The Boston real estate market has seemed immune to the collapse of the real estate bubble. The asking price for a nice single family house in Cambridge is about the same as an old-but-airworthy Boeing 737. How can prices be so sticky, friends are asking?
My personal theory is that high housing costs discourage consumption, but the discouragement is much slower than for any other product. If the local movie theaters put up prices to $20 per ticket, demand would fall within weeks. If the landlords insist on a huge rent increase, however, they will almost always get it and come to believe that the new high rents will stick. Moving is a huge endeavor that people will try to put off as long as possible. If a couple is sharing a house or apartment, they may both need to find jobs in a new location, for example, which could take a year or more.
Eventually, however, people discover techniques for consuming less Boston real estate. We have bad weather, very old houses (most would be consider slum-grade in newer parts of the country where flat floors, tight roofs, and uncracked walls are standard), and slow job growth. A lot of my younger friends noticed that apartments in California were about the same price, decided that San Francisco would be a more fun place to live, and found higher paying jobs in the San Francisco area. Others will discover the virtues of moving back home with mom and dad for a few years.
Real estate does obey the Econ 101 laws of supply and demand, but with such a long delay in response that it seems to defy those laws.
The Boston area has been so built up for so long that there was little chance that an oversupply would occur as in Miami, Vegas and Cal.
Instead, people in Boston and environs were stuck with bidding up prices on the existing lot of 100 year old crappy houses with few ammenities. 🙁
Real estate is a product that under normal circumstaces cannot simply be sold immediately/dumped like a stock or bond.
The market generally takes a bit of time to produce a buyer, hence a rapid movement downward simply doesn’t occur very often in normal market cycles.
You can sell your Yahoo shares with the push of a button. Your condo in New York normally takes a while.
In my opinion this helps to create a sort of buffer against people making hasty/bad choices as far as getting into or out of the real estate market.
“real estate market has seemed immune to [… rest of post elided …]”
Liquidity. What you’re saying – and you’re right – is that real estate is not a very liquid market.
It’s also combined with very emotional buying/selling behavior. When going up everybody panics and pays too much. When going down the sellers are very reluctant to sell because selling will crystalize their loss.
What happens then is that sellers won’t sell at a loss and buyers are hard to find at prices acceptable to sellers. So the number of sales goes down for a few years because the market can’t clear.
It generally takes a few years of prices going sideways on low volume until the real (inflation adjusted) price falls enough that buyers and sellers can find mutually acceptable prices.
Occasionally this leads to disaster when “a few years” becomes more like a couple of decades. cf 1930 -> 1960