Today, everything has changed.
Looking at ads in a realtors' window, South End real estate is nearly as pricey as eternally fashionable Back Bay. One-bedroom condos are offered at prices just under $400,000. We're not talking about a sample of one here, we're talking pages of condos priced at nearly $500 a square foot.
Talk about sticker shock.
"What's this all about?" I ask Lucian G. Estevez, a realtor in the Coldwell Banker office behind the window ads.
"Boston has gotten too rich, basically," he says. "We're not getting as much relocation business."
I asked how sales were doing.
"It's been slow. Most of the sales are to developers, usually for condo conversion. But there are a lot of first time (condo) buyers, too, and they're looking in the range of $350,000 to $500,000, which is incredible…
"It's a very interesting market right now. A lot will depend on interest (rates). Most people buy with 3 and 5-year adjustable mortgages. It's pretty transitory. Most property turns in 3 or 4 years. People will sell and go deeper (in the South End), trying to catch the next wave."
I asked who was buying.
"It's mostly two working professionals that buy. In the late 90's it was dot-comers. But today it's financial types, people from the biotech companies, and doctors," he said.
What we're talking about here is staggering price inflation. While the gentrification of the South End in a generation is impressive, the inflation extends to virtually all of Boston and its major suburbs. Indeed, two Boston economists have told me, somewhat sheepishly, that they have made as much in home appreciation as they had earned by working.
Start thinking "bubble." The curious thing about real estate bubbles is that they may be aided and abetted by tax policy. The higher the price of real estate in an area, the greater the tax benefits the owner will collect.
It could be argued that real estate bubbles are financed by a rising tide of tax deductions. It could also be argued that more federal tax benefits flow to price bubbles than flow to the encouragement of home ownership.
You can understand this by comparing Boston, my home for 25 years, and my adopted hometown of Dallas.
Dallas has a median home price of $134,600 and a median household income of $37,464. In English that means half the houses sell for more, half for less. It also means that half the households have more income, half have less. Divide the median home price by the median household income and you get a house to income multiple of 3.6.
Boston has a median home price of $386,300 and a median household income of $44,882, a multiple of 8.6. Viewed another way, while income is about 20 percent higher in Boston, housing prices are nearly three times as high.
Now compare the tax benefits of home ownership in both cities using my online home ownership tax benefit calculator. Assuming a family income tax bracket of 27 percent, 10 percent down payment, a 4.5 percent interest rate on a 5/1 adjustable mortgage, and local tax rates of 1.0 and 2.0 percent of market value for Boston and Dallas, respectively, the median price home buyer in Dallas has total tax benefits of $41 for 1 year.
No, that's not an error.
After the first year the itemized deductions are less than the standard deduction. As a consequence, government policy doesn't spend much to encourage home ownership in Dallas. And Dallas has no home price bubble.
Now consider Boston. There, the median price homebuyer has total tax benefits of $36,523 spread over 20 years. Needless to say, those who own homes in the Boston bubble are collecting a lot more of the $110 billion in federal homeownership tax benefits than those who own homes in Dallas--- or any other low priced city.
So tell me. Is federal tax policy blowing real estate bubbles? Or is it encouraging home ownership?
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