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BJ Ray's Blog

By BJ Ray | Agent in Boston, MA

SOMERVILLE VS. CAMBRIDGE: A REAL ESTATE INVESTOR'S PERSPECTIVE

SOMERVILLE VS. CAMBRIDGE: REAL ESTATE

Posted on April 28, 2011 by BJ RAY Email
single-family_feat

Cambridge vs. Somerville is boiling over. Could there be a border war? Maybe. If so, we though to ask our resident real estate expert: On which side should we buy our new condo? He gave us about as comprehensive an answer as possible to the question:

Which market makes for a better over all real estate investment?

North American Vexillological Association

"But have you got a flag?"

Getting caught up with the “controversy” over the heightening debate between Cantabrigians (i.e. people from Cambridge) and Somervillians (people not from Cambridge), I decided to run some numbers looking at the local real estate market in Cambridge and Somerville over the past 6 months to see how they compared.

The numbers aren’t stunning. There is almost nothing terribly surprising. It really comes down to a tale of (some) risk versus stability. Clearly, real estate-wise,Cambridge has it good. For starters, there is property tax which, in Cambridge for residential owners, is practically non-existent. All the scientific industry happening in Cambridge, especially in and around Kendall Square, affords Cambridge to charge an extremely low property tax rate to its residents. Cambridge, as many would argue, has a comparatively better public school system, and more workable access to public transportation (for now). But what doesSomerville have?

Somerville, which comprises only about 4 total square miles, has some serious potential.

But if you already live in Somerville, you probably know this to be true.

So here’s the rundown. From the Multiple Listing Service (MLS) I pulled sales data for all single family homes, condominiums, and multi-family homes in both Cambridge and Somerville. For the most part I used data from the past 6 months. I did also look up some sales data from both places over two years as well.

Here’s a look at what contributed to the following charts:

real estate market overview for somerville and cambridge

A brief real estate market overview for Cambridge & Somerville

Nothing here you wouldn’t expect EXCEPT that the multi-family home market in Somerville is crushing the Cambridge market in all categories except for those currently under agreement. There are, as of this morning, only TWO Cambridge multi-families actively on the market compared to almost 60 in Somerville. That’s a giant disparity if you consider that size-wise, Somerville is about 60% of the size geographically as Cambridge.

The other major disparity is the single family market. It appears to diametrically opposed to the multi-family differences.

Cambridge versus Somerville market overview

What will become of the multitude of multi-families currently on the market?

People love pie, that’s a fact. AND they love pie-charts, at least I do. Here’s a graphic representation of the two markets. The question is what will become of these multi-family homes? Is it more profitable for their owners to convert and flip for condo sales or does it make more sense to keep one for rental income. I looked at those numbers too.

Through MLS I was able to get reasonably well-informed figures on rental expectations in both towns. The market is as the market does and, with no real surprise, it hashes out just as you’d think it does. This chart breaks down average original list price, average list price and sale prices, etc.

What’s interesting here is that the rent in Cambridge is about 30% higher on average than it is in Somerville, yet the price per unit* is nearly 40% higher in Cambridge.

which is a better investment?

Which is a better investment? Which has more risk? More upside?

Folks are paying more of a premium for a multi-family home in Cambridge.

If you break down the cost per room, the percentages stay about the same. So even though there is a grand disparity in overall average price for each multi-family home, the ROI (annual income versus overall cost**) is better (by about 15%) in Somerville. That may reflect the higher risk involved in owning in Somerville versus Cambridge.

So we can see that perhaps owning an investment property in Somerville will provide a better return for rental income, so long as the rate of rental increases in each town remains a constant. IF the Green Line’s arrival over the next few years makes a difference locally to the rent in the areas of Somerville it will improve, then (if you buy now) it makes even more sense to buy a multi-family in Somerville.

But what about the investor who would like to flip a property?

Where is the best return here? Well let’s look at the next chart, which outlines the condominium market performance over the past six months in both areas. It’s a little less clear cut but still I think one town has the edge over the other.

Cambridge vs Somerville real estate market performance

Condo Breakdown

The delta of sales price has Cambridge condos selling for about 25% more than Somerville. If you compare this to acquisition costs (in price per UNIT) in Somerville, it shows that a unit in Cambridge costs 40% more to purchase (in multi-family form) but only returns, on average 25% more than Somerville as a flip.

Cost per square foot cambridge versus somerville

Cambridge wins in weight-class, but Somerville has more room to grow

The average price per square foot also corroborates this information.

Cambridge gets about 31% more dollars per square foot than Somerville, but still costs, on average, 38-48% more to acquire the property to flip.

I also looked at each market’s performance over the past two years. I especially looked at trends for absorption and cost per square foot in the condominium. Looking at dollar per square foot, reported by month on average since 2009, there is little change in the delta between the two and predictably, when it does change, the two markets seem to mirror each other with Somerville playing the role of the mirror (i.e. its changes happen almost seemingly in response to Cambridge’s).

The absorption charts (for condominium homes sales pended) also show a similar effect. The exception being last Spring, when the tax refund incentive was is in full swing–many of the people buying homes in Cambridge didn’t qualify for the refund, hence there was more of a run on the lower-priced homes in Somerville. But aside from that anomaly, it seems as if when the Cambridge market peaks in price and its housing market is maxing out, the natural progression is for many of those buyers to move towards looking in Somerville. I’m sure this wasn’t always the case, but the charts below sure suggest that this was a common tale for many buyers.

absorption rates and cost per square foot over time

Absorption rates and cost per square foot for condos over time

Single family homes are a different story. Cambridge has more, sells more and for a higher price (by far) than Somerville. I’m sure I could really break this down to the minutia and show per zip code how each market performs.

Clearly there is a single family housing stock in Cambridge that is incomparable to almost anywhere in Boston, Somerville or even Brookline (although Brookline would come the closest).

Cambridge’s single family homes sell, on average, at $1.2M.

Here’s a look at how the single family market compares in each location:

single family market comparisons for somerville versus cambridge

Cambridge's Single Family Market TOWERS over the competition

I’d say the over all clear winner here is Somerville for value, return on investment and (aside from single family homes) selection.

So while Cambridge has its Harvards and its MIT’s, its BioGens and its Vertex’s, Somerville has its own allure. I think if you’re in the real estate market and you’re looking for a positive investment, BOTH areas are great areas to buy and own property. But, according to this study, Somerville provides, as the saying goes, more bang for your buck. As for amenities & quality of life? Well that’s your prerogative and up to you to decide. I can only help with the numbers!

* This takes the average units/building in each market and divides that into average sales price. This does not account for overall condition of the units/buildings sold however.

** I didn’t include operating, acquisition or carrying costs here since you could argue that they would, when comparing two very similar markets, cancel each other out.

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