available to newcomers.

Thankfully, after years of unbridled growth, Boston’s real estate market is showing signs of regulating itself. Listing numbers are increasing, and the property prices are now growing at a much slower pace. Foreign investments, one of the driving forces behind Boston’s real estate market explosion, have also stagnated.

Apart from market self-regulation, there are alternatives to rent control to make housing more affordable. Investments in the transit system could improve Boston’s dreaded commute, attracting residents further out of the city. Relaxing the notoriously tight building regulations would also be an incentive for investors to create more affordable housing rather than focusing on high-end units. Finally, urban residents are changing their lifestyle and switching from single-family homes to the less expensive micro-units and co-living.

Market Self Regulation

Boston’s real estate market is finally showing evidence of auto-regulation, so rent control and its associated issues are not an end-all solution. On its own, rent control can’t solve a problem as complex as housing affordability, and it’s worth taking the time to explore other options.

What’s your take on rent control?

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The housing market across the country, and especially in Boston and New England, is experiencing a growth trend that’s accelerated over the last few years. The median home and condo prices in the U.S. have dramatically risen, reaching a record high in early 2019. Despite the continued appreciation, both real estate economists and the general public are starting to worry about the shadow of a second recession (the dramatic downturn of 2007 still on their minds). With this apprehension in mind, we’ll discuss some of the things to expect from the housing market in the second half of 2019, going into 2020.

The Housing Market Is Going Strong… for Now

The year 2019 started with a bang, and this wasn’t even news. Ever since 2012, home prices have been on the rise, reaching unprecedented numbers in some markets. The Greater Boston Area is a good example: in March 2019, the median price for single-family homes hit a record-breaking $377,000. According to the latest CoreLogic HPI Forecast released in May 2019, home prices have increased by 3.7% year over year from March 2018. This trend may continue into the next year with home prices expected to increase by 4.8% on a year-over-year basis from March 2019 to March 2020. Also, the Case Shiller Home Price Index in the United States reached an all-time high of 215.68 Index Points in April of 2019.

There are several other encouraging factors. One of them is the arrival of a new pool of homebuyers (the Millennial generation) on the housing market. Despite their reputation for refusing to settle down, Millennials⁠—compared to older generations⁠—account for the greatest share of primary home loan originations. This number should continue to increase as more and more members of this age group reach their prime home-buying years. Low interest rates continue to support strong demand, and experts anticipate these rates will remain low for the foreseeable future.

After estimating in late 2018 that 30-year mortgage rates could reach 5.1% for 2019, Freddie Mac revised this estimate down to 4.3% and projects it will remain low in 2020 at 4.5%. Finally, unemployment rates are minimal as well at 3.7% in June 2019, a minor increase from a 49-year low of 3.6% in the previous month.

Housing Market Growth May Be Slowing Down

The housing market is starting to show signs that the unbridled growth of the past few years may be coming to an end. This will be a relief for aspiring buyers burdened by dwindling inventory, high prices, and competition, particularly in hot markets like the Bay Area and Greater Boston.

The number of listings available on the market has progressively improved in recent months across the country, with unsold inventory reaching a 4.3-month supply at the current sale pace. This is an improvement from the 4.2 months of supply of the previous month, but still a long way shy of the six months’ supply required in a balanced market. Although house prices remain on the rise, they are increasing at a slower pace than they have in recent years.

This gradual upturn in the quantity of available housing does not necessarily mean that new buyers will find suitable housing wherever they want, as affordability remains a major concern in many markets. The San Francisco Bay Area, Seattle, Los Angeles, San Diego, and Boston are still out of reach for most buyers despite an increase in inventory and a reduced number of bidding wars. The rise in stock is not always due to the appearance of new listings, but also the result of properties sitting on the market. In New England, the increase in the number of listings—especially in the single-family home market—is barely keeping up with the demand boosted by favorable mortgage interest rates. The best-faring markets in this area are the ones that remain relatively affordable for most buyers, notably Rochester, NY.

Rising Prices and Diminishing Affordability

The real estate market is by nature cyclic and it is clear that the housing market will not maintain this pace in the long term. As a result, economists and homeowners are wondering how sustainable the current housing trend is, with numerous experts pointing to 2020 as the onset of the next recession.

In many cities across the country, housing prices are back to (if not above) their pre-2008 levels, and potential buyers are struggling to secure reasonably priced housing. This affordability issue is a key reason many industry stakeholders believe the real estate market is due for a correction, particularly in inflated markets.

It is unlikely that we will see a real estate crash comparable to the one we experienced a decade ago. Firstly, lending requirements (which were one of the critical factors of the 2008 financial crisis) are very different today. Also, the market’s key players are continually learning from past mistakes; banks now apply strict standards to select potential borrowers. Appraisers who reported feeling pressured by lending institutions in 2007 have been working towards establishing appraiser independence and higher education requirements to improve industry standards.

Should You Be Worried About the Housing Forecast?

Trends indicate that the market will slow down in the short term–to the relief of home buyers dealing with the listing shortage and high prices. However, the chances for a 2008-like real estate crisis are remote. If an economic crisis takes place, it will most likely be due to political and financial factors rather than the state of the housing market.

Where do you think we’re headed?

Please leave a comment with your thoughts and questions:

The post Market Outlook for 2019 and 2020: Trends to Watch appeared first on Boston Appraisal Services.

From eliminating disposable straws to banning single-use plastic bags, reducing human impact on the environment is at the forefront of many citizens’ minds in recent years. As a result, the real estate industry is progressively adopting ecology-minded trends, resulting in the gradual emergence of green buildings (both commercial and residential) across the country. Green buildings are defined as properties that use renewable energy and efficient building materials in their operation, construction, and design to create positive impacts on human and environmental health. One of the key technologies that embody this growing shift towards sustainability is Photo Voltaic (PV), otherwise known as solar panels. Although we can rejoice that the green building movement is becoming more mainstream, the question of whether or not this energy source and other green features add value to a property is still up in the air.

Property owners are often surprised when the time comes to estimate the fair market value of their green building. Many appraisers believe that these green features, although expensive, add little value to the property, while potential buyers find these features appealing and valuable. This dichotomy between the perceived value of the property and the one reflected in the appraisal can lead to many issues when selling or refinancing. Let’s explore how solar panels and other green features add value to real property.

Solar Panels and Other Green Features Are a Good Investment

The good news for owners of green buildings is that several studies demonstrate that they tend to sell for more than the average property. In the residential world, a 2015 report from the Lawrence Berkeley National Laboratory concludes that houses equipped with solar panels sell for $14,329 more on average than a non-solar comparable property, which represents a 3.74% increase. Other recent reports support these findings, with green homes selling, on average, for 2.19% to over 8% more than traditional buildings, depending on the property’s features and location.

Given the significant investment that these features represent, particularly if they are added once the building is already built, the previously mentioned numbers seem low. However, the most compelling argument for installing solar panels or other eco-conscious elements in a building remains that they pay for themselves in the long run, as the owners save money every month on their energy bill. For commercial buildings, green features like solar panels can significantly decrease their operating expenses. Additionally, tax credits for commercial and residential buildings are an added incentive for those who install energy-efficient products or renewable energy systems in their property. Finally, as technology progresses, these elements will become not only more efficient but also more affordable.

With analysts predicting that energy prices will continue rising in the coming years, it is likely that green features, such as photo voltaic, will become more widespread and something that buyers will demand and be willing to pay more money for.

The Other Side of the Coin: The Appraisal Process Doesn’t Always Reflect the Contributed Value of Green Features

Sometimes, appraisals do not reflect the perceived value of these improvements, to the dismay of building owners.

This is due in part to the fact that, to establish the market value of a property, appraisers must present in their report comparables with similar features to support the opinion of value. Although green buildings are becoming more popular in some markets, often at the initiative of the state—for example, California’s goal is to have 33% renewable energy by 2020 and 50% renewable by 2030—they are still scarce in many parts of the country. In the absence of green comparables, appraisers have little evidence to conclude that solar panels and other features add value to a building.

To objectively derive the additional value that solar panels contribute the property, appraisers turn to the discounted cash flow (DCF) method. DCF consider the present value of the future cash flows (or savings) that the array will generate over a given period of time.

While DCF is useful, some appraisers lack the specialized training needed to fully consider the value of these features. They have little incentive to educate themselves on the subject, especially if green buildings are not prevalent in their area and if the chances that they will need to value one are slim. Appraisers specializing in green buildings exist, but they can be few and far between in geographic areas where green technologies have yet to catch up.

Finally, with the constant changes in technology, the information required by an appraiser to evaluate the added value of each feature accurately is not always available. Some features are not visible to the untrained eye, and unless the owner informs the appraiser of which elements are present on the property and their characteristics, he or she may easily miss them.

Keeping Up with Green Trends: Appraisers Are Catching Up Quickly

Nevertheless, with more green buildings constructed, bought and sold every day, the issue of finding appropriate comparables will diminish over time. Moreover, the appraising community is making a conscious effort to catch up with these trends. Companies are offering specialized training to educate appraisers on the different features to take into consideration when valuing a building and how to incorporate them in an appraisal.

The Appraisal Institute (AI), which is the largest professional association of real estate appraisers in the United States, released “The Residential Green and Energy Efficient Addendum” in 2011 (updated in 2017) to help appraisers communicate the green features of a property transparently and efficiently in the appraisers’ reports. AI is also at the forefront of green building education for appraisers with its Valuation of Sustainable Buildings Professional Development Program.

How can building owners ensure that green features are reviewed in an appraisal?

Appraising a new feature is always a challenge, and it can take time for the perceived value to be reflected in the appraisal, based on sales comparison. Builders, homeowners, and real estate agents should prepare to provide the appraiser with all the documentation necessary to identify the characteristics of each green feature and prove that these features contribute to the value of the property by saving money every month. Detailed technical specifications, HERS rating, comparative energy bills, etc., help the appraiser to support the added value for each high-performing and energy-efficient element.

Have you encountered a situation where a building’s features were not reflected in an appraisal? How was the situation resolved?

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Given the growth of the real estate market and gradual stabilization of values as we approach the top of the market, it’s more important than ever to evaluate the equity position in our portfolios and make educated and informed decisions to keep holding or pursue an exit strategy. Appraisal plays a critical role in the investment process and can lend considerable insight to your approach.

Direction of the Market

The tenuous lending environment forces us to consider what strategy will allow us to continue receiving the greatest economic benefit from our holdings. In recent months, moves by the Fed have shown its concern that economic growth, while needing the temper of slight interest rake hikes, also needs to be encouraged to ensure strong lending activity. Over the last year, refinance volume has dropped significantly due to the interest rate increases, while purchase mortgage volume has exhibited marginal growth since last year. The availability of capital and still relatively low rates is allowing continued stability and appreciation in most markets.

Determining Value

You can easily gather an estimate of the value of real property held for income purposes using cap rate calculations based on the net income of the property. If you know the net operating income (NOI) of your asset and the prevailing rate of return demanded by local investors for your property type, location, and perceived risk, you can get an estimate of value by dividing the NOI by the cap rate. As an example, if your 4-unit multi-family generates an NOI of $124,000 and investors are seeking a 9.5% rate of return for the subject property class, the cap rate calculation would yield a value of $1,305,263.16. This is the basis on the income approach to valuation.

For strictly single-family property, the use of AVMs or automated valuation models can be of some aid. Examples include the ‘estimated’ values offered by so many public real estate listing sites. AVMs are essentially applying the substitution or comparison method of appraisal using data drawn from public sources such as market databases, tax records, and MLS data. The best approach is to request a formal appraisal to get a more precise valuation of your property based on all the available data and the experience of market experts.

Viable Exit Strategies

So how does it look? Is the value what you were expecting? How has the value of the property changed over the last 5 years, and during the term of your ownership?

If your cash flow isn’t improving or it’s at a point of stagnancy, it might be time to consider selling and reinvesting in a project with more upside. Alternatively, if you’re not ready to let it go, but see value-add potential and are willing to put in some effort and invest some cash, you can improve condition, decrease vacancy, increase rents, and pursue auxiliary revenue generation strategies.

Time to exit? You have few options: do you want to continue to earn a passive cash flow or are you ready to cash out?

If you see the market for your property improving and significant appreciation on the horizon, or if you see a value-add strategy that fits with your goals, it may be best to hold the property and make the needed improvements while the market takes its course. On the other hand, if it’s too much hassle or you see an eminent decline in value approaching, you can either fully cash out or sell and hold a note. The first may be best if you have better opportunities with higher rates of return, and the latter if you’re looking for tax deferral benefits and continued cash flow without management responsibilities. Either way, get an appraisal to know the specific market for your property and to proceed with certainty. A quality valuation can also give you an advantage in negotiations.

Following the Most Profitable Path

When considering how to move forward your investment strategy or entering negotiations with buyers and potential partners, knowing the marketing direction and your equity position gives you a distinct advantage and improves your long-term profit potential. Equipped with detailed market research, a thoughtful review of your investment strategy, and an expertly-prepared valuation, you’re in an excellent position to reap the maximum value from your property whether you choose to continue holding or pursue an exit strategy.

The post Valuing Your Income Properties. Is It Time to Execute Your Exit Strategy? appeared first on Boston Appraisal Services.

Since 2015, legislative officials of Boston have been developing legislation concerning residential evictions in the city. Even though that legislation has failed to advance in the Massachusetts legislature, its proponents continue to work on a revised version for 2019. Residential real estate values are likely to be affected whether or not the bill is ultimately enacted into law.

Boston Apartment Market Background

Boston’s soaring real estate market has increased the demand for affordable residential units and reduced their supply. The average apartment rental rate in the Greater Boston area rose from $1,752 in 2015 to $2,152 in 2018. While apartment construction is increasing, much of that new supply is aimed at prosperous young professionals. Developers are buying up older housing stock, in anticipation of redevelopment. Consequently, tenants in those older buildings have limited options, with their rents rising sharply until the buildings are demolished for reuse.

In 1994, a coalition of Cambridge landlords led a successful referendum to have rent control banned in Massachusetts. The landlords claimed that existing rent control suppressed new multi-family residential construction; 51% of the state’s voters agreed with them. This belief was vindicated by following years’ construction: from 1998 to 2001, 2,569 multi-family residential permits were granted in Boston compared with 420 from 1991 to 1994.

Eviction Legislation History

The growing loss of affordable housing in 2015 caused Boston neighborhood activists to press for legislation to extend renters’ rights. A proposed ordinance would require landlords to report tracking evictions, only evict tenants for a few specified reasons, and engage in non-binding mediation with tenants for any rental increment beyond 5 percent. No city councilor would sponsor the legislation, primarily because it appeared to reinstate rent control.

The housing reform bill was again proposed in 2016. Supporters of the legislation dropped the mediation requirement from the 2015 proposal. Boston landlords continued to oppose the legislation; they claimed the reasons for their objection were the costs of reporting and the possibility of being targeted by advocacy groups when reported evictions were made public. Once again, this proposal did not advance.

In 2017, another rental reform package was proposed. Part of that package was the ‘Jim Brooks Community Stabilization Act,’ named after a late Boston social justice advocate. The act would require landlords to report evictions, but it would prevent those data from becoming public. City officials could then present soon-to-be-evicted tenants with legal and relocation aid. But the act did still include a list of specific reasons—or ‘good causes’—under which landlords could begin eviction proceedings. Subsequently, public hearings were held by the Boston City Council Committee on Community Relations. After the proposed act was strongly opposed by both landlords and some tenants, it was referred back to committee.

An amended version of the act was passed by the Boston City Council in October 2017. Most of the provisions of the 2015 proposed act were gone. The approved act only requires landlords to notify the city of evictions and allows the city to inform tenants of the tenants’ eviction rights.

Because Boston is a home rule state, the act was presented to the Massachusetts legislature in January 2018. The bill was sent to study in May 2018, thus, effectively killing it. Legislators rejected the act because, as presented, they weren’t allowed to amend it. Also, they were aware that landlords and real estate developers viewed the bill as the first step into reenacting rent control.

2019 Proposals on Boston Tenant Rights

Boston Mayor Martin Walsh released his current agenda for the Massachusetts legislature on January 7, 2019. His list includes three proposed acts to help residential tenants facing eviction. The first act would provide certain low-income tenants facing eviction with court-appointed attorneys.

The second act, focused on Boston’s elderly population, resembles the 2015 proposed tenant protection legislation. It would prohibit ‘no-fault’ eviction of anyone over 75. Landlords would be required to provide notice to the local community at the same time the eviction notice is served to the elderly tenant. Eviction would only be permitted for good cause such as failure to pay rent, damage to the property, or use of the premises for illegal activities. Rent increases would be limited to five percent per year for tenants aged 75 or older to prevent landlords from using large rent increases to get around just cause protections. This would apply to all properties with six or more rental units.’

The third act would give tenant associations of multi-family residences larger than five units the right of first refusal to purchase those residences at fair market value. This would provide tenants with the ability to match any bona fide offers on buildings including their apartments.

Effects on Residential Rental Property Market

All three of the proposed acts are currently in committee; their eventual disposition is uncertain. In the short term, that uncertainty could cause Boston’s residential real estate investors to hold off any purchases until the legislative issues are clearer.

If the bills behind these proposed acts become available for comment, there is likely to be heated public reaction. Landlords and real estate investors will undoubtedly object to the public release of eviction notices, the effective brake on rental rates, and a list limiting just causes for evictions. All of these would increase management and ownership expenses. The five-percent rent raise limit would reduce potential gross income and suppress new investment. Current and potential investors in Boston’s multi-family residential market should stay alert to news about these and other proposed legislation. Trade organizations and well-informed sales professionals will be especially helpful in keeping investors up to date on legislative actions regarding this bill.

The post Boston’s Proposed Just Cause Eviction Legislation: Facts and Effects appeared first on Boston Appraisal Services.

The demand for all types of real estate in New England reflects region-wide economic factors. While the national economy influences geographical real estate values, some 2019 trends unique to New England are especially important to buyers and investors. These trends include labor characteristics, financial considerations, and population behavior.

Employment

Unemployment in New England is currently 3.7%, a significant drop since the post-recession level of 8.7%. New England’s job gain rate over the last year was 1.5%, compared to a national rate of 1.7%. Massachusetts and New Hampshire experienced the highest job growth in 2018, while Rhode Island’s and Maine’s employment numbers were virtually unchanged, and Vermont’s jobs shrank slightly.

Average wages throughout New England increased in the last year at an average rate of 2.6%. This increment was marginally lower than the national average of 4.7% but still positive for each of the region’s seven states. Wage growth in both Massachusetts and New Hampshire surpasses the national average.

New England, particularly the Cambridge area of Massachusetts, is seen as an excellent source of skilled labor. The technology industry has traditionally benefitted most from a wealth of well-educated workers. In recent years, major growth witnessed in the life sciences industries (including pharma and biotech) has made these sectors the strongest segments of New England’s economy.

Cost of Living

A downside to this regional employment growth is an elevation in living costs. Specifically in the Boston area, the cost of living increased by 2.5% in 2018. Housing represented the greatest portion of that increase: shelter costs rose by 4.7%. Market prices for natural gas and dairy products also grew sharply.

Recent interest rate increases have also hiked the cost of living in the New England area. The Federal Reserve increased its short-term lending rate by a quarter-point, to 2.5%, in December 2018. At its January 2019 meeting, the Federal Reserve suggested that rates would stay level for the coming year.

The current rate for a fixed 30-year mortgage in New England ranges from 4.40% to 4.50%, according to bankrate.com. This is slightly below the U.S. average of 4.54%. However, uncertainty about the near future of the American economy leads experts to conclude that residential mortgage rates will increase in 2019. Also, the recent federal government shut-down hampered consumers’ confidence. Economists expect the U.S. economy to slow in the coming months in response to tariffs’ damaging effects on some trade markets. Great Britain’s imminent exit from the European Union (the infamous Brexit) has also reduced investors’ expectations for 2019.

Consumption, Work, and Commuting

Lifestyle changes are affecting real estate demand. U.S. online retail shopping increased by nearly 13% between 2017 and 2018. Online purchases represented 9.8% of all retail sales at the end of 2018; this is more than 200% of what was attributed to online shopping in 2010.

Furthermore, labor models are rapidly changing. While unemployment continues to be low, the rate of new hires is also low. Statistics for the number of independent contractors and gig workers in the U.S. economy are scattered and inconsistent. But by many measures, non-employees are increasingly becoming a crucial part of the workforce. The most recent Bureau of Labor Statistics (BLS) analyses suggest that some 7.5% of the U.S. labor force are independent contractors, and another 6.4% are on-call, temporary, or gig workers.

Unfortunately, the BLS has not standardized its collection methods for this segment of the labor force; the Federal Reserve estimates that as many as 75,000,000 Americans, or 46% of the workforce, work in ‘non-traditional’ arrangements. Independent contractors and gig workers often escape the burden of commuting. In New England, that burden is noteworthy: Boston ranked first in 2018 for hours lost and cost per driver, due to traffic congestion.

Trends’ Effects on Real Estate Markets

All the economic trends mentioned influence demand for New England real estate. Increases in mortgage rates and relatively high prices will likely slow single-family home sales. These same forces are further intensifying demand for residential rental property.

Congestion, high office rental rates, and constantly improving telecommunications are driving large employers out of city centers, increasing demand for suburban office spaces. The ongoing growth in technology and life science industries is escalating businesses’ need for campus office properties that include laboratories and storage spaces. The proliferation of independent contractors and remote workers is also heightening demand for co-working offices near residential and retail developments.

The growth of online retail commerce is causing substantial changes in the commercial real estate market. Demand for traditional bricks-and-mortar stores of all kinds is declining. Consumers expect ever faster delivery of retail goods and services; this trend has increased demand for dispersed distribution hubs to speed up last-mile delivery. Thus, opportunities abound for investors who are looking for the ‘next new thing.’
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The post Economic Trends Affecting New England Real Estate in 2019 appeared first on Boston Appraisal Services.

What is the process when private real estate is needed for public projects? ‘Eminent domain’ is the label frequently used to describe that process, and its basis lies in the U.S. Constitution. All U.S. states, including Massachusetts, have their respective statutes regarding the state taking private real property. Although eminent domain’s application has expanded in recent decades, it is now a contentious issue in many regions. This latest controversy means appraisers currently have a critical role in the eminent domain field, working for private property owners and public entities. When eminent domain plays a part in an appraisal assignment, both the appraiser and client need to be aware of the unique requirements of this kind of practice.

What Is Eminent Domain?

‘Eminent domain’ is the legal term for a government’s legal authority to take private property and convert it to public use. The process of eminent domain is also called condemnation. This power is granted to American governments by the Fifth Amendment of the U.S. Constitution, which also requires that a government that takes private property must offer the property owner equitable indemnity. Courts have traditionally considered just compensation as fair market value for the property taken. The U.S. Supreme Court has defined fair market value as “… the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”

Dissecting Massachusetts’ Property Condemnation Laws

Massachusetts law further regulates eminent domain within the state. That law does not limit the kinds of uses for which governments can employ eminent domain. In 2005, the U.S. Supreme Court upheld a government’s right to condemn real estate for private development. The decision sparked debate about appropriate uses for eminent domain. Contested uses include those for private redevelopment, sports stadiums, and recreational trails. The issue often revolves around whether the term ‘public use’ includes public improvement or public benefit. Since 2005, 44 states have enacted laws that limit their uses of eminent domain. Massachusetts is not one of those states.

Redevelopment funded by government is sometimes called ‘urban renewal.’ Areas targeted for urban renewal are often described as decayed or blighted. Massachusetts, Vermont, and Maine have specific laws regulating the urban-renewal process. Massachusetts’ Department of Housing and Community Development administers an urban renewal program to help municipalities establish redevelopment authorities.

Similarly, local governments often constitute specific boards or authorities to oversee redevelopment projects in their areas. The Boston Redevelopment Authority directs urban renewal in defined areas of a city, totaling about 3,000 acres. There are similar authorities throughout New England, including in Bangor, Lewiston, and Springfield.

Eminent Domain Expertise

An appraiser can provide a value estimate either for an eminent domain authority or a property owner. When working for the condemning authority, the appraiser may have a role in estimating project costs, preparing appraisals to establish just compensation offers, or serving as an expert witness in court proceedings. Likewise, the appraiser might be retained by the owner or the owner’s attorney after the appraiser has estimated value for a property owner. If the property owner and condemning authority can’t negotiate just compensation agreeable to both parties, they usually proceed to court. In that situation, the appraiser is often seen as an expert witness, and he is almost always hired by the owner’s attorney.

Appraisal assignments for eminent domain require special training and experience. The appraiser must be familiar with valuing partial property rights, such as easements and rights-of-way. He should also be well-informed about the applicable laws of where the taking occurs: these may affect both the market value definition and the admissibility of comparable sales. In an eminent domain court case, the appraiser acting as an expert witness may be asked to provide court testimony. This service demands the appraiser possess excellent public presentation skills and thorough knowledge of court procedure.

Advice for Consumers and Practitioners

Eminent domain has a specific and complex history. The U.S. and Massachusetts both have laws governing the taking of private property for public use. The traditional application of eminent domain is for building highways, utility lines, and public safety projects. Eminent domain also has a role in urban renewal, where a local government seeks community improvement by acquiring and redeveloping a property. Expanded use of eminent domain—for individual developers, sports facilities and trail corridors—has gained public scrutiny. Appraisers serve the eminent domain process by providing estimates of fair recompense, for public entities and private property owners. This service is a specialized area of appraisal practice. Appraisers need extra training to be competent in eminent domain issues and public testimony. Sometimes, an appraiser’s most crucial role is advising a prospective client to seek legal help before ordering an appraisal for just compensation.

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The digital age has disrupted many traditional businesses. Ridesharing has upset the taxi business; online marketplaces have, to a large extent, replaced newspaper classified ads. Residential real estate markets are flexing to accommodate fast-growing short-term rental companies such as Airbnb and VRBO. Owner-occupied homes now have the potential for limited rentals; houses purchased for investment may have alternative rental opportunities. Well-informed and competent real estate appraisers account for this new rental model in their residential appraisals.

Is Short-Term Rental the Highest and Best Use?

The first criterion in establishing a property’s highest and best use is whether a use is permissible. States and cities in the U.S. are placing legal limitations on short-term rentals. Massachusetts now has a statute that explicitly addresses short-term rentals; Boston also recently enacted laws for such rentals. In addition, some homeowners’ associations and condominium projects regulate short-term rentals.

In Massachusetts, owners whose short-term rentals exceed 14 days in a year must pay a 5.7% room tax. All short-term rental properties must be state-registered, and all must have liability insurance. The Boston ordinance is even stricter: only owner-occupants may offer short-term rentals, and only one unit per residential property is allowed. Owners must provide contact information to both the city and tenants, and they must notify owners of adjoining properties when these property owners register for short-term rental.

Assuming short-term rental is permitted for a property, its appraiser must ensure that the property’s location is in an area that generates demand. The property should be easily accessible and have features attractive to regular renters.

Short-Term Rental Appraisals: Which Value Approach Is the Best?

The sales comparison approach assumes that comparable sale properties are similar to the subject. Therefore, the appraiser should confirm whether comparables are used for short-term rental. Afterward, these comparables must be adjusted to account for differences in potential rent income.

The income approach assumes that a property’s net income has a measurable relationship to its most probable sale price. But in Massachusetts, especially Boston, short-term rental alone may not be adequate to reflect a property’s worth. In that situation, short-term rental income might be considered complementary, not a primary value indicator.

If there appears to be adequate income to justify an income approach, the appraiser must be sure to account for vacancy, both between rentals and during low market seasons. Also, short-term rental will accrue extra expenses, such as for cleaning, advertising, and marketing.

Conclusion

Appraisers should consider short-term rental as a potential use for many single-family residences. Laws, ordinances, and legal use limitations must first be explored. For properties where short-term rental is allowed, subject property’s location, design, and features must be appropriate. In valuing those properties with their short-term rental included in highest and best use, appraisers must be careful in using the sales comparison approach to select comparable sales that have similar potential use. Adjustments for differences in use are critical since these likely figured in buyers’ choices. In the income approach, appraisers may find that capitalized income for houses with short-term rental potential still doesn’t equal value; in those cases, income may be a complement to value rather than a primary value indicator. In estimating short-term rental income, appraisers must account for vacancy and rental turnover and all expenses incurred to accommodate short-term renters.

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If you’re involved in the mortgage business, you may be feeling the recent industry concern regarding the fall in mortgage volume. While volume has made some small rebounds in September, the overall trend is toward a decline with a year-over-year drop in volume of 18%, and 39% for refinances.

Interestingly, according to MortgageOrb, the refinance share of the mortgage market increased to 32%, up from 29% in July. What does that say? We can only speculate that it might mean purchase mortgages may be declining in volume faster than refinance loans (contrary to the prior YoY figure) and/or the September bump in volume was enough to increase REFI marketshare.

Why has refinance volume and purchase mortgage activity declined? There’s no simpler explanation than rising interest rates and the resulting decline in demand due to rising financing costs. According to Freddie Mac, rates are anticipated to rise to over 5% by year end. Other factors include limited housing inventories and bearish investment due to the rising cost of capital and advancement in the market growth cycle.

According to CNBC, the majority of homeowners in the US have existing loans with rates below 4%. Considering this, we can hypothesize that the still limited need for refinance is even less due do the high refinance rates of the recent past that have already served/saturated the majority share of the refinancing market.

This situation is further complicated by the fact that rising rates are deterring homeowners from pursuing refinancing to take cash out or finance renovations. Borrowers are turning to second mortgages and home equity lines of credit to get the funds they need and to avoid refinancing into a higher interest rate on the full balance of their first loans.

So what does all this mean for the mortgage business and the future of REFIs? These cycles are typical and this time around, it’s not likely to be as severe due to consumer protection legislation, such as the Dodd-Frank Act, passed since the Great Recession. Additionally, many of the volatile market conditions such as the excesses in subprime lending and availability of credit aren’t present today to the extreme and detrimental degree as in the period leading up to 2007.

We’ll likely experience continuing rate increases, interspersed with brief periods of cessation where rates decrease slightly and REFI volume makes a short-term rebound. Once the economy cools in the next few years, the FED will cut interest rates and we’ll experience new growth in mortgage lending, especially refinances.

If you’d like to talk with the team and I about what’s happening with the economy and local market, please give us a call or hit the chat button to the right. Btw, that’s not a chat-bot, it’s actually us.

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