How do housing markets work?[da1]
As in other competitive markets, the price of housing is determined by supply and demand. For most commodities in a well-functioning market, when prices increase, it signals to suppliers high demand for their product. Suppliers, in turn, respond by increasing production (the supply) to respond to demand. This helps to moderate the effect of increasing demand and keeps prices steady. However, in Massachusetts the supply of housing has been stubbornly slow to respond to the increase in demand, for reasons covered in the Making it Pencil section. In other words, the supply of housing in the state has been inelastic.
One way to look at the high price of housing in Massachusetts is a sign of the Commonwealth’s ongoing attractiveness to individuals and families. Demand for homes in Massachusetts has outpaced the supply across the state. While the level of rents and home prices varies across the state, in every region households struggle to find housing they can afford. Using the framework of supply and demand is useful in that it highlights a core solution; increasing the supply of housing through construction and rehabilitation.
It is both that simple and more complicated. The type of housing and location households need varies depending on their size, life stage, and preferences. For example, students typically want to rent homes close to college and university campuses, parents often prefer single-family homes in towns with high-performing schools. Homebuyers and renters are also competing with other sources of demand depending on where they live. For example, on Cape Cod and the Islands the prices of homes are among the highest in the nation as second homeowners from near and far are willing to pay high prices for a vacation home that may be vacant for much of the year or used as a short-term rental. Finally, investors also compete with home buyers to turn single-family homes into rentals. In some communities, speculative investors are also purchasing multi-family buildings with the hopes of generating income through increased rents in some markets. While the source of increasing demand may vary across the state and across neighborhoods, the effect is the same, prices are rising as supply fails to keep up.
Unlike markets for most goods, one of the key factors that determines the price of housing is its location. The location is a prime factor in determining demand for housing. Economists often conceptualize regional housing markets tied to economic centers, often urban job centers. In Eastern Massachusetts high rents and home prices are tied to the economic growth and prosperity of the Greater Boston economy. The growth in high paying opportunities in knowledge industries and the agglomeration of firms linked to technology, finance, and professional services have contributed to the situation where housing demand exceeds the capacity of existing housing. [da2] [KS3]
While each municipality is unique, housing costs generally increase closer to Boston and Cambridge and the transportation hubs that allow for shorter commutes. It is essential to note that historic exclusionary and racist policies have shaped these markets in complex ways that have contributed to some neighborhoods and municipalities that are near the urban core to have less investment [da4] [da5] [KS6] and slower growth in housing prices. However, today many of these same communities are facing displacement and gentrification pressures. This is driven by the fact that economic growth in the Commonwealth has been strong relative to both the nation and the northeast region.
Beyond the Greater Boston housing market Massachusetts’ key regional employment hubs include Worcester, Springfield, and Pittsfield. Within each of these markets home values, rents, and vacancy rates vary depending on the municipality, neighborhood, and even the block. In some instances, geographically distant communities may share more characteristics than neighboring communities. For example, the Cape and Islands are unique in that they have some of the highest housing prices in the state and nation due to their status desirable second home and vacation destinations and this is also true of the Berkshires, though home prices have not reached the same levels.
Further, the high cost of construction has meant that the supply of housing that is available at prices affordable to low- and middle-income households has remained even more inelastic than housing overall. The cost of construction in Massachusetts remains largely consistent across regions in the state, but the wages available to households vary considerably. With the potential for tariffs on the supplies to build housing looming, it is likely that the cost of construction will remain high or increase in the near future.
While prices are frequently highest in and around urban centers, suburban communities grapple with zoning restrictions, infrastructure limitations, and community resistance to higher-density development that keep supply low. In more rural municipalities communities often grapple with population decline and a mismatch between the existing housing stock and the needs of current residents. For example, due to single family zoning rules and an aging housing stock there are too few small and accessible units that meet the needs of older households. Areas outside of the urban core often struggle with insufficient public transportation. Recognizing these differences is crucial to crafting policies that are both effective and equitable.
In order to be successful, strategies to increase the supply of housing should reflect the market’s challenges. Due to the importance of location in determining demand for housing, there is no one- size-fits-all approach to encouraging appropriate housing development. The Healey Administration recognizes that a one-size-fits-all approach to housing policy is insufficient and within regions the specific needs of communities varies from place to place. The Administration is committed to implementing policies that reflect the specific needs of different municipalities and has created, expanded, or continued state efforts to support housing across the Commonwealth. Examples of these efforts include:
Gateway Cities: Nearly every region of the Commonwealth is home to one or more Gateway City. These 26 small and mid-sized cities such as Holyoke, Lawrence, Lowell, and Brockton, are often regional hubs of economic activity and jobs. [da7] The Gateway City designation is defined in Massachusetts General Law and there are cities that share their characteristics but do not meet the official criteria. Massachusetts defines Gateway Cities as those municipalities that have a population greater than 35,000 and less than 250,000, median incomes below the state average, and a rate of educational attainment of a bachelor’s degree or more that is below the state average. Housing stock is often older and requires targeted investments to rehabilitate existing housing, spur mixed-use development, and enhance transit-oriented growth. The Administration is expanding financial incentives, such as the Housing Development Incentive Program (HDIP) for housing developers to invest in these areas while prioritizing affordability and local job creation. In Gateway cities in Western Massachusetts the challenge is that rents are often not even strong enough to cover the costs of market rate apartments, let alone deed-restricted affordable ones.
A recent report on housing in Gateway Cities highlighted recent improvements over the past decade, including a decrease in concentrated poverty, rising homeownership rates among residents of color, falling vacancy rates, and increasing home values.[1] At the same time, housing cost burdens remain high due to limited housing stock, slowed housing production, and rising home prices, which worsen affordability for potential homeowners. Renters face steep rent increases and displacement pressures. In addition, many communities in Western Massachusetts, such as Chicopee, Holyoke, and Springfield, struggle with significant financial gaps in new housing production.
The State has introduced programs like Commonwealth Builder, Housing Development Incentive Program (HDIP), and Gateway Housing Rehabilitation Program (GHRP)to address these housing challenges. Gateway Cities differ in local resources and administrative capacity, necessitating investment in capacity-building efforts by state and regional planning agencies to increase access and utilization of resources. Related to growing capacity, in 2024 the State has set aside funding to establish the Equitable Developers Fund, [KS8] [KS9] [KS10] a program to support Gateway City emerging developers.[2] Local Community Development Corporations (CDCs) will also play an essential role in the development and preservation of affordable housing in Gateway Cities.
Seasonal Communities: In 2024 the Affordable Homes Act created the Seasonal Communities Designation and the Seasonal Communities Coordinating Council to address the unique challenges facing communities with substantial seasonal variations in employment and housing needs. Many of these communities are located on Cape Cod, the Islands, and in Berkshire County. In these communities demand for second homes and short-term rentals makes it extremely difficult for year-round residents to obtain and afford housing.
The legislation designated several communities and additional communities will receive the designation based on based on the proportion of short-term rentals to overall housing stock, housing stock dedicated to recreational or seasonal use, the number of seasonal visitors, and additional socioeconomic characters of the municipality.
Seasonal communities are faced with housing constraints due to limited supply of year-round housing. Year-round residents must compete with short-term rental investors and second homeowners when purchasing or renting a home. As of 2024, about one percent of the state’s housing stock, about 43,401 units, is registered with the state’s Department of Revenue as short-term rentals. Although it represents a small proportion of the state’s housing stock, short-term rentals are concentrated in specific communities where they have an impact on local housing markets. For instance, half of registered short-term rentals are in Barnstable County. The town of Provincetown has the most registered short-term rentals, at 27 percent, among their housing stock. Dukes and Nantucket Counties each have over 20 percent of their housing stock registered as an STR.[3]
Employers, hoping to secure housing for their workforce, are another player in the local housing market. Many seasonal employers on the Cape and Islands own housing that they rent to their employees. The jobs in many of these seasonal communities do not pay wages that are high enough to afford housing, resulting in workers being forced to locate further from jobs and have high commuting costs or live in with multiple roommates to afford housing near their workplaces.
To ensure that housing is available for essential workers strategies that create deed restrictions are an essential tool. Towns and cities are also exploring policies to discourage short-term rentals and encourage year-round rentals and community-based organization are exploring social housing, which can include community land trusts. The work of the commission will be to support seasonal communities in identifying strategies to ensure that workers and year-round residents can continue to find housing. [KS11]
Small and Rural Towns: Massachusetts is known for its small towns where town meeting continues to govern important planning and development decisions. There is significant variation among rural towns from seasonal communities on the Cape and the Islands, to bedroom communities in Greater Boston, to the Hilltowns of the Berkshire and Franklin County. At the same time, many small and rural towns share common constraints to development. For example, public water and sewer infrastructure expansion is a more critical issue for housing production in small and rural towns and environmental constraints are a barrier to expanding septic and water systems. In addition, often far from job centers and with limited commercial and retail development, small towns rely heavily on property taxes to fund local government. Thus, small towns and rural areas often lack the financial and technical capacity to develop affordable housing as very few have professional planning or development staff.
Many of these communities saw an increase in population during the pandemic and an increase in demand for housing. Even though there have been longer-term trends of population decline, demand for housing remains strong as households are smaller and increasing in number in many rural communities.[da12] [KS13] Although there are lower housing costs among small and rural towns compared to other parts of the state, the sustained demand for housing without an increase in supply means that many households are cost burdened as incomes are often lower than urban centers and transportation costs are higher and public transit is limited or not available.
Another critical issue [da14] faced by small and rural towns is the aging housing stock. The significant cost of repair for decades-old housing can contribute to a decline in supply. For example, the cost of rehabilitating older housing stock may exceed the return value, particularly if the property is not up to code, deterring homeowners and investors.[4] Additionally, “under the current state financing structure for development of affordable housing, proposed developments in rural areas must compete for funding against larger developments in suburban areas and cities”.[5] Thus, there appears to be a negative feedback loop of continued disinvestment, perpetuating housing that is unsafe or inaccessible.
Under the Healey administration, an Office of Rural Affairs was established[da15] to provide dedicated resources and staff to support rural communities across the state.[6] The 2019 Massachusetts Rural Policy Plan details recommendations including a reconfiguration of state funding formulas to include rurality as a factor and establish dedicated funding for water and sewer infrastructure expansion.[7] Additionally, the report suggests the development of a statewide land use plan and growth management strategy, which is underway, and to explore relocation strategies to increase population in rural areas.[8]To further economic development in rural areas, the report recommends developing targeted economic development policies such as passing the Massachusetts Rural Jobs Act, which supports the expansion of small businesses through access to capital.[9]
Although there are multiple definitions of ‘rural’ across government agencies, Massachusetts takes into consideration a community’s population density (500 persons per square mile or less), size (total population less than 7,000), and type of hospital in the area.[10] Currently, there are 181 communities on the Rural and Small Town Designation List; all are eligible to apply for the Rural Development Fund.[11] Funds may be used to address a wide range of planning topics including housing.
The Healey Administration is also working to expand grant programs, such as the Community One Stop for Growth initiative, to support rural municipalities in housing development. State investments in broadband expansion, public transit, and workforce training will also ensure that rural housing policies align with broader economic development efforts.
Another policy tool of interest to many rural communities, especially those where there are high priced second homes, is the local option real estate transfer fee. Yet, the revenue raising potential varies widely across that group. For example, Nantucket currently has a real estate transfer fee of 2% for certain real estate transfers that funds the Nantucket Land Bank. In Western Massachusetts where sales prices are considerably lower the potential to raise revenue for affordable housing or conservation are much more limited as the transfer fee is typically levied only on the portion of a sale over a certain threshold. Real [KS16] estate transfer fees are most impactful in seasonal communities towns with high home values and frequent property transactions. Other tools are needed for these types of rural communities.