August 25, 2005

Is Boston’s sizzling property market cooling?

By Jason Szep

BOSTON (Reuters) - Kathleen Cook has heard reports of a
cooling in Boston's red-hot housing market but the veteran real
estate agent has yet to see the hard evidence.

Catering to mostly wealthy investors from a harbor-front
office, Cook's agency is steaming through its inventory,
selling a 2-bedroom, 1,045 square foot (97 square meter) luxury
apartment this month for $1.1 million and gearing up for a
record year.

"We've already sold as much this year as we did last year
-- and last year was excellent. People talk about a cooling in
the market but I haven't seen it," said Cook, an owner of
Atlantic Associates Real Estate.

Talk that Boston's home market is still hot alarms Marco
Van Akkeren, an economist at PMI Mortgage Insurance Co., whose
research shows that Boston faces the greatest risk of a drop in
housing prices among 50 U.S. cities studied.

But Boston is also showing signs of a soft landing that
economists hope to see repeated elsewhere. The volume of
Massachusetts home sales fell in three of the past four months
and the annual rate of home price rises has slowed since 2000.

In the first quarter of 2000, Massachusetts ranked first in
the pace of year-on-year house price rises. But by the first
quarter of this year, it had slipped to 20th, according to the
Office of Federal Housing Enterprise Oversight.

Massachusetts data released this week reinforced the idea
of a slow seeping of air from a once-sizzling sector rather
than a bubbling market ready to rupture.

From a year earlier, sales of single-family homes slipped
7.4 percent to 5,328 in July, the third drop in the past four
months, the Massachusetts Association of Realtors said.

The median single-family home price of $375,000 was 7.1
percent higher than in July 2004, but that looks modest against
the 50 percent surge in Massachusetts home values from 2000 to
2003 -- the biggest increase in the nation.

Many economists and property experts say a 5-year boom in
the U.S. real estate market is now peaking, or close to a peak,
and expect price falls in the cities on the East and West
Coasts where buying has been most feverish and aggressive.

Some experts such as Akkeren also fear too many people are
buying speculatively, trying to cash in, causing prices to veer
sharply away from economic fundamentals and leaving hot markets
like Boston, San Francisco and San Diego at greatest risk of
price falls that could destabilize the economy.

"Home prices in Boston have diverged so much from long-term
economic fundamentals," said Akkeren, who sees a 55.3 percent
chance of Boston home prices falling in the next two years.


Akkeren backs his concern with a battery of statistics --
Boston's home prices leapt 77 percent in the past five years
against a national average of 55 percent, while wages have
failed to catch up, rising just 23 percent in the same period.

Unemployment near 5 percent is high compared to Boston's
past, while its population shrank by 20,000 people between 2000
and 2004. Recent mergers -- from Bank of America's takeover of
FleetBoston to Procter & Gamble Co.'s proposed purchase of
Gillette -- also bode ill for job growth.

"There's also the high cost of doing business -- office
rental rates are among the highest in the country," he said.

In a sign that the luxury end of the market that Cook's
agency handles is still hot, condominium sales continued to
grow at a double-digit pace in July, as the aging baby boomers
whose children have now become adults sell their suburban homes
and move to smaller, low-maintenance housing near the city.

"I think you'll see some softness in pricing at the high
end fairly soon. There is a lot of property for sale and asking
prices are really kind of wild. But not a very rapid drop,"
said Karl Case, professor of economics at Wellesley College.

"If you look at past booms that have ended in price
corrections, they really do end with a whimper not a bang,"
said Case. "Prices hold because sellers say 'I know what my
house is worth'. They pull it off the market if it doesn't
sell. Buyers low-ball. And what goes down is the number of
deals. That's what is beginning to happen," he said.

"That can lead to unemployment. It slows the economy
because a lot of people depend on those sales. But everyone is
anticipating prices are just going to fall as if it were an
auction market. It is not an auction market," he added.