bostonbubble.com

[Former Arlingtonian]

People of Boston are living through an epic period of real estate mania. Looking at the data behind real estate transactions tells the tale. The W Boston is a perfect example of what is really happening in luxury real estate:
In August 110 Stuart St UNIT 16G, Boston- sold for $1.750 and the new mortgage is $1.400 Million

In July 110 Stuart StUNIT 17G, Boston sold for $1.695- new Mortgages are $750,000 and $200,000.

In July 110 Stuart StUNIT 21H sold for $977,000 - new Mortgage is $630,000

110 Stuart StUNIT 22G, Boston, MA 02116 - sold for $1.873 Million
Mortgages on this Unit are $750,000 + $400,000 + $225,000= $1.375Million

In April 110 Stuart StUNIT 23B, Boston sold for $2 Million and the new Mortgage is $1.3 Million

In June 110 Stuart StUNIT 23B, Boston sold for $1.98 Million and the new mortgage is $1.29 Million.

In May 110 Stuart StUNIT 25E, Boston sold for $1.93 Million and the new mortgage is $1.23 Million

How about 110 Stuart StUNIT 24A, - which first sold in December 2012 for $800,000 and just sold in March for $500,000. There may be more to this story, but looking it certainly gives the impression you can't flip a property at 110Stuart.

Rentals at 110 Stuart are going for $3,900 per month -you can't finance and there are some trying to rent for $10,000 per month.

Here is the listing for $3,900 -
http://gatelyrealty.com/idx/mls-71586728-110_stuart_street_unit_21a_boston_ma_02116

[CL]

How is it even epic mortgages? The listing you give has average loan to value ratio of 67%. Which means the market needs to drop 33% for it to go underwater. Peak to trough the last crisis dropped 20% in metro Boston area (Case Shiller Boston 9/2005 to 3/2009). High tier housing probably dropped less. It probably takes a housing crisis twice as bad as the last one to make these housing unit as distressed.

[Former Arlingtonian]

People have relied on falling Interest rates to drive up home Values for 30 years. What happens to high end housing when the people are borrowing 67% and more to finance $900,000-$2 Million Condos, and don't forget the added costs of Condo Association fee + property taxes. Will these properties ever see these kinds of valuation ever again?

I make the case the rebound is a result of falling interest rates and falling mortgage rates.

What happens to these high prices paid when Mortgage rates have bounced off the bottom and may be headed higher



Interest rates and Mortgages rates have been falling for a very long time and perhaps everything we know is going to change?

[CL]

You ignored the fact that most of the conventional mortgages are fixed rate. Which means when the interest rate rises, the existing homeowner mortgage rate will not rise, thus -

1. It will not distress their ability to continue payment. Only a massive financial crisis causing a lot of high-income unemployment will do that.

2. They have high equities in those condos, so they can weather any potential ups-and-down better than others.

3. If the mortgage rate indeed rises, whenever they trade up/down/relocate these owners need to refinance to a higher rate mortgage which serves as a big negative incentives. As such, it's very likely they retain their existing properties until the price appreciates.

All of which points to, instead of a collapse in price due to fire sale (back in 2007-2009), it will be a collapse in listings, which I think is happening this year. Check the inventory data in towns like Belmont, Lexington, Newton, etc. It's down significantly. People who had houses in good areas are sitting on refinanced, record-low rate and stable income, and they don't have any incentive to take a mortgage rate hit and move.

Price, however, will not collapse, since the listing will be scarce, at least in good desirable places. If anything, they may go up.

[Former Arlingtonian]

CL,
Yes, people have locked in epic lows in mortgage rates.

But, the idea that everyone who locked in lows has a safe job is a false premise. Look at the boom in University related jobs which is a huge source of home buyers for Lexington and Arlington.

If interest rates rise in the future will there be fewer people willing to pay the $50,000+ tuition bills.
http://www.forbes.com/sites/specialfeatures/2013/08/07/how-the-college-debt-is-crippling-students-parents-and-the-economy/

Lots of recent buyers are employed in the University/College industry. I know its unimaginable to believe that Universities can't thrive forever, but low cost of debt is a key ingredient of their success. I remember when people thought DEC, Polaroid, and Raytheon would be the economic engines of Massachusetts forever. Railroads and Textile industries were the economic engines of Worcester-MA until they weren't (I know a bit of an exaggeration).

At this moment in time it looks like the Federal Reserve can keep interest rates lower forever. But, its very possible that we have already seen the early signs that the Federal Reserve will have to deal with a future in which the market dictates interest rates.

Every Condo buyer must meet their monthly obligations of mortgage payment, property taxes, and condo fees. If you miss a couple of months because of income interruption that is when the problems begin.

Yes, I know we will no longer have any financial crises.

U-6 unemployment in the United States is 13%+
ECB-is cutting rates today due to weak European economy.
I wish we were out of the woods in terms of our economic challenges, but its impossible to look at the facts.
In Boston area the bullet proof high tech market is showing signs of weakness as EMC has announced layoffs at their RSA division, CA continually layoff software engineers, Iron Mountain is laying people off, we live in the age of quiet layoffs.

I'd welcome a presentation of economic facts from you that can dispute my concerns.

[CL]

So your base case is interest rate rises, then people decides to forgo college altogether, leading to massive unemployment in professors and a collapse in the real estate market? Seriously?

As for Fed raising rate, I think it's clear Fed will only raise rate when the economy and unemployment is in full recovery mode. They always err on being late than early. You mentioned ECB just cut rate, today. The central banks are incredibly worry about deflation, not inflation at the moment.

As for economic data - instead of looking at U-6 employment being 13%, how about looking at unemployment rate in local area? I just googled this up, as of Aug 2013.

Newton 4.8%
Lexington 4.5%
Wellesley 4.6%
Brookline 3.6%
Needham 4.5%
Weston 3.3%

[Former Arlingtonian]

Cl,
I am not predicting massive unemployment for professor, but I could imagine a downturn where they slow hiring and do some layoffs.
I wish I were alone in seeing an Education Bubble - I'll admit this is a wee bit of an exaggeration.
Read: http://www.forbes.com/sites/georgeleef/2013/10/23/a-tale-of-two-bubbles-housing-and-college/

The problem is that the Federal Reserve can only keep interest rates low while the markets believe there is no inflation. Inflation has not been banished from existence and can become the focus of financial market participants at a moments notice. Through out the history of mankind our economies have swung from times of inflation, towards times of threatening deflation, and back to inflation.

I know you are going to say that this time is different and inflation will never be a force in society and we will never see a hurricane ever again.

When inflation pops up the Federal Reserve and other central banks will be forced to respond by raising interest rates. I have absolutely no idea when it will happen, but it will happen as 'surely as night follows day'.

Creating overly small data sets on unemployment is statistically meaningless because it doesn't give you a representative sample (the observations become anecdotal).

As of last January the U-6 Uemployment rate for Massachusetts was 12.9 "As of January, the last period in which this most desperate of unemployment rates was calculated for Massachusetts, U-6 in the commonwealth was at an alarming 12.9 percent. Some 23 states have lower U-6 rates than the Bay State, including such economic stalwarts as Nebraska (8.8 percent), Oklahoma (9.6 percent), Iowa (10 percent) and Louisiana (11.1 percent)."
You can find the article here:http://www.bizjournals.com/boston/blog/bottom_line/2013/03/massachusetts-jobs-unemployment-truth.html?page=all

Are you a Realtor or a Home Owner?

Kind Regards,

[admin]

[admin]

Oh... how did I forget single point of failure #5?:

• The US actually defaults on its debt thanks to political brinkmanship.
  

- admin

[Former Arlingtonian]

Mark Hanson is an expert in the field of Mortgages and the Housing Market.

He summed up what has been happening with:
"Lastly, a surge of supply into a market with 10-year notes at 1.6% and 30-year mortgage rates at 3.25% — when investors and organic buyers were driven by the biggest stimulus to ever hit housing too jump all over each other and pay 15% over last price/appraised value — is a completely different situation than a surge of supply AFTER a house prices and interest rate surge, which have both done a great job of sidelining a large percentage of investors and organic buyers alike.

In short, people forget the housing market has been turbocharged by the greatest direct stimulus in history over the past 18 months. They are so accustomed to historic rates stimulus they simply don’t see it. I hear so much that the past year “recovery” has to be “organic” because the “government” is not providing any stimulus or subsidies. Perhaps, technically they are correct because the Fed is not a government agency. But when you factor in the power of the Fed buying rates down from 5.5% in 2011 to 3.25% in 2012/13 on demand and 6.5 million mortgage mods on supply you come up with a very volatile situation if that go-go-juice is ever taken away. And it was just taken away.

Real simply, the housing market “hard reset” to Twist/QE3 — rates being forced down to 3.25% from 5.55% by the Fed over a couple of months — began in late 2011. Now that this stimulus has been taken away literally overnight, housing must “hard reset” again. This “reset” will appear in the form of a sales volume/price “air pocket” through year end at least.

Bottom line: While more supply would have been great for “this” housing market a year ago, now — with far fewer buyers, prices through the roof (far more expensive than in 2003 – 2007 on a monthly payment basis), and 15% purchasing power lost in the past 2 months — it could crush it."
Find the original here:http://mhanson.com/archives/1419

Mortgage rates falling with Fed intervention in pictures

[Former Arlingtonian]

In this video Robert Shiller talks of the Housing market being very speculative and driven by irrational exhuburence and Mark Hanson explains how lack of buyers - lack of affordability - could sink housing.

http://video.cnbc.com/gallery/?play=1&video=3000193241

My favorite quote is Mark saying "one house is too much inventory of a city of dead people"

[Guest]

Admin - I believe if foreign investors have a viable alternative to US treasury, they will definitely buy it. The problem, however, is that no such alternative exists today or in foreseeable future. China is at least a full 10-20 years away, if not longer, to allow its currency to float, open the capital account, develop an international bond market and let it mature. Euro has its own set of thorny issues. I think, at least in short run, the reserve money status is not in question.

Inflation (a modest amount to be sure) is probably what Fed is actually hoping for as it means the velocity of money is finally picking up instead of all the money flowing back to bank reserve. As of now I see Fed a lot much worry about deflation (aka Japan style lost decade) than inflation, and will be data driven, very dovish and err on late than early. September 2013 non-tapering essentially showed their mentality. As for inflation will happen "as surely as night follows day", try telling that to Japanese who has been waiting for a decade plus to escape the deflation trap.

Regarding Unemployment, I do not see county/town unemployment data as statistically meaningless, the same reason why I don't think demographic/income data in town level is statistically meaningless since sample size is reasonable. Explain why Newton (population of 85000+) or Lexington (population of 30000+) is not enough for representative sampling.

And since Former Arlingtonian asked, I am not a realtor. I rented from 2004-2009 waiting for the market to turn, and owned my house since then.

[admin]

[Former Arlingtonian]

Guest,

Sorry to call you the R word. We are all human and we argue our cases based on our bias (my personal bias is these current prices are crazy - there is a chance I'll be wrong)

Let's compare Japan vs United States. During Japanese crisis the primary buyers have been Japanese living in Japan and there are lots of Japanese Manufacturers. This created lots of Japanese Yen strength which resulted in the Yen buying more and more.
Here in the United States we are dependent on lots of foreign buyers of US Treasuries for our economy to function. The USA is dependent on lots of buyers who live outside the US that will be concerned about inflation and the impact on US Bond prices.

The excess bank reserves are piling up for the Banks as the Fed continues its historic bond buying program. We are suppose to believe that the Federal Reserve will manage inflation. Do you remember how well the Fed handled the Tech Bubble, or the Housing Bubble 1, or the Stock market crash.

Here is a graph of the hockey stick ramp-up of excess reserves for Banks.



Look at the big leap the 10 year US Treasury took earlier this summer.. The Market may force Interest rates up - Central bankers cannot always control Interest rates.