2023 Boston Real Estate Sales Review and 2024 Forecast

Boston’s real estate sales market stagnated throughout most of 2023.  High interest rates put a freeze on total real estate transactions. The city saw a -21.13% drop in property deals compared to 2022 and a -37.26% drop since 2021.  Despite the decrease in total sales, prices remained steady throughout 2023 on account of low inventory levels.  Here were the trends affecting Boston’s real estate market.

2023 Boston Real Estate Sales At Lowest Point In 5 Years

Total property sales took a nosedive in 2023 thanks to high home prices and higher interest rates.  Boston recorded 13,792 residential real estate sales throughout 2023, the lowest number of deals in the past 5 years by a significant margin.

The precipitous drop in real estate deals in Boston coincides with the Fed’s decision to begin raising interest rates in early 2022. This is the clear culprit of decreased demand in Boston’s real estate market.

Property Prices Remain High But Steady in Boston

Despite the clear trend of demand degradation in Boston, property prices did not decrease alongside demand.  Boston’s 30 day media sale price for all property types has hovered around the $800,000 mark steadily over the past 24 months.

Supply of Properties in Boston at a Tipping Point

This can be explained by the very limited supply of Boston real estate for sale. We reported in last year’s real estate market report that new construction units entering the market have significantly slowed under the new administration, a trend that has not changed in 2023.  Basic economics will tell you when supply decreases alongside demand, prices will remain steady.  That is definitely the case in Boston over the past two years.

As of the beginning of December, the total number of properties for sale in Boston was 1,214, down -10.14% compared to the same time last year.  A look at total listings over the past 5 years shows a clear downward trend as the city struggles to keep pace with housing demand.

Trends Affecting Boston’s Real Estate Market In 2024

The biggest trend weighing down the real estate market in Boston is most likely going to be low inventory.  Unequivocally, low supply can mostly be pinned on: poor national energy policy, supply chain disruptions, high wages, lack of labor, higher costs of borrowing, arduous permitting delays and high affordability requirements in new developments.  All of these combined factors have taken their toll on rising construction costs over the past 24 months.  Let’s quickly examine some of the challenges facing us for greater housing supply in Boston.

1. Soaring Construction Costs Preventing New Supply From Hitting The Market

If there’s one thing the Greater Boston area desperately needs at this moment, it’s new housing inventory.  That is true both for the real estate market as well as the rental market, as low supply is keeping home prices high and rental prices rising.  However, the cost of new construction has never been higher for developers, as high interest rates, cost of building materials, energy costs and even labor raters have all skyrocketed since the pandemic.  There is also the mathematical equation of adding too many affordable units to a development which destroys the viability of the project itself.  After speaking with countless developers throughout the Boston area; there is a general consensus that 20 percent affordability requirements in today’s inflationary environment is simply untenable to get development deals done at scale.   This is a simple supply and demand issue.  Since we have an unfortunate mix of several negative factors at play – developers have been sitting on the sidelines.

Most developers that we have spoken with say that affordability restrictions should either be lifted entirely or lowered considerable over the next twenty four months to increase production.  If the balance sheet does not add up, most developers are going wait for rates to come down, which is what we’ve seen over the last 12-18 months.  A few factors are going to have to change to get supply going again.

2. Boston’s Demographics Are Changing

Recent reports have shown that Suffolk County’s population has dropped by -3.4% from 2020-2022.  Conventional wisdom would tell you that this should precipitate less housing demand, but that is not necessarily true in Boston.  A closer look at who is moving in and who is moving out paints a different picture.

Data from the US Bureau of Economic Analysis shows us that Greater Boston’s median household income has increased by 62.93% from 2010 to 2022. That is more than double the increase in Boston’s CPI (+28.39%) over the same time period, which shows that low income people are moving out and high income people are moving into Boston.

This makes sense when you consider the fact that Boston has been a hotbed for venture capital in the biotech and medical spaces over the past decade.  Pitchbook’s Venture Monitor has shown that Boston has remained the second largest market for attracting venture capital over the last 6 years, which has brought with it many high paying jobs and white collar workers who can afford higher housing costs.  This has been a big contributing factor as to why demand for real estate has remained high despite an overall shrinking population in Massachusetts.  The demand for being close to high paying and high skilled jobs coupled with traffic has kept rental and sales prices high even through high interest rates.

3. Boston’s Unemployment Rate As Low As Ever

After seeing a spike in unemployment during the pandemic, Boston’s unemployment rate has all but returned to its low pre-pandemic level. Current unemployment sits at 2.5% after shooting up to 15.8% in April 2020.  One concern heading into this year is if we see a massive wave of layoffs in the metro area, it could affect housing demand and real estate prices negatively.  That was definitely not the case in 2023 where all the rumors of massive tech layoffs never materialized. Overall one of the biggest factors in rental and sales utilization is strong jobs reports. Low unemployment levels in Greater Boston make it easy to fill the few available apartments that we have and also translates into high sales prices.

2024 Boston Real Estate Market Predictions

Looking forward to the 2024 real estate market in Boston, there appears to be no long-term supply relief in site.  After 11 rate hikes since March 2022, the Fed has penciled in 3 rate cuts for 2024 assuming inflation continues to ease.  This will make it easier for builders to get development projects to balance on paper, which should mean more new construction permits for Boston in 2024.  Most developers we have spoken with are looking for about a 2 percentage point decrease in borrowing costs to try to thread the needle and get their projects off the ground.  Some have started indicating that they have started seeing decreases in material costs which is a good sign.

Still, some potentially positive improvements won’t provide new units in the short-term, so expect housing supply to remain low through at minimum the first half of 2024.  As interest rates lower, buyers who have been holding out will reenter the market, causing real estate prices to rise through 2024.  Look for a 3-6% increase in median home prices in Boston in 2024 unless massive job layoffs start to occur.

The city will have to find creative ways to add housing inventory next year.  Their plan to convert empty office space into residential units is a good start, but additionally they will have to put a high priority on getting new construction permits issued for developers.  Tax incentives could certainly help but also dropping or reducing affordability requirements would stimulate more developers to move forward and start projects.  Massive development projects like that of Suffolk Downs will begin hitting the market in 2024, but we need more new similar projects to get underway.  We will continue to monitor these trends as they develop.