Boston Real Estate Market Update - February 2025

My optimism that mortgage rates are going to head lower is increasing. We've been waiting for two years for rates to come down. I have not been optimistic that it was going to happen anytime soon.

That optimism hit its lowest point between September - November 2024, when we saw that the Federal Reserve decreased the Federal Funds Rate, but the 10-year responded by increasing. That was not good. We covered this more in depth in the November newsletter (see - Fed Cuts Rates, Mortgage Rates..Rise..?).

Let's break down the jargon once more:

• Federal Funds Rate: The rate at which banks borrow from eachother overnight to ensure they have the minimum deposits on hand as required by law. This is the rate people refer to when they talk about the Fed "cutting rates". This is a short-term rate.

• 10-Year: A note issued by the US Treasury representing the amount of interest an investor would receive if they held the note for 10 years. This is a long-term rate, and it is influenced primarily by long-term inflation expectations and more generally, the long-term economic outlook.

• 30-Year Fixed Mortgage Rate: The rate a homebuyer would get on a 30-year fixed mortgage. This roughly follows the 10-year, since it is a long-term rate.

30 Year Fixed Rate Mortgage Average in the United States. Source: Federal Reserve Bank of St. Louis

Federal Funds Effective Rate. Source: Federal Reserve Bank of St. Louis

So why my renewed optimism? Long story short, and I'll spare you the details, I believe the long-term economic outlook of the United States is improving. Will we ever see rates as low as we did in 2020-2021? I remain less optimistic about that.

My personal musings only. This is not investment advice.

This has drastically important implications for the real estate market. If long term rates do proceed downward, this will:

• Make refinances more palatable to homeowners that purchased from 2022 - present

• New mortgages would be more affordable, which would drive home prices up

• I believe it will also unlock new inventory, as homeowners locked into low mortgages are reluctant to sell.

There are other factors to consider as well, such as inventory.

As regular readers of my newsletter know, inventory in the greater Boston area has been a struggle for years. Even before the pandemic there were problems. The market here has not recovered since, and this has resulted in continued price support.

Below graph for reference. Greater Boston real estate inventory as of January 2025 was about the same as it was in January 2024 and even less than it was in January 2023.

Active Listing Count in Boston-Cambridge-Newton CBSA. Source: Federal Reserve Bank of St. Louis

There are some reasons for optimism that this will change. Massachusetts policy makers, such as Governor Maura Healey, are attacking the supply-side problem through making it easier for people to build housing units. In a coming newsletter (next month or the following), I am going to cover the new Massachusetts Accessory Dwelling Unit (ADU) law that took effect just ten days ago.

As part of this I will also cover the MBTA Communities Act, which was enacted to promote multifamily housing developments near transit hubs where local zoning ordinances may otherwise prohibit them.

I bring these up only to say that, tying things back to the earlier points on interest rates, I believe, for a variety of reasons, that interest rates will continue to be the primary driver of supply/demand in Massachusetts' real estate market.

I don't expect a big supply "unlock" until rates come down significantly.