bostonbubble.com

[JCK]

In my neck of the woods, as compared to 2005 when we bought our condo in Cambridge, rents are about 40-50% higher (nominal), interest rates are about 30-40% lower, and prices are down about 5-10% (nominal). For my condo, you monthly costs are $500-600 lower for buying (assuming 20% down) vs. renting. This does not factor in either the tax advantages of buying or the fact that you are paying down loan principal if you buy.

This seems to shift the argument very strongly towards buying, unless you're looking for short-term housing. I'm be curious to hear what others are seeing out there.

[john p]

I think you need to answer two questions.

First (the short term investment proposition)

I think you'd have to think about what percentage of people buying a condo are doing it temporarily until they decide to move into a house.

I'd venture to guess that 65% of Condo Buyers hope to be in a house at some point. I could easily be wrong on this one. Perhaps many empty nesters are filling the ranks as potential Condo Buyers.

Anyway, the reason why I say this is important is that back in the Bubble Years, many decided to buy a Condo even with the intention of selling it within as few as 3 to 5 years because it was considered a short term investment because prices kept going up.

Because a Condo isn't seen so much as a short term investment, you have fewer short term speculative buyers, and thus possibly fewer overall buyers.

Second (the long term investment proposition):

If rental prices are increasing, you might have Speculative Buyers who intend to live in a place for a few years, and then decide to keep the property as a rental when they decide to move out and buy a house.

Lastly (Cost of Capital)

I think much will be decided by the Cost of Capital. Buying a condo for a long term investment would make sense if you want to lock in a cheap cost of capital. The risk is that if mortgage rates go up, house prices will go down unless we're in a period of prosperity and affordability isn't so much an issue.

During the past several years we've seen the Federal Reserve employ a Quantitative Easing Strategy. I wonder if by adding liquidity and seeing the reaction time and again, they've gotten a feel as to managing the throttle and the brake, kind of like how a new driver gets a feel in operating a car.

I think when we entered a Bubble, managing the Economy was more like flying a plane.

http://www.centennialofflight.gov/essay/Dictionary/four_forces/DI24G1.jpg

You typically have to balance:

Thrust of the plane provided by a propeller or jet engine, or elastic band.

Weight of the plane

Angle of Attack, or the upward or downward angle of the plane. Too much of an upright position can cause a drag or a skidding with the pressure of the air, or a slightly upright position or level position can cause lift if the surface are on the top is larger because the air will naturally pick up speed as it passes

http://www.units.muohio.edu/dragonfly/flight/wing.gif

Now this operation seems to align with what economists see in quantitative easing. The issue I see is that there is a byproduct in quantitative Keyensian type deficit spending in order to get some lift, and that is Debt, and Debt is Weight. Debt is like having a very, very heavy plane. The heavier the plane is, the more and more fuel and bigger engine you need to keep it up in the air, which means you need to keep printing more and more money.


The big thing I think about is what many call a "Game Changer", and what I mean by this is a change in the Economy when the Properties Change. This would be like what would the properties be if through quantitative easing we actually landed the plane on the earth and instead of Thrust, Weight, Angle of Attack, etc. we're now looking at the fundamental properties of how an automobile works because we are grounded.

When I think about this "Game Changer" I'm thinking about the difference between vapor, water or ice, and how a change in Physical State changes the properties of how we conduct ourselves.

Does anyone see any Changes in the State of the Economy on the horizon?

[john p]

And by the way, you can't do this on weekends if you buy a condo in the City.

http://www.youtube.com/watch?v=-c_7fRq_19s

Practice your thrust, lift, and weight

[john p]

JCK:

Another thing I forgot to mention was, think about the nature of employment in 2012.

What do you think the average length of time one spends at any given job?

I think that areas like Arlington and Newton have become pretty sought after because the ex hipsters can still get a taste of the benefits of the City, the neighborhoods are safe and the schools are decent.

But more importantly.... if someone wants to change jobs, because they live close to the job center, Boston, they can be more comfortable making a long term investment in a location / house.

[Guest]

I think buying is good idea recently. The rents in boston just going up crazy right now. This will become the true support of housing price in boston, which will lift it from falling any further.
Unlike housing price, rent is really tiding to inflation, just like food cost. Yeah, I said it, shame on the Boso who excludes food when calculating that ultra low annual inflation rate of USA.
So if my mortgage is 500-600 less than what it cost to rent the same place, I will try to do whatever I could, to come up with the 20% down payment and own that feaking place in a heart beat. I don't see how else your 20% down payment will get any true annual return of 3.5% (your mortgage rate) by investing anywhere else in the coming 2 or 3 years, unless you are involving in some risky business like shorting the treasuries or buying facebook stock and hoping it will bounce back.
Of course it is very difficult to get loan right now, and it is hard to come up with 20% downpayment. But that's also why you should buy now if you could. If everyone can get the loan and require no downpayment, we call that housing bubble, right?

[Former Owner]

So, now the reason to buy is that rents will go up and up and up and Real Estate will never fall again.

A great read and analysis on Real Estate is http://Mhanson.com/archives/1013

Lets not forget Bank credits have caused an additional $2Billion -$3Billion to be invested in Boston/New England real estate in the last two-three years - I believe this is adding to the market distortions.

Boston real estate is booming and there are some decent industries in Boston, but the accelerant is Banks investing through Tax Credits - to reduce the Banks corporate income taxes.

For example , Massachusetts Housing Investment Corp (a non-profit) has received and invested $891,000,000 in 2010 and $1 Billion in 2011 to build affordable housing and non-profit construction of real estate. Keep in mind that this is just one example of how CDFI non-profits are distorting the Real Estate markets of Boston area and New England.

In 2010 - $652 Million was Housing Tax Credits from Banks (the granted by the US Treasury) and $210 Million in New Market Tax Credits. The Banks provided actual loans of $29 Million. Remember, the Banks get a Tax credit of approximately 30% of their investment when they invest with tax credits.

In just two years Banks, through their use of New Market and Housing tax credits, have invested $2 Billion in Boston/New England area affordable housing and other real estate building. I'd be willing to guess that Mass Housing Investment Corp is on track with another $1 Billion in investing in Real Estate in Boston and New England. That would make $3 Billion of investment Money flowing into Boston and New England area just through one CDFI non-profit.

Why would Banks lend with traditional loans when the can invest using Tax Credits and the Bank is assured of reducing their corporate income taxes.

http://www.mhic.com/annualreports/2010%20Annual%20Report.pdf
http://www.mhic.com/annualreports/2011%20Annual%20Report.pdf

[Guest]

[Former Owner]

We are in complete agreement -

I was making the case that the prevailing mood is you have to buy because Rents are going up.

This frenzy will push many marginal first time buyers into the market - willing to take the risk that owning( with a mortgage) is better than renting.

The tragic part will be those that buy before the have a substantial emergency fund to weather the economy.

Look at the current frenzy of the market - this is likely to ebb and flow. The important thing is for folks to buy something they can afford.

[JCK]

[Former Owner]

JCK,

Massachusetts Housing Investement Corporation putting $2 Billion in to real estate in 2010 and 2011 - is the equivalent of buying/selling of 5,700 home sales if each home was sold at $350,000.

This $2 Billion bid up the properties that hit the market in 2010 and 2011. A portion of this money went into acquiring old homes and multi-tenant buildings and rehabing the properties.

When ever you have external Money flows of this magnitude into a market the size of Boston/New England you are distorting the market. These distortion show up has increased house prices and increased rents.

There is probably a up lift in rents from foreclosures that aren't being sold by Banks and are being kept on the books.

Here is a great analysis of the latest Case Shiller Home numbers by a guy far wiser than I am.....http://mhanson.com/archives/1027?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+MarkHansonAdvisers+%28Mark+Hanson+Advisors%29