Lots of talk this weekend among Boston bloggers about a possible housing bubble. Derek at The Third Decade notes a couple of recent Globe and Times articles and wonders if there really is a bubble: “[W]hat’s the real likelihood that there’ll be an implosion or a bursting of the so-called bubble (famous last words, right)? I can imagine a slow down in other areas of the country, but here in the dense, urban Northeast, it seems unlikely that there’ll be a sudden drop or change in the housing market.”
Charley of the Blue Mass Group, meanwhile, worries about the housing shortage:
A real problem is that we really don’t know how to develop property properly around here to soak up demand. In Chicago, there are 20+ miles of lakefront, all along which are high-rise apartment buildings. Downtown, these are for the rich, but north and south of downtown these are affordable for middle class people: teachers, social workers, cops. They’re perfectly decent places to live. In MA we’ve got nothing comparable to that. We’ve got tremendous density in this area, but because of zoning laws, labyrinthine affordable housing requirements, and old-fashioned NIMBYism, we can’t build our way out of the bubble.
I left a comment at Derek’s site on why I think there might indeed be a bubble (summarizing my posts here). But let me respond to his and Charley’s broader (and valid) point that there’s something special about the density of Boston that makes our housing prices particularly high now. There’s all of the reasons that Charlie lists, of course, and having seen the Mission Hill Neighborhood Association fight a well-designed apartment/condo building on an ugly unused plot of land, I don’t think NIMBYism will fade anytime soon. On top of that, I have to recommend as required reading MassInc’s 2002 article on the role that education funding has in restricting housing supply. Like Charley, I’d like to see housing prices fall more in line with median income and like Derek, I’m realistic enough to expect that the city will continue to be expensive as long as a large number of people put demand on a limited number of places.
But it’s worth maintaining a conceptual distinction between the housing shortage and a housing bubble. If there is a bubble, it’s because low interest rates and unrealistic expectations of asset appreciation lead home buyers to borrow more in mortgages and to pay more than they should. Prices get built up, even as rents stay stable or decline. In that sense we can’t build our way out of the bubble, we simply have to wait to see what happens when interest rates go up and the amount that the median buyer thinks he or she can pay for a house starts to stagnate or go down. The housing shortage in eastern Massachusetts allows the bubble to have exaggerated effects - after all, markets in smaller cities in the middle of the country are not experiencing the dizzying heights of CA, DC or MA. Ultimately, though, a shortage and a bubble might not be the same thing, even if they’re happening at the same time.
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