What about rental income? It seems like Boston has a never-ending supply of college students, so owners know they can get a steady return via renting out a unit rather than sell it at fire-sale prices.

It’s tough to predict though. My wife and I are looking at houses, and while we’re not in a super rush, I can’t help but be tempted by the $8000 federal credit. Plus, with mortgage rates ridiculously low, we don’t want to miss out on locking in on something like a 4.75% rate.

On the other hand, it’d hurt to buy a house this year and see it drop a few tens of thousands of dollars over the next few years.

The areas where we are looking are declining very slowly though (Danvers and Beverly mostly). I was hoping for prices to drop quicker as we neared the summer months, but I don’t see that happening really.

If you track Case-Shiller back to 1995 or so, scaling the y-axis relative to 1995 prices, you’ll notice that the index for Boston starts to pull away from other cities as early as late 1998/early 1999. This early acceleration could be due to the dot-com boom, particularly since the other city which happened to experience disproportionate growth in this period was San Francisco. However, SF fell back when this bubble burst in 2001, while Boston maintained its steady climb, which continued even as other bubble cities started to veer upwards in 2002-2004.

So, for whatever reason, I’m thinking that Boston is experiencing a relatively gradual fall which matches its relatively gradual growth starting in the late 90′s. However, I can’t think of any particularly good reason why a slow incline necessarily means a slow decline. My best guess is that the Boston market was less exposed to speculation due to the region already starting off with relatively expensive prices in the early stages of the bubble, but this is totally a guess.

Something worth considering is how prices have gone through the floor in areas with high sub-prime loan percentages like Dorchester, Mattapan, and South Boston, while more upscale neighborhoods are relatively calm so far, albeit still declining at a steady pace. However, the upcoming Alt-A and Option-ARM mortgage resets over the next 2-3 years could expose even upscale areas, since those mortgages tended to be given to people who had better credit than sub-prime borrowers. Given enough exposure to these mortgages, Boston’s steady decline could accelerate as a result.

Additionally, it’s worth noting that the NYC index is following a similar path, so these two markets may have something in common.