bostonbubble.com

[Renting in Mass]

Home affordability ratios by state.

Click the Price-to-Income header to sort by ratio. Massachusetts is the fourth worst. Only Hawaii, DC, and California are worse.

This data is a year old, but I doubt the rankings have changed very much. Boston prices have help up relatively well over the last year.

I've found it interesting that Case Shiller shows Boston with a smaller price decline than all but two metro areas. I've been wondering if Boston is going to buck the trend, or if it's going to end up somewhere closer to the average. This is one indication that prices are still too high in the Boston area.

[Renting in Mass]

Here's some Q1 data.

No matter which metric you use, housing still isn't affordable in the Boston area.

[CC]

For price-to-pent and pent-to-mortgage ratios, what will be considered more normal?

Thanks!

[Guest]

An orthogonal but related issue is quality of housing. Instead of just assuming that all properties are equal, I would like to see a comparison of what 3br/2.5ba costs in each city, in other words what it costs to house a family of 4. I'm guessing Boston will pass up DC in that case but not California or Hawaii. To pass those states up, we'd have to also exclude housing not up to modern standards: modern heating/cooling, no low ceilings, no funny layouts (bathroom sinks in living rooms), no health hazards (lead paint, lead pipes, asbestos, basement bedrooms, etc), no slanted wall rooms, no small studs, etc. I'm guessing Boston would be 2 or 3 in this list. San Diego is expensive but at least their homes can be easily remodeled to make them livable!

[CL]

I think in terms of price to income ratio and price to rent ratio, MA is expensive. That, however, only looks at the income statement/Flow part of the equation and ignores the balance sheet/Wealth part of the equation.

I looked at Core Logic for LTV by state. MA ranks #7 lowest LTV. Hawaii, ranked #1 in most expensive state in home affordability, but rank #2 in least leveraged state in terms of LTV. NY rank #1 in least LTV.

From Core Logic -
http://www.corelogic.com/uploadedFiles/Pages/About_Us/ResearchTrends/CL_Q4_2010_Negative_Equity_FINAL.pdf

Which means, as we should already know, that part of the reason why MA home price has not collapsed is that MA is not as leveraged as other state. Thus, there are less fire sale going on compared to say Arizona (LTV 95%!) to drag down the price.

The implication is the doomsday scenario (home price dropped another 20-30% in short term) may happen in Florida, Nevada, Arizona, but in MA, where unemployment is more contained and existing homeowners still have quite a bit of equity, I just don't see it. Also, note that MA has very few "near negative equity loans". So sellers who don't "agree" with current market can stay put if they want (and chances are they can service the debt given the relatively low LTV). Which means it will be hard to have quality bargain (via. general movement, ie divorce, relocation, etc) and sluggish price and sales going forward. If you want to wait until Price-to-Income to normalize before buying, then you may need to wait for a while.

Also, with the Dodd Frank new regulation requiring a higher (20%) downpayment, existing home equity becomes more important. Which means states with low LTV will be better positioned.

[CL]

CC: I like Rent-to-Mortgage more than Price-to-Mortgage, since rent to mortgage compares 2 flows concept while price to mortgage compares asset to flows, which make assumption in equity.

[Renting in Mass]

[CL]

Renting in Mass - of course, if price drops, LTV by default has to come up. But I think there is a feedback looping effect here - if a housing market has very little equity in it, coupled with high unemployment, will lead to foreclosure. Foreclosure will drag down the price of everything near it, and leading to a higher LTV.

My argument is the fact that MA has a lower LTV and relatively low unemployment will make this vicious cycle less likely to happen, compared to other states.

[Renting in Mass]

[CL]

I did some back-of-envelope type calculations (if you don't like averages, you can skip the post) -

Total Home Equity in MA = 212.381 billion, according to CoreLogic
Total housing unit = 2.748 million, according to Census Bureau
Average equity in each unit = 77K

Household Median Income = 64K, according to Census Bureau
Affordable Mortgage supported by median income = 295K, 28% Gross Income rule, 4.5% interest rate.
Average reasonable mortgage in each unit = 295K

Average housing value supported by existing equity and reasonable mortgage = 372K

Current Median housing value of owners-occupied units in MA = 357K

All these is just a way to say that, as a whole, if you consider existing equity and very low mortgage rate, the seller is not in distress and valuation is well supported, from a owner's perspective.

Another note on interest rate - do remember, assuming sellers can refinance the existing mortgage, the rate for seller will still be 4.5% even when the rate shoot up later. Which means while a new high rate will affect demand (less buying power), it will not force extra supply (since rate are locked in during refi). In fact, it will reduce supply since seller needs to pay off old cheap mortgage and get a new expensive mortgage. Which means sellers won't sell unless 1) price remains high, or 2) really forced to, which we established is not generally the case.

So in short, sellers are not that desperate and price will not collapse until they become desperate. There will only be less house available.

[john p]

Add to this that house price movement also realtes to the ratio of buyers to sellers.

Right now you have pent up demand (about 5 years of new buyers waiting on the sidelines renting waiting for the market to continue to crater) and on the other side you have sellers who either want to trade up, relocate, or desperate sellers who are in trouble. The "Echo Boom" or kids of the babyboomers are coming into the housing market.

I agree with your analysis that as long as you still have a job you can weather this storm. Also, those with jobs have gotten cost of living increases so they are at least making 10 to 15% more than when the Bubble burst in 2005. Those nominal salary increases have given some cusion and families have built up savings that they are potentially burning through if they get laid off.

You guys, everything hinges on one thing; will there be a double dip or not?

If I were buying right now, that would be a huge part of my research.

[BeaumontV]

You can't forget the down payment. Refinancing hinges on having at least 20% equity in the home, which many do not.

Buying hinges on having a 20-35% down payment (though 10% in some cases). For the echo boom kids, they need $25-$40k in their bank account, which is highly uncommon.

[CL]

BeaumontV - I do not know the exact distribution of home equity within MA, but I wonder if the number of >20% home equity owner is as low as you thought, given for the average for the whole state the home equity is at 39%.

[john p]

BeaumontV: I agree about the down payment, but that is still a lot of pent up demand and the longer that pent up demand builds, their savings do as well.

If people rent for an extra five years, they're easily saving that kind of money.

I think if someone is single and is carrying that load it is hard to save, but two living together renting, savings can build up pretty quick provide you live reasonably cheap. The problem usually is that once two people start living together the hen begins her nesting instincts and wants her own house, so renting for a long time is kind of out of the equation for most guys.

I'd be curious to see any data showing the average age of the first time buyer over time...

[Renting in Mass]