Why is housing in Boston so expensive?

Experts say local policies, high interest rates, and a lack of supply drive up costs.

As the median sales price for a home in the Boston region inches closer to $1 million, many feel hopeless about finding housing that fits their needs.

The Greater Boston Association of Realtors announced another record high for June: The median sales price for a house hit $961,250. The price is a 7.7% year-over-year increase at a time when mortgage rates are slightly under 7%, inventory is low, and the high cost of construction is slowing down new residential projects.

After modest growth in sales activity in Boston area housing, the market slowed down in June to its lowest level in four years, GBAR reported. Regardless, buyers far outnumber listings, helping lift the monthly median selling prices for single-family homes and condominiums to record highs.

The condominium market’s sale prices remained relatively stable over the past year but still reached a record, increasing 0.7% from the previous monthly high to $750,000 in June.

Most properties sold in June exceeded the total asking price, with a typical single-family home selling for 104.1 % of its original list price.

At the end of June, active listings for single-family homes increased 28% annually to 1,605 homes, while the condo market increased 17% from last year with 1,767 units up for sale.

GBAR President Jared Wilk, a broker with Compass In Wellesley, cautions homeowners not to get too aggressive on pricing, as this could reduce the pool of buyers for their property.

“In today’s high interest rate environment, many buyers are unable or unwilling to overextend themselves financially,” Wilk said in a statement. “They’re choosing to be less aggressive and more conscientious, which has caused some to suspend their home search for the summer or until rates come down, and that’s made for a less competitive market than we saw in the spring.”

Wilks said more bids are coming in under the asking price, and overpriced properties are drawing fewer offers, sitting longer, and requiring a price reduction or two to sell.

Even so, it remains a seller’s market for now, with stubbornly high mortgage rates and prices at record levels. However, with inventory improving, buyers will have more say in how the market performs in the coming months, giving wiggle room for negotiation and allowing buyers to be patient before deciding to buy a home.

“Buyers have more housing choices and leverage during negotiation than they did in the spring, which has made for a more relaxed sales pace in recent weeks, and that’s likely to continue until the Fed moves to lower interest rates,” Wilks said.

What precisely is driving the housing costs up in our region?

“It’s simple economic supply and demand,” said Greg Vasil, the CEO of the Greater Boston Real Estate Board. “We are where we are because we haven’t built enough … for a long time, for a couple of decades at least, and that’s a problem.”

Vasil said one of the biggest hurdles in the region when constructing new housing is the high land cost. Coupled with high material costs, which have worsened since the pandemic, and high soft costs, such as permitting and planning, the overall cost of building continues to go up.

One of the biggest impediments is that Massachusetts is a home-rule state, where cities and towns govern themselves. This means that every developer who wants to build something has to comply with the local zoning rules and regulations. That often comes up against neighborhood opposition, Vasil said.

“Look at other parts of the country, and they can build things much faster because they don’t have as much red tape as we do,” he said.

He said the state doesn’t have a lot of by-right zoning, especially for housing.

Vasil noted that the most drastic change has been the MBTA Communities Act. The controversial state law aims to expand zoning for multi-family housing in commuting communities, even as many towns reject it.

The law allows new housing construction to occur faster, Vasil said, allowing developers to bypass local zoning board of appeals, saving time and money.

Vasil said that even though it seems counterintuitive, the local rules on affordability requirements are hampering the construction of new projects and keeping prices inflated.

Last year, Boston updated its Inclusionary Development Policy by lowering the threshold from 10 to seven units and increasing the income-restricted percentage from 13% to 20%.

In 2017, the Cambridge City Council passed an amendment to its Inclusionary Housing Zoning Ordinance, requiring that market-rate developments reserve 20% of the floor area for affordable units.

In Somerville, the city requires new developments with over 18 units to have 20% affordable units, beginning in 2016.

But the problem is, with the rising costs of everything else, developers lose money when they are required to make more affordable units, Vasil said.

“When developers start doing the numbers, it doesn’t work,” he said, and new construction is hampered.

However, Vasil said the 40B law, which allows local zoning boards of appeals to approve housing developments under flexible rules if they are at least 20-25% affordable, has permitted more housing in communities that wouldn’t have allowed it otherwise since it was enacted in 1969.

With zoning controlled locally and communities deciding what they are allowed to do, a developer can be so involved in red tape that they say, “Forget it. It’s not worth it,” Vasil said.

Lastly, Vasil said another sticking point in the rising prices is the state’s goal of lowering home emissions by 2030 by reducing reliance on fossil fuels, which is challenging to comply with. The cost of including the new technology in the homes far exceeds what one could afford to buy or rent the units.

“We are behind where we should be,” Vasil admitted. “But it’s frustrating between the costs and technology. I’m not sure we can get there.”

How is the rental market playing into the high costs?

With fewer homes to buy, many renters are remaining renters. With less inventory on the market, landlords can jack up prices.

Supply is the biggest problem driving up costs, said Demetrios Salpoglou, the CEO of Boston Pads.

“I think everybody on a 50,000-foot level agrees that we need more housing,” Salpglou said. But when it comes down to the neighborhood itself, many point to another location to place it, he said.

Plus, many developers who would build new housing get financing for the project through a bank loan. The higher the interest rates, the harder it is to make a return. Add inflation and energy costs, and it makes it even harder.

The high costs have delayed or even stopped the construction of new buildings.

Demand remains strong in the region. People will always be drawn to the city, chasing careers and opportunities, which inflates the rental market, said Salpoglou.

Boston Pads, which analyzes data from over 18,000 landlords, reports that the average rent in July is $3,266, 5.66% above the rent from last year.

Two years ago, rental prices rose 18.46%. Salpoglou said there were reasons for that. Labor, fuel, property management, and raw materials costs spiked.

“I think we’ve hit the top,” he said. “I think that the days of significant rent growth are over.”

Salpoglou said that inflation growth is coming to a halt and will probably slow down by next year.

But make no mistake, these are still record-high prices, he said.

What’s in store for the home market in the region?

In a typical cycle, the housing market slows as the summer wanes, said Wilk, the president of GBAR.

However, since COVID four years ago, the usual summer slow-down has passed entirely, with strong demand continuing throughout. But, this year, he says he is beginning to see signs of its return.

Wilk said the average number of days a house is on the market is longer, and real estate agents are beginning to see price reductions.

“But overall, the prices are not coming down,” Wilk said. He said the price reductions are only because asking prices are starting higher.

Wilk said that although the higher mortgage rates have affected people’s purchasing ability in recent years, they have not slowed down the market. The federal fund rate, which determines national mortgage rates, when raised is designed to slow down the growth in prices, he said. But, “they hadn’t by and large,” he said.

On the flip side, many sellers who locked in lower mortgage rates in prior years don’t want to give that up, so they don’t put their houses on the market since their purchasing power of a new home is way lower.

If the Fed drastically reduces rates, as it has indicated, more people will put their houses on the market.

“If they come down enough where it’s an easier pill to swallow, I think people will put their house on the market,” Wilk said. However, there will “be much more competition, and [that] will continue to raise the prices.”

Wilk said the region needs to catch up on inventory and get ahead so there won’t be another frenzy when the rates come down.

However, he said, “There is hope for someone who wants to buy a house in the future.”

Wilk cautions that buyers should set realistic expectations, widen their scope to multiple communities, and determine what they need over what they want.

The most significant difference he has seen is that two to three years ago, buyers would ask themselves, “What do I need to pay to get this house?” he said. “Now they are asking what I am comfortable paying for this house.”

It’s a small difference, but Wilk said it is a difference.