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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Real estate appraisals can be used to serve a wide range of purposes: selling, buying, refinancing, or settling an estate. However, the most common goal of an appraisal is to establish the market value of a property. Although the concept of market value (sometimes also called Fair Market Value) is frequently mentioned in the real estate business, it is not always understood. It is type of value opinion among others definitions of value. It is essential to define what market value represents to understand its relevance to an appraisal.

What Is Market Value?

Market Value has multiple definitions and varies by state and region. The one most commonly used by appraisers is given by Fannie Mae, but USPAP encourages appraisers to “identify the exact definition of market value, and its authority, applicable in each appraisal completed for the purpose of market value.” Generally speaking, market value assumes several conditions:

• A buyer and seller who are well informed, act in their own interest, and not under duress
• The property is exposed for a reasonable period on the open market
• The payment is made in cash or equivalent, excluding cash or non-cash incentives

These conditions are not always met in real life, which is why the price a property might reach on the market is not necessarily its fair market value. For example, a seller may need to move out of the area by a specific date and sell the property for a price lower than it might have reached had it stayed on the market longer.

The market value of a property is not a price opinion or a price prediction. It is an opinion of value that typically falls within a range. Therefore, the market value of a property may differ from one appraiser to the next.

As the market (and the condition of the property itself) may change quickly, the market value can also evolve. The market value given in a report is a snap shot in time, which is why appraisal reports are only valid for a limited time. The effective date of the appraisal is traditionally the date an appraiser visited the property, but not necessarily. For example, if the appraisal is ordered to settle an estate, the effective date would be the date the owner passed away.

For most non-commercial properties, appraisers assess the market value by comparing the subject property to similar buildings comparable in location, features, age, etc., that sold recently. However, such comparables are not always available, and the appraiser may have to adjust the different properties used to match the subject.

The appraiser may also be confronted with a changing market (appreciating or depreciating) that sometimes affects the market value of the property. An influx of comparable properties in foreclosure or short-sale could lead to a declining market, while property prices might increase artificially in a bidding war in an area in demand. In this case, the appraiser must conduct a thorough market analysis and adjust the comparables accordingly.

Market Value: One of Many Types of Valuation

Even though establishing the market value of a property is the most common purpose of an appraisal assignment, especially if the report is to be used by several parties, it is far from being the only one. Market value is occasionally confused with other opinions of value, which are often more specialized.

The tax assessed value of a property is calculated by the municipality, for property tax calculation purposes. It is determined by the assessor using various methods, from market value to computerized models and assessment rates, depending on the jurisdiction. The after repair value (ARV) of a property is a projection estimating the market value of a property after renovations have been completed. Thus, comparables are not the properties in similar condition to the subject in the present, but after the projected improvements.

If the property is distressed, the purpose of an appraisal may be to determine the value of a property if it was to be sold quickly rather than after a customary exposure period on the open market (disposition or liquidation value). For an income-producing property, an investor might be more interested in its value based on cap rate than in its market value.

Interpreting the Report

Defining market value is a crucial part of any appraisal assignment as the price a property may sell for is not always its fair market value. In order to prepare an accurate report, it is important to keep in mind the purpose of the assignment, as values differ according to intent and usage. For the recipient of the appraisal, understanding the definition of market value will assist in interpreting the report and why the valuation may vary depending on the scope of the appraisal.

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