Cambridge as a safe haven from economic depression

14 Dec. 2012

CAMBRIDGE, MA — Walking through Cambridge you’ll notice that you don’t see many “For Sale” signs in front lawns.  However, a five-bedroom, bath and a half home on Trowbridge Place has one.  On the outside, the gray paint is chipped off the side of the shutterless house.  On the inside, it looks like nothing has changed since it was built in 1902.  Described in its listing as “a developers dream,” this property would go for $200,000 or maybe even $400,000 in most towns – but not in Cambridge.  This Trowbridge Place home is asking $1.3 million.

While most cities still suffer low-valued real estate prices from the recent recession, Cambridge teardowns frequently sell for $1 million or more.  The U.S. Census Bureau ranks Cambridge as the city with the highest concentration of million dollar homes this year.  Experts suggest that Cambridge’s extraordinarily expensive housing prices kept the Cambridge economy strong throughout the recent recession.  While real estate prices cratered across the nation after the housing bubble burst in Dec. 2007, Cambridge was hardly affected, and if anything, continued to thrive in all areas of its economy.

The recession softened Cambridge’s real estate market only to the degree that properties took longer to sell with little loss in value, if any.  The average Cambridge home was valued at $742,000 during the recession while the national average was $260,500.  The average Cambridge home on the market this month is listed at almost $1.2 million, which is more than twice as much as the $540,000 Massachusetts average and five times more than the national average.

While Cantibridgians make more than double most Americans on average, wealth was not Cambridge’s primary shield from the recession, as San Francisco’s economy after 2007 shows.  San Francisco had the second highest percentage of million dollar homes behind Cambridge in 2000. After the recession began, San Francisco’s home sales fell by about 1,000 per month and the median sale price declined by almost $250,000.  Neither of these averages has risen back to pre-recession levels yet.  From Oct. 2007 to May 2011, San Francisco’s foreclosures more than tripled, while Cambridge’s foreclosure rate hardly changed at all.

In Cambridge, housing prices actually increased in May 2008, seemingly unaffected by the rest of the country’s struggle.  At that time sales dropped in half, but rose back to normal levels by Nov. when real estate prices dropped back to normal levels.  Real estate prices have continued to rise since then, appreciating by 17 percent.

Instead of wealth, a scarcity of homes was the primary recession buffer for Cambridge’s real estate market.  According to Ben Solow, an Economics Ph.D. Candidate in Game Theory at Boston University and a Central Square resident, the housing bubble is often incorrectly thought of as the overall rise in home prices before the recession.

“In the early 2000s, ‘house flipping’ became a popular trend, particularly out West,” said Ben as he drew out an economics diagram. “The housing bubble is actually a drastic shift upward from the trend line of the projected number of homes in America.”

Developers in growing cities, particularly out West, foresaw no end to rising home prices and collectively built far more homes than they could sell.  People didn’t buy, houses stayed on the market too long and banks made risky loans.  As a result, developers went bankrupt and homeowners defaulted on hefty loans.

“Cambridge is a popular place for house flipping in terms of renovations and upgrades,” said Solow. “However, there’s not a lot of land to expand outward or build more houses.  Cambridge couldn’t move above the trend line because it didn’t have the space to.”

With over 100,000 citizens, Cambridge’s housing demand is much higher than its six square miles can supply.  Nearly 16,500 people reside in every square mile.  There are currently 23 single-family homes, five multi-family homes and 75 condominiums on the Cambridge market, or one available residence for every 1,000 Cantibridgians.

The concentration of both MIT and Harvard University, along with the greatest number of biotechnology researchers in the U.S., draw people to work in Cambridge.  Forbes’ list ranked Cambridge as one of the best places for businesses and careers, due to its projected 1.6 percent annual job growth rate.

“The Cambridge housing market is a benefactor of the best economic effects of a university town,” said Tom Von Zabern, a Cambridge real estate agent at Re-Max Destiny.  “Since the ‘90s, the city has grown from a state of durable manufacturing to a state of intellectual manufacturing.”

Sixteen major biotech companies have settled in Cambridge since the start of the recession. This industry employs almost 68,000 people in the city.  Von Zabern suggests that both medicinal research and biotech firms like Novartis, Cambridge’s largest non-university employer, want to have bases in the area to choose from the nation’s best science, math and research graduates.

These tech companies and employees often receive research grants.  In 2010, Massachusetts companies received $850 million in venture capital biotech funding, which was 23 percent of all U.S. Venture Capital biotech investment that year.  With 36 percent of Massachusetts’ largest biotech firms in Cambridge, that amounted to nearly $306 million in funding to Cambridge alone.

As a result, the $140,000 average salary for tech company employees is 77 percent higher than the average salary in Massachusetts.  With steady, high paying jobs, research and biotech employees continued to buy properties – really expensive properties.

“They are young, but well-funded with the ability to qualify and pay off million dollar mortgages,” said Von Zabern. “An additional $400,000 than they wanted to spend really isn’t enough to make them turn away from buying a house.”

With so few houses on the market, masses of successful people make offers substantially over asking prices to ensure a quick end to house hunting.  As a result, home prices have shot up drastically in response to a relatively inelastic demand.  The average Cambridge home prices are now almost as high as they were during the short May 2008 spike in housing prices.

As an example, one of Von Zabern’s clients offered $200,000 more for a home than its $1.3 million asking price, even though the house needed a lot of work.  Although she thought this would be enough to guarantee her the winning bid, someone who offered $400,000 over the asking price outbid her.  However, Cambridge bidding prices haven’t always been so absurd.

“In the ‘70s and ‘80s Cambridgeport was pretty run down and had significant crime,” said Susan Murie, a Cambridge real estate agent at ePlace Homes. “You could buy a four-family for $200,000 or $150,000 back in those days, but that has changed greatly since the ‘90s with most homes and condos selling in the $800,000 to $1 million range.”

The Cambridge price boom started in 1994, when rent control was considered flawed and done away with in Massachusetts, in part because the Mayor of Cambridge, who was Harvard Law graduate, lived in a rent control apartment.  People who purchased land during the rent control days became millionaires almost overnight, and a building boom started in Cambridge that has never stopped.

Although in many cities expensive property taxes come with high-valued homes, homebuyers don’t need to be concerned about that in Cambridge.  The city’s low property taxes make owning multi million-dollar homes less daunting to homebuyers and residents.  Cambridge has one of the lowest property taxes in the greater Boston area.  While Cambridge property taxes are $8.66 for every $1,000 assessed value, Boston’s is $13.04 per $1,000 and Belmont’s is $13.35.

“It’s shocking that surrounding cities pay nearly 50 percent more in property taxes than Cambridge residents,” said Johnny Kim, a Cambridge real estate agent at Coldwell Banker. “The low property taxes result in a significant yearly savings.”

The incredible savings from such a low property tax are especially significant for homeowners who own expensive homes.  The owner of a $1 million home in Cambridge saves almost $22,000 in taxes over five years compared to what that owner would pay if the property were in Boston.  However, although property taxes are lower than nearby cities, the homes’ expensive appraisal values raise substantial city government taxes.

As a result, Cambridge government spending on public projects, schools and community centers has steadily increased by about three percent annually since 2008.  From a $50 million main library expansion project in 2009, to the complete renovation and reconstruction of the public schools over the past two years, in no way has the recession slowed Cambridge’s major capital projects.  Fiscal prosperity is also evident in government officials’ salaries, such as City Manager Robert Healey’s, which is almost as much as President Obama’s and makes him the highest paid municipal worker in the United States.

Commerce in the area has also remained strong since the recession.  From 2006 to 2011, commercial real estate in Cambridge grew substantially and added 1.2 million square feet.  An additional 5.4 million square feet worth of commercial properties have received building permits from the city.

For example, the almost completed $500 million Alexandria Center at Kendall Square will include seven buildings with boutique shops, restaurants, a new park and 220 apartments.  The Kendall Square development has caused a ripple effect to nearby neighborhoods like Area 4, which has had an influx of new, high-end restaurants and shops.

Although space for homes is limited in Cambridge, there are plans in the works to develop more apartment-style residences in the next few years like the Alexandria Center at Kendall Square has done.  The Cambridge Development Department has released two planning studies since 2010 with a focus on increased housing.

“We are trying to increase the incentive for people to increase housing even though Cambridge is so small,” said Stuart Dash, the Cambridge Director of Community Planning. “It’s already a dense city, so you have to do it thoughtfully with an eye towards the context that it is already in as with any planning and urban design considerations.”

These developments will require a great deal of revenue, but this year’s AAA financial ratings from major credit agencies affirm that Cambridge will have no trouble financing them.  Cambridge has received AAA ratings every year since 1999.  This year, Cambridge was one of 27 U.S. municipalities to earn three from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.  These ratings all project a stable two-year outlook for Cambridge due to the city’s strong and resilient local economy and property tax base.

It is impossible to say if these developments will ease the demand for housing to an extent that real estate prices will lower according to Dash.  However, as of now Cambridge has a lot of money to work with, and according to AAA ratings, its real estate, and therefore its economy, won’t falter anytime soon.