Real Estate Bubble in Cambridge

A friend decided that he did not need his three-bedroom condominium in Cambridge anymore. Here’s an email from him:

Went on MLS this week. Today was the first public open house. Got two written offers. Accepted one for 1.325MM with no mortgage contingency.

The government assures us that inflation is non-existent, but if you would like to live in the Boston area without being stuck in traffic for an hour every morning, it will cost you about 20 percent more this year compared to last year. Brookline, as the only town that is both close to the center and has a school system with reasonable results, is getting particularly packed with newcomers.

What if you are willing to rely on the highways? The same friend just bought an 11,000 (!) square foot place in a suburb that has one of the Boston area’s top 10 school systems. He will be luxuriating on 10 acres of land and swimming in the pool. The “guest house” is nearly 4000 square feet. Cost of this Neverland-style ranch? $1.7 million. (Plus the Al Gore-sized electricity bills!)

[Separately, this does lead to the question of why realtors are making 5 percent on nearly every transaction in Cambridge. Unless grossly overpriced, places are sold within a few days. If buyers and sellers could determine a fair price from an appraiser at a cost of $500 or so, why are they paying $60,000+ to realtors to assist them? (The actual legal conveyance from seller to buyer will be done at an additional cost by lawyers, of course.)]



  1. jay

    April 29, 2014 @ 3:26 pm


    You still have to stage the open house and communicate with potential buyers, maybe of whom are annoying. I paid a family member a few K to do this in 2012 when I sold my condo in Cambridge and saved a large sum of money. It’s possible that people who value their time don’t typically have underemployed family members that they trust.

  2. Joshua Levinson

    April 29, 2014 @ 4:21 pm


    If there’s a residential bubble, it’s not happening independently. There’s tons of commercial development happening and almost no residential. More jobs, same number of homes, higher prices.

  3. E. Rekshun

    April 29, 2014 @ 6:23 pm


    I think home buyers and home sellers use real estate agents because the home-buying process is a bit intimidating to the buyers & sellers; the agent holds their hands throughout. I’ve purchased four residential properties and never used a buyer’s agent. The title company handled each closing and the seller paid all closing costs.

  4. David Walker

    April 30, 2014 @ 5:16 am


    Around the world, economists have always treated asset price inflation (such as the rising price of established housing) as separate from common-or-garden inflation in the cost of goods and services. You can argue over whether this is right, but it’s not some plot by the US government, the Federal Rserve or whomever. US “inflation” – that is, consumer price inflation – really is at historic lows.

    US house prices have been moving up a bit. One reason inner-Boston housing prices would be rising particularly strongly would be that demand for the services of the relatively wealthy and technically skilled people who live in inner Boston is rising particularly fast. High-income people continue to do well. Should be good for the aviation business.

  5. Alex Masa

    April 30, 2014 @ 8:26 am


    “The government assures us that inflation is non-existent”

    While I have my own reservations about how the BLS computes the inflation, I believe you’re oversimplifying the definition of inflation. Did the cost of cars, telephone service, iPhones, gasoline, hotel rates, gold, clothes etc also go up by 20% since last year?

    Cost rises in one or a handful of asset classes, even if inflated due to the government’s intervention, doesn’t necessarily constitute inflation, when we define inflation as the value of money relative to a basket of goods/assets. Oh, and by the way, those house prices *can* also decrease, as the recent history showed. No matter how much your friendly realtor will insist they won’t …

    “if you would like to live in the Boston area without being stuck in traffic for an hour every morning, it will cost you about 20 percent more this year compared to last year”

    According to the latest Case-Shiller survey the actual increase in the Boston area, year over year, was 8.5% not 20%.

  6. philg

    April 30, 2014 @ 2:22 pm


    Alex: Thanks for looking up the Case-Shiller number. I think you’ll find that it includes suburbs of Boston that are no longer desirable places to live (due to the increased traffic congestion and/or decline in school quality). Leaving aside the relevance of looking at the cost of living in a place where nobody with money would want to live there is the fact that the government’s CPI does not include the actual cost of any houses. The federal government uses a fictitious rent that a homeowner might charge him or herself.

    You cite some other stuff and ask if those items have gone up by 20 percent as well. I don’t think that the original posting suggests that they have. But I do think if we looked a hotel rates for hotels where you’d actually want to stay, restaurants where you’d actually want to eat, etc. you’d find that prices have gone up much faster than official CPI. (I just paid $500/night for a weekend stay in D.C.; it was $150/night for a Hampton Inn near the Orlando Airport the last two nights).

  7. Jack Crossfire

    April 30, 2014 @ 8:45 pm


    There’s none of the obsession with sustainability that Alan Greenspan had. Now, the dogma is to provide unlimited credit to everyone, equally. If prices have to rise 20% so everyone can qualify for a mortgage, let them rise. The fed balance sheet hit $4 trillion last year & is on track to hit $5 trillion this year.

  8. Paul Houle

    May 1, 2014 @ 9:50 am


    Inflation is a political phenomenon too.

    In the time period 1945-1980 or so, labor had bargaining power relative to capital so that when the money supply puffed up, some of that wound up in higher wages which then wound up in higher prices for most goods and services.

    The financial services industry couldn’t survive in this high inflation environment because it couldn’t create products that could beat inflation. Merrill Lynch was a penny stock, and the 401K-IRA scam started because private pensions were starting to look unaffordable.

    After Reagan it was morning in America, and they had the Volcker-Freedman recession of 1981 and the balance of power changed in such a way that the Fed could print money and it didn’t go into wages, it went into asset prices, which, like health insurance and cell phone framily plans, has a way of distorting people’s thinking.

    If you own stocks and stocks go up you feel good. If you own a house and house prices go up you feel good.

    People who are buying stocks and houses might fret for a minute that the “rent is too damn high” but then they think that “past performance is reflective of future results”. Ten years ago, when you confronted an overcrowded urbanite about how they were killing themselves to pay a mortgage on a million-dollar ranch house, they’d tell you they were the smart ones because they expect to sell the house for $5 million later.

    After 2008 people have wised up a little, but there is no constituency that worried that asset prices are too high and wants to take effective action it.

  9. philg

    May 1, 2014 @ 10:29 am


    Paul: I don’t understand how it would be possible for “labor [to have] bargaining power relative to capital.” I guess you can argue that when capital is very cheap, as it is right now, employers can borrow money at 2% or whatever and substitute machines for extra hands, but that isn’t really “bargaining” and there aren’t that many jobs where machines could help but aren’t already there. In the free market portion of the U.S. economy, i.e., where the employer is not the government or a government contractor and where the employer is not a monopoly, I would think that a worker’s wage is determined by the availability of other workers with similar skills, not the availability of capital. And then in the command-and-control part of the economy, worker’s wages are determined by the political process (e.g., pensions, health care benefits, and salaries for police officers, firefighters, school teachers, etc.). That doesn’t leave any place for labor to “bargain with” capital.

    [Separately, if you noticed that American workers’ wages went up from 1945-1980 you might look at the fact that this was a time when the percentage of workers getting a college education increased (and before the rise of “college as the new high school”). It was also a time when foreign workers couldn’t be effective either because their countries had been destroyed by World War II or because their countries did not allow private companies to operate (e.g., China).]

  10. Josh

    May 1, 2014 @ 6:25 pm


    “…I would think that a worker’s wage is determined by the availability of other workers with similar skills, not the availability of capital.”

    This is literally the textbook summary of this guy’s writings and probably the biggest reason to argue against capitalism. (At least in the context of these writings.)

  11. philg

    May 1, 2014 @ 11:26 pm


    Josh: Marx was right about a lot of things. He just wasn’t an accurate prophet!

  12. Anonymous

    May 2, 2014 @ 7:18 pm


    How can labor have bargaining power bargaining power relative to capital? Unions.

  13. Walter Mitty

    May 3, 2014 @ 8:03 am


    With reference to real estate brokers making 5% for just a little work, there’s a chapter on this in Freakonomics, which is a good read. It’s a book about the application of the tools of economics to problems that economists rarely tackle.

    According to the book, realtors respond to incentives. Most of the time, this results in the broker to persuade the seller to undervalue the home, resulting in a quick sale. The exception is when a realtor sells his/her own home. Then the realtor jacks up the selling price, at the expense of taking longer to reach closing.

    As far as the 20% increase goes, there are effects other than simple inflation at work. Some of the increase might be recovery from unsustainable low prices that followed the real estate bubble burst. Some of it might be the formation of a new bubble.

  14. Walter Mitty

    May 3, 2014 @ 8:31 am


    There are two major factors that influence wage rates: market forces and bargaining power. Collective bargaining enhances bargaining power. It’s already been pointed out that labor unions are the employees’ handle on collective bargaining.

    For investors, it’s more subtle. In a publicly traded corporation, a majority of the shareholders can elect a Board of Directors. The BOD hires the CEO, the CEO hires the management team, and the management team hires the employees. In practice, the BOD often becomes a rubber stamp for the CEO. But dissatisfied shareholders can try to remedy this in one of two ways.

    One way is to try to organize an insurgency among shareholders, to oust the existing BOD. Another way is to divest themselves of their shares, by selling out. BODs and CEOs tend to be very sensitive to this second method, if large numbers are involved.

    In the 1980s, the investor strategies began to work better, while the labor union strategies began to work worse. (Except for public sector unions).

  15. Paul Houle

    May 3, 2014 @ 4:49 pm


    I’m talking about labor and capital as political blocs instead of factors of production.

    Defined that way there was definitely a “sea change” in U.S. politics in the late 1970s. Remember up until a point, Ralph Nader would regularly show up in Washington and get legislation passed. All of a sudden, however, the door was slammed in his face. Quite likely it had something to do with this kind of thinking:

    As for the “abundance” of capital today it is definitely a strange situation. Corporations are very profitable right now but they are not investing it. Apple has stacked up hundreds of billions of dollars in cash, and companies aren’t interested in investing in broadband unless they can charge $10 a GB for it. If you look at how companies “invest” it is if they are paying credit card interest rates, not the going rates.

    Perhaps it’s got something to do with the failure of Says law that makes unemployment possible.

  16. philg

    May 3, 2014 @ 9:43 pm


    Paul: As Americans we do love to imagine ourselves as the focal point of the universe. But when looking for something that changed economic conditions starting in the late 1970s, U.S. politics does not seem like a logical place to start. Why not look at China instead? The integration of China into the world economy seems like a much more likely explanation for change than Ralph Nader’s varying influence.

    As for whether or not involuntary unemployment is possible, I don’t think the U.S. provides any evidence one way or the other. It is hard to find an American who is unemployed in the sense that a person from the 18th Century might have understood the term. We have some people who work for the government as civil servants, military personnel, etc. We have some people who work for the government by staying home and playing Xbox and getting checks in the mail (disability? unemployment insurance? welfare?). We have some people who work for private companies or for themselves.

    As for corporations not investing money… why wouldn’t they invest if they find something that they think will be profitable? Has there been a reduction in greed or profit-seeking? (Apple may be a special case due to the fact that they are stacking up cash faster than any company in history; broadband is a special case because we have monopoly suppliers who can make a lot of profit without investment.) shows that “private nonresidential fixed investment” in the U.S. is on an overall upward trend (albeit fluctuating).

  17. philg

    May 6, 2014 @ 9:42 am


    I thought about this a little more. If there were some big change in the power of labor that was due to purely domestic factors, such as political change, one would expect to see equal changes in industries exposed to foreign competition and industries where it was either illegal or impractical for foreigners to compete. But in fact unions seem to be as strong as ever in the airline industry (illegal for foreign airlines to compete) and for government workers (impractical for foreign-based workers to take the job). See also for how unions can capture profits when it is impractical for business owners to move (theaters in Manhattan).

    So I think the China explanation is correct. We American workers have a hard time accepting that “we’re not special.” That’s why we are constantly amazed that we aren’t paid more. Our teachers and parents told us that we’re the best. How come employers don’t realize this and instead pay people in Singapore more?

  18. Russil Wvong

    May 11, 2014 @ 1:26 am


    The top end of the income distribution is doing fine compared to the rest, so it’s not surprising that you’re seeing higher prices at high-end restaurants and hotels; luxury goods are booming.

    … when looking for something that changed economic conditions starting in the late 1970s, U.S. politics does not seem like a logical place to start. Why not look at China instead? The integration of China into the world economy seems like a much more likely explanation for change….

    The timing doesn’t really make sense. After Mao’s death in 1976, it wasn’t immediately clear that Deng Xiaoping would succeed in outmaneuvering Hua Guofeng. Nor did China become a major exporter overnight.

    For an example of a sector not exposed to foreign competition where wages are low, consider the fast-food sector, or the restaurant/hospitality sector in general.

    As for whether or not involuntary unemployment is possible —

    I know you’ve talked about this before — why can’t the unemployed start up businesses with low barriers to entry, like landscaping?. Unfortunately I think you’re trying to reinvent economics on the fly, and stumbling over old fallacies (kind of like Greenspun’s Tenth Rule) — congratulations, you’ve just rediscovered Say’s Law.

    In the case of landscaping specifically, you can see from this graph why this wouldn’t work. If everyone’s cut back on their housing-related spending, where would the extra money for more landscapers come from?

    More generally, this is how you get high unemployment due to a shortfall in demand: everyone tries to cut back their spending at the same time, but one person’s spending is another person’s income. Everyone’s spending goes down, everyone’s income goes down. It’s called the paradox of thrift. A simple example.

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