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This is a brief report on what the data for the housing market in Massachusetts looks like in real terms. Market data is typically reported in nominal terms which can be misleading because it combines changes in housing values with changes in the value of the dollar. Correcting for inflation removes changes in the dollar as a factor and gives a more accurate picture of how housing values have changed. This report is based on the published data of the Massachusetts Association of Realtors, though it should be noted that the S&P/Case-Shiller index is a superior data source.

The Massachusetts Association of Realtors released their data for August 2007 on Tuesday, September 25th. While the raw prices were provided in nominal terms, for this report they have been adjusted for inflation using the CPI Northeast Urban numbers available at http://www.bls.gov/cpi/ Adjusting for inflation produced the data represented by the graphs below:

Full Price History




Change in Median Price From One Year Earlier, February 2004 - August 2007

Seasonal variations are removed by comparing prices from the same month in the prior year.



Some observations:

• While The Massachusetts Association of Realtors reported a small price increase of 1.4%, prices actually declined (albeit slightly) when inflation is accounted for.
  
• The real decline from August 2006 to August 2007 was 0.16%.
  
• Prices are now 11.10% below the peak set in June 2005.
  
• The year over year decline in August was less severe than normal, falling outside the normal range, along with three other months so far this year, including July.
  
• The moving average is now about 1.6 standard deviations below zero, whereas it was over two standard deviations below zero for awhile. This indicates that declines have been moderating, at least with respect to the data reported by The MAR
  

As as been the case for at least several months now, The Warren Group reported greater declines than The Massachusetts Association of Realtors. As was the case last month, the discrepancy this month was particularly pronounced as The MAR reported a small nominal increase while the The Warren Group reported a substantial decline on equivalent data - a 4.9% decline with nominal prices falling from $330,000 in August 2006 to $314,000 in August 2007. Given that The MAR reported the August 2007 median as the much higher $357,000, the continued monthly discrepancies between the two groups have apparently been accumulating and The MAR's latest number is now a glaring 13.69% above The Warren Group's. This was a hot topic again this month with some (including The Globe) suggesting that the discrepancy could be due to foreclosure sales.

The S&P/Case-Shiller Index for Boston is likely superior to the data from both The Massachusetts Association of Realtors and The Warren Group as it corrects for many flaws that are inherent when only using the median price. The S&P/Case-Shiller Index also has the advantage that futures contracts can be traded against it, thereby offering an unbiased insight into where housing prices are expected to be in the future. The MAR data was used for this report mainly out of inertia and might be replaced with the S&P/Case-Shiller Index in future reports.

As usual, please do try this at home. Double checking of the math used to construct the above charts and analysis is strongly encouraged in order to help ferret out any errors. The data was derived from the following sources:

• http://www.bls.gov/cpi/
  
• http://www.marealtor.com/content/monthly_reports.htm
  

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[Phil O. Math]

I want to start by thanking you for taking the time to do this and publish your findings. I really think you're doing us all a great service.

But I also would like to urge you to make the switch to the Warren Group price data or else the S&P Case Shiller index. By using the MAR's data you're legitimizing the MAR and their data when more and more they have become invalid.

Perhaps it would take a lot of effort to make this switch but if the effort is not too great and the accuracy of your findings would be improved by switching data sources then the switch would provide further benefit to us all.

Just my 2 cents. Thanks again.

[admin]

Phil O. Math,

Thanks, your point is well taken, and I have been thinking the same thing. The S&P/Case-Shiller Index would be a much better choice in most respects, except that it is released a month later than the data from The MAR and Warren Group. There is also some value in being able to say that even The MAR's own data shows weakness when analyzed correctly. I do have some new ideas for analysis using the S&P/Case-Shiller index, so if and when those come to fruition, it may be time to phase out the MAR reports.

- admin

[Ed]

Does inflation really matter? Even if the value of the dollar falls relative to other nations, or even relative to the value of other goods, the regular employee's salary stayed the same. So if you're still making $40,000 a year, and a house now costs less than it did when you were still making 40,000 a year, what does the value of the dollar matter, except for how much house it buys? I really don't see the value of factoring in inflation.

If you want to see if prices are going down in MA, log into the H3 MLS and take the average Days on Market number. Properties are lingering, especially condominiums. They're sitting on the market for 400+ days with two or more price reductions and still not moving.

[john p]

I think the dollar relates to general affordability. If you have enough for say a $2,500 mortgage payment and heating oil goes way up due to the shrinking value of the dollar, that and your transportation costs and a couple other things might wipe away your 3% raise you got last year.

If the masses aren't getting ahead with respect to affordability, the market will leave them in the dust.

Inflation also affects the long term interest rates which factor into the mortgage rates, so if you can afford $2,500 it is broken into two primary fixed costs: principal and interest, and the percentage of that amount that goes to interest grows, the principal needs to lower. Further, if the variable costs i.e. property taxes go up (which they are, often times due to inflation costs (heating the schools)) that eats further into the $2,500. The more that $2,500 gets eaten away by: interest rates, property taxes, budgeted amounts for heating and transportation, etc. the less people can pay for a house.

The flip side is the "ownership class": those that own substantial amounts of equities, properties and other holdings. People with like 12 years in at a Fidelity might have $250k in their 401k's. They will make more in interest in their 401k's than they will get on any raise they get on their salary. Because of this, many are not buying property because they want their ownership holdings (often times stocks) to grow so they get that 10 percent kick each year.

[admin]