Market Conditions for Multi-Family Dwellings in West Roxbury, Ma

Posted by: Tim White
Posted on: Tuesday, June 26, 2007 at 5:19 am
Categories: Home Selling, Home Buying, Market Conditions, West Roxbury

There was a time, a long time actually, when the real estate market for multi-family dwellings in Boston was hot, hot, hot.

Not so much anymore.

Why the change?  Well, the short answer is that the return on investment (ROI) for multi-family properties has been marginalized.  So as not to short-change the dedicated readers of rehubbub.com, however, allow me to give you the long answer (opinion) to the question of ‘what happened to the multi-family market in Boston.’ 

First, let me attempt to explain why this market segment was so hot for so long.  In my estimation, there were two 2) primary reasons:

  1. For many years, right up until the mid-1990’s really, rental income on multi-family properties was more than sufficient to cover the cost of most owner’s monthly mortgage payment, including PMI (if applicable) and taxes.  In fact, it was often the case that this rental income, not only paid for the mortgage, insurance and taxes, but also provided the owner with residual income that was theirs to keep and do with what they wished.  Even if the owner of a multi-family dwelling was merely “breaking-even” in the sense that the rental income was only enough to carry the mortgage and related expenses, it was still a win-win for the owner.  Why?  Because the owner was not only building up equity in the property by paying down the mortgage note, but also because appreciation was adding to their property’s value.  Thus–by applying the logical equations of the time value of money–most landlords in Boston did quite well by investing in multi-families.   

However, the above mentioned conditions were no tightly kept secret–and it wasn’t long before many more people appeared on the scene who also wanted to invest in multi-family properties and realize some of the same benefits of those who came before them.  Soon, as the population of ready, willing and able investors grew, demand began to exceed supply–thus forcing values up, up, up.  So high, in fact, that the cost to finance a multi-family in Boston was no longer necessarily offset by the amount of rental income one could expect to get, even when factoring in the double-digit appreciation occurring year after year.  Thus, in this sense, ROI on multi-family investments was marginalized and it continues to be as such.

2.  Then, in the nick of time and before the multi-family market might well have gone flat, the condo-conversion craze hit the Boston real estate market, like a tsunami.  Now investors did not care so much about whether income received from rentals was enough to cover the mortgage payment, as they had no intention of keeping the property in their possession long enough to be affected by tenancy or rental income issues.  Instead, a brand new way to make money from investing in multi-family properties hit the scene–which was to convert the individual units to condominiums.  So, between the mid-1990’s, when the rental approach to profit from multi-families was hitting a financial wall, so-to-speak, through to around late 2004, investors were buying these multi-family properties in droves, quickly converting them to condos, and selling them just as quickly.  These were heady days and many investors made a lot of money through condo conversions.

But, market dynamics being what they are, with every action causing an equal and negative re-action, things changed once again.  This time, here’s what happened to the multi-family market:  Demand for multi-families exceeded supply (similar to what happened in above mentioned rental scenario #1); however, this was coupled with a new phenomenon–an oversupply, or glut, of new condos being introduced to the market, thereby creating more supply than demand forcing condo values to, at best, stabilize.  Essentially what had happened is that the multi-family/condo conversion market ended up cannibalizing itself. 

While there were other economic factors at work, those mentioned here certainly had a primary impact on the market dynamics.

So, where does this leave us?  What does the multi-family market look like today?  Suffice to say the landscape looks quite different. 

In keeping with our current theme of analyzing the Boston real estate market one neighborhood at a time, let’s turn our attention to the neighborhood of West Roxbury and look at the current state of the multi-family market contained therein.  As in previous posts on the West Roxbury market–the first of which addressed the single family market which was followed immediately by a post on the condo market –we will use as our tools the three (3) leading indicators of median sale prices, supply and demand by units, and the monthly supply of inventory (MSI) to dissect the multi-family market in order to give a sense of current condition of this market segment.

First, let’s look at the following graph which illustrates the median sales price trend-line of multi-family properties in West Roxbury over the past two (2) years:

multi-median.jpg

This trend-line is not for the feint of heart, but keep in mind the size of the multi-family market in West Roxbury represents only about 10% of the overall market at any given point in time.  With numbers this small, it is not unusual to see significant swings month over month as a single sale or two can, at times, skew the numbers.  With that caveat, this trend analysis reveals a relatively static market when compared the hay days of the late 90’s through 2004.  By the numbers, the median sales price for multi-family dwellings in May 2005 was $635,000, but in May ‘06 it fell to $497,500–a 22% drop year to year.  The good news is that there has been an 11% rebound over the past 12 months with May ‘07 median sales price at $530,000.  Similar to the single-family and condo markets in West Roxbury reported on in earlier posts, the multi-family market segment had also experienced a market correction, albeit more dramatic, the single-family and condo segments.

Now, let’s analyze this next indicator which addresses basic supply and demand over the past 24 months.

multi-supply.jpg

Again, the news is not good for the multi-family market segment in terms of overall values and number of units sold.  This indicator measures the relationship between properties for sale versus properties that have gone under contract.  The first thing that stands out here is that this has not been a very good Spring market for multi-family dwellings in West Roxbury–especially when you consider there’s only been three (3) sales in the past three (3) months.  And though the amount of inventory for has remained relatively constant over the past two (2) years, the number of properties going under contract for the last 12 months has been cut nearly in half when compared with the first 12 months between May ‘05 and May ‘06

multi-mis.jpg

Our last indicator, the monthly supply of inventory (MSI), corroborates the previous two (2) trend-lines.  That is to say, typically, when median sales prices are down and the number of properties going under contract is also down, then is many cases the amount of time it takes to move inventory off the market increases.  And this is exactly what this indicator shows.  Since May 0f 2005, the monthly supply of inventory has increased steadily increased from 2.3 months to 3.8 months in 2006, and finally to it’s current rate of 6.8 months for May 2007.

So, what’s this all mean?  Obviously, the multi-family market in West Roxbury has gone through a significant downward shift over the past two (2) years when compared with the previous eight (8) years.  Is this surprising?  Well, when you consider that, at its height, the multi-family market surpassed both the single-family and the condominium market in terms of values and appreciation rates, is it really that surprising that when the market finally corrected itself that those property values that were once at the peak of the market are now getting a taste on the other end of things?  I think not.  What will happen to the multi-family market in Boston?  Not sure–but stay tuned as we will take another look at this market segment at year’s end.

Looking for more news about the Boston real estate market? Consider subscribing to this blog's RSS feed and have articles like this delivered to your favorite feed reader whenever a new article is published.

Other posts you may find interesting

Share This

Comments

5 Responses to “Market Conditions for Multi-Family Dwellings in West Roxbury, Ma”

  1. Mr. Mojo on June 26th, 2007 5:43 am

    huh?

  2. wide*angle on June 26th, 2007 12:11 pm

    I’m beginning to experience real style, weight and substance to this person’s post’s. They are a fine example of the “value proposition” possibilities of a real estate professional. With a little research the homebuyer, homeseller or investor can find the deep market knowledgebase they are looking for. (even if they won’t admit it) The REAL DEAL; and not to be confused with the eatery of the same name although they do a good job as well.
    Bravo.

  3. DCW on June 29th, 2007 10:42 pm

    WOW! Great, content rich blog. Very detailed and informative. Thanks.

  4. maureen rossi on June 30th, 2007 6:02 am

    Hi Tim,
    Thanks I will share your report with some of my clients for a perspective of west Roxbury. By the way, even in 1979 the market rte of rent, about $150 per month, did not pay the mortgage, and taxes. Most of the time the homeowner needed about 3 years of ownership for the slowly rising rental rates ( 1980’s $400-500 per month) to equal mortgage and taxes.

  5. admin on June 30th, 2007 7:14 am

    1979?

    Pre-historic!

Got something to say?





Close
E-mail It