Boston luxury condo market slows to a crawl (but what does that mean?)

Posted by Michael DiMella on Mon, Apr 27, 2009

This is the fun time of year when all sorts of 1st quarter real estate sales data is released (at least if you're "into" real estate data like me!).  Some sources are better than others, but as I have repeated time and time again, what is being reported in the news may not be completely representative of the market or of a particular market segment.  Hopefully, if you're a regular reader here (and if you're not, why not?! subscribe here) you can see that I try to present any market data in as clear and specific way possible so you know what particular segments of the market are doing. 

  

What did the newspaper say now?

Here is a case when the Globe got things half right, in my humble opinion.  But it's not their fault, really. They did a story Friday on the slowdown in the luxury condo market in Boston, reporting that the luxury market took a big hit in the first quarter of 2009 - large decreases in both the number of sales and prices, in fact.  Using data from the Boston Listing Information Network (LINK), the Globe had this to say:

The median selling price of luxury condos plunged 19 percent to $560,000, while sales skidded nearly 42 percent in the first quarter of this year when compared with the same period in 2008, according to data released today by the Listing Information Network, or LINK, a company that tracks the downtown Boston condo market. Sales in the city's overall condo market fell about 33 percent, and the median sales price, or midpoint price, dropped almost 14 percent to $410,000.

  

Ok, so what's so wrong about that?

Well, actually nothing, as long as you don't care about learning about the luxury market.  The Globe accurately represented the data they got from LINK, but I question whether what LINK defines as the "luxury" market actually represents the luxury real estate market in Boston.  LINK selects a set of 75 full service condo buildings in various neighborhoods and calls that the luxury market.  However some of those buildings may have relatively inexpensive sales in them, definitely not what most people would consider luxury.  For instance (and I'm not knocking Harbor Towers here at all - this is an actual sale in January '09), but is a $560,000 - $459/sq ft - condo sale in Harbor Towers (built in 1971), representative of the Boston "luxury market".  I say no.  I think condo sales above $1 million in Boston are a much better barometer of luxury market activity.  So for my purposes here, I will define luxury as downtown* Boston condo sales over $1 million. 

*Note: downtown Boston as used in this data here contains sales from the Back Bay, Beacon Hill, Fenway/Kenmore, Midtown, North End, South End, Waterfront, and West End neighborhoods.

  

Here's the real Boston luxury condo market

Maybe I'm nitpicking, because my definition of the Boston luxury condo market actually shows basically the same trend as what the Globe reported, with a small (ok, big) caveat - they reported that prices "plunged" 19% and I don't see prices declining, only the number of transactions which severely contracted.  Of course that could change in Q2 (and I'll get to that below), but as of now luxury prices are holding when looking at the 1st quarters since 2000.

Now for the graphs:

Boston luxury condo median price vs sales

This first graph shows Median Price (of $1M+ condos in downtown Boston - my "luxury" definition) on the red line, measured on the left vertical axis, and Number of Sales on the blue bars, measured on the right axis.  As you can clearly see, sales are WAY down (a trend for the past 2 years), but prices are actually up slightly.

 

Boston luxury condo year over year price changes

boston condos year over  year sales changes

These two graphs above show the Year over Year Percentage Change (change from the same quarter in the previous year) for the the first quarters of each year since 2001.  The first one shows changes in Median Price.  There is some up and down volatility mainly because of the small number of $1M+ condos in Boston being sold per quarter so the median price can be pulled up or down by a few low or high sales in a given quarter.  But as you can see - over the past 5-6 years in the first quarter, prices have been relatively flat, and there was no severe price drop this year in the luxury market. 

The second graph shows the Year over Year Percentage Change in the Number of Sales for the downtown Boston luxury market in red and in the whole downtown Boston market (any price) in green just for comparison.  Clearly, you can see the severe drop of nearly 50% in the number of luxury sales.  This is actually a larger decrease than was reported in the Globe story.  Very clearly, the luxury market has slowed nearly to a crawl and activity has decreased more than in the market as a whole.  That is a big change from the last few years.  The luxury market had been showing more strength and "holding up" the rest of the market to a degree in previous years.

 

boston luxury condos, price per square foot

One final thing I found interesting was that Median Prices for luxury condos were actually higher in 2000 than they were in 2009.  Have prices actually declined over that time?  Or is it just a change in the type of units being sold? 

Above is a graph of Price per Square Foot of the luxury market (blue line, right axis).  As you can see price per square foot has almost steadily increased since 2000, so it's a clear indication that smaller units are being sold for more money (per foot) than in 2000 when more larger units were sold for less money (per foot) but for higher actual prices since they were much larger units on average.

  

Pretty pictures, but what's this all mean?

The luxury market is at a crawl, and even more worrisome is the amount of inventory on the market in the $1M+ price range.  Right now, Downtown Boston has about 22 months of supply, meaning at the current rate of sales it will take 22 months to sell all the properties currently on the market (FYI: 8 months of supply is usually the measure of a "balanced" market).  The good news is that there is not a lot of new inventory due on the market in the near future since new development construction has very much slowed.  But will prices have to fall to get this inventory sold?

I suspect prices will have to fall to some degree, although this market segment has shown prices that are much "stickier" than in the lower priced segments.  Many high end developers and luxury sellers don't have the "need" to sell like many lower priced sellers often do.  They show much more willingness to wait for their price, and the average $1M+ property usually has a longer market time anyway, simply because fewer buyers can afford those properties.

The last word: Boston luxury condo prices will most likely fall this year, though I don't think it will be a huge fall, especially given that we are already seeing some signs of economic recovery (and lower interest rates for larger mortgages) that may start bringing more of the needed buyers into the market later in the year.

 

Do you have questions?  What are your thoughts?  Comment below!

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Tags: Condos, housing market, luxury