Boston North Shore home prices may be in for another increase. On the heels of what has been termed an “epic housing crash” of just a few short years ago – when home values dropped nearly 35% – prices are on the rise again. In the past 12-18 months, many hot real estate markets have seen home price increases of as much as 10% or more, and home analysts expect additional new highs may be on the way. Let’s take a look at why prices may rise.

Boston North Shore home prices may be on the rise again.

Boston North Shore Home Prices May Cost More Soon

According to the National Association of Realtors (NAR), the median price of an existing home sold in May reached a record high of $239,700. The Association has been tracking prices since 1968. The home price increase is good news for homeowners who have their Boston North Shore homes for sale now or who may be contemplating selling soon. In addition, it means many homeowners just earned a few thousand dollars in additional net worth.

For others, the rising Boston North Shore home prices and the prognosis for further increases is anything but good news.

Lawrence Yu, chief economist of the NAR issued this warning about how the higher home prices may affect one segment of the potential home buying public. “We are seeing flashing yellow lights on affordability. People who are currently renting and want to convert into ownership — that’s a major difficulty,” said Yun. “Boston North Shore home prices are rising way too fast compared to people’s income and wage growth.”

The median price increase in homes for sale means, in part, that there is more activity on the higher end of the real estate market. The median price is defined as the dollar amount where half the homes sold at a lower price and half sold at a higher price. Additional price indexes measure repeat sales of similarly-sized homes show nationwide that prices are still running roughly 10% below the peak levels from ten years ago.

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Some housing analysts in their market assessment of Boston North Shore home prices contend the tight inventory available continues to restrict sales and put pressure on pricing. Conversely, near-record low mortgage interest rates and job growth help create greater demand. The result, according to the experts, is a “pressure cooker effect” and the market’s release valve – new home construction – isn’t helping to solve the problem. That point is evidenced by new home sales currently performing more than 40% below normal market levels.

According to the Urban Institute, last year over a million new households were created in the U.S., but only 620,000 new housing units were created. That shortage of more than 400,000 units has put an undue strain on both rents and home prices. Analysts say that trend will likely continue in the near future unless there are relatively quick policy changes.

Although the housing market has made great strides in its recovery from the crash of less than a decade ago, affordability is the biggest factor restraining a more complete rebound. Normally, housing would be the driving force behind overall economic growth, but it’s not. That’s primarily due to less than exciting home construction activity. Most of the construction demand has been fueled by rental demand. But, housing starts for multifamily construction are slowing down. The previous activity was mostly found in urban rental centers where rents were higher than normal and the supply has caught up with or exceeded the demand.

While the number of renters still strapped by rising rents continues to grow, the burden of affordable rent payments prevent prospective home buyers from saving for a down payment. Even though the monthly payments on homes for sale may be more affordable than rent, renters who don’t have a down payment are unable to take advantage of that opportunity.

So, what does all this mean for the existing and future housing market? We will likely see Boston North Shore home prices remain fairly high and continue to climb in some markets where sales have been brisk in the past few months. Limited supply meets high demand creating higher prices – it’s a basic economic law of supply and demand. Despite interest rates being at near-record low levels, the lending market is still considered tight by historical measurement standards. Some economists argue, in fact, that low interest rates have actually contributed to higher Boston North Shore home prices, because home buyers are now able to qualify for larger houses.

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At least in the foreseeable future, Boston North Shore home prices will likely continue to see slightly higher listing and selling prices. The first-time homebuyer will probably continue to be unable or unwilling to enter the marketplace. And for a housing market that’s been labeled “recovering,” that’s a worrisome commentary on the real estate economy. What’s worse, as NAR chief economist Yun asked rhetorically, “We are facing housing affordability challenges already with low interest rates, but what happens when the rates begin to rise?

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