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[admin]

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 December 2007 on Monday, January 28th. 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. Prices for January 2003 and earlier have been estimated by applying the earliest reported median from The MAR, February 2003, against the S&P/Case-Shiller Index for the Boston area. Suggestions for improving this estimate are welcome.

Full Price History



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

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



Some observations:

• Current prices are once again lower than in any other year in the time period covered by The MAR, by the largest margin yet.
  
• The inflation adjusted median is now at the lowest point on record - the present price represents a loss relative to any time since the record began.
  
• The cumulative price decline from the beginning (Feb 2003) is 1.02%, which is an annualized decline of 0.21%.
  
• The most explosive price growth occurred in years prior to those reported by The MAR, which is hinted at in the dramatic gap between the 2002 estimate and the reported prices for 2003. This should serve as a caution against the conclusion that price declines are nearly over now that the real price is below all previously reported prices. The reporting period is too short for that conclusion.
  
• The real decline from December 2006 to December 2007 was 7.13%.
  
• Prices are now 20.24% below the peak set in June 2005.
  
• The year over year decline was below the bottom of the normal range in December for the second month in a row. This may signal that declines are beginning to deepen, though it is too premature to tell at this point.
  
• The reported median for December 2007 is only a whisker above the estimated value for December 2002. They are in fact equal if the estimate is rounded to the nearest $100.
  

As as been the case for at least several months now, The Warren Group reported greater declines than The Massachusetts Association of Realtors. The Warren Group reported a decline of 10.5% in the median price for single family homes with nominal prices falling from $309,000 in December 2006 to $276,568 in December 2007. Adjusted for inflation, that represents a real decline of 13.79%. Given that The MAR reported the December 2007 median as the much higher $323,000, the cumulative discrepancy puts The MAR reported price at a glaring 16.79% above The Warren Group's. A major factor in the discrepancy is that The Warren Group includes foreclosure sales and sales directly by the owner, which The MAR does not cover.

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. It also has more extensive historical data available. 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 graphs 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
  
• http://www2.standardandpoors.com/ ...truncated...
  

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[JCK]

Nice work. I really appreciate that you take the time to do this each month. 20% below 2005 peak is pretty significant at this point.

The only conclusion I'm going to take issue with is this one:

[admin]

[JCK]

Admin,

I think I read too much into your statement. I thought you might be saying that a big fall YOY fall in December would portend an even bigger YOY fall in January. Sounds like you saying that declines, generally would likely continue, based on inertia.

I absolutely agree with that point. I certainly don't expect appreciation in January!

[admin]

[terrace4]

What happened to the graph of real S&P/Case Shiller prices, with futures, that you posted in recent months? I look forward to this post every month--thanks for the fantastic analyses!

[admin]

[SamChady]

I like how you put the earlier period data in as an estimate. Thanks

How did you do this? Did you try to correlate the 2 data sources (pre & post 2003) used in some way? In other words, to normalize the data sets to each other, or maybe you used another method.

[admin]

[admin]

Correction: the formula I posted above was both incorrect and not what I used in the spreadsheet to create the graph. It should have been:

[SamChady]

Yes, I would be worried about only having a 1 month overlap to correlate, but its better than nothing, and you were very clear in marking the data as estimated.

You might have to go back to 2000 if things keep falling, especially if inflation increases.

[JCK]

Admin,

Instead of using just Feb 2003, could you calculate correlation for each month in 2003, and use the average of those numbers as your correlation factor?

I don't think that should be too difficult (assuming all the numbers are available), and would avoid relying too heavily on Feb 2003 as being representative.

How closely do the MAR numbers and S-P track with each other from 2003 to present? Do they correlate closely enough (even if the absolute values are somewhat different) to be useful substitutes of each other?

Thanks again for this. I agree with Sam that you may need to go back to 2000, if prices fall too much farther!

[admin]