Economics Trumps Boston Foreclosure “Deals”

Over 900,000 USA households are in the foreclosure process, up 71% from a year ago, according to a survey by the Mortgage Bankers Association. That pan-USA figure represents 2.04% of all mortgages in the USA, the highest rate in the report’s quarterly, 36-year history.  What does that mean for those looking to buy downtown Boston real estate, especially a foreclosure “deal”?  Not much.

Ultimately, USA foreclosure statistics have little applicability to downtown Boston for two reasons, the first revolves around the fact that the number of foreclosures in downtown Boston is quite low, and second, simple supply and demand economic forces in the city center prevent  any foreclosure pricing “deal” opportunities – these forces erode any price point differentials between market and foreclosure prices.  Foreclosed homes stay at their foreclosure list prices because of supply gluts, and the economics of Boston’s real estate market prevent the surges in supply of “cheap” homes to support the market dynamics that are being seen in the hardest hit housing markets in the USA.

A compilation of 2008 (January – October) Boston foreclosures by the Boston Globe shows that there was one foreclosure sale in downtown Boston during the first 10 months of 2008 – yes, many more outside the city center, but the downtown market demonstrates significant insulation to foreclosure pressure.  The single unit was a Leather District loft-style condo that sold for $443 per square foot, more than $100 more per square foot than current high-end units at the newly renovated Beach Street Lofts are selling for.

Case in point for the economic forces of the downtown market on a bank-owned unit offered to the public was 10 Hanover Street unit 3, a one-bedroom one-bathroom 690 square foot condo in the North End.   In June 2008,  the condo hit the market for sale, and was listed at $274,900 ($395 per square foot), a very attractive price for the unit and the neighborhood. We worked with clients to move quickly on the property, despite this, there were over 20 offers on the unit, and it closed two months later for almost $100,000 more than the list price at $365,000 ($529 per square foot).  In the end, the short sale property didn’t really end up offering the value for which Buyers were clamoring. In 2008, the average price per square foot in the North End was approximately $600.  This example highlights that simply supply and demand in downtown Boston prevent foreclosure “deals” from occurring.

Unit 809 at the Ritz Carlton will be an interesting condo to follow to see if the theory checks out.  Unit 809 is a 1+ bedroom 1.5 bathroom 1,357 square foot unit in the Ritz Carlton Millennium Towers that is a bank-owned property recently listed for sale at $679,900 ($501 per square foot), and represents almost a 50% discount on the average price per square foot in the building – granted, the average price per square foot is being inflated substantially by several other recently listed properties in the development, including Manny Ramirez’s Ritz Carlton condo. Unit 809 is being sold as is, and is competing against 8 other units that are priced under $700 per square foot, the others at “market prices”.

The economics of supply and demand in downtown Boston trumps any “deal” that a Buyer assumes can be had by finding a foreclosure.  The first hurdle lies in the absolute number of foreclosures in the city center, there really are none, and when coupled with the supply and demand forces present in the city, the idea of a “deal” on a downtown Boston condo quickly becomes elusive.