bostonbubble.com

[john p]

I think that there is tension in the market, meaning it is being pulled two directions. The wealthy, ownership rich are pulling away from the working people that live month to month and have trouble earning at a faster rate than inflation.

Think about it, if someone had a nest egg of say $500k and they earned $100k, each year their increase in wealth would be the say 3% raise for working, and the 8-10% on the nest egg investment. Those that don't have the nest egg don't get the wealth growth of the 8-10%.

My feeling is that the rich are getting richer and because of this, the physical resultant is a manifestation of these two of these two levels of income growing at different velocities.

My thought is that despite the fact that someone from Newton can afford more because they've got tons of wealth, they are most likely collectively overpaying for their homes because the difference between a $1M house and a $400k home in another town isn't that different. It's kind of like paying $1 for a McDonald's hamburger and $100 for a Wendy's hamburger. I'm saying that the Wendy's burger isn't that much better. What's really funny is that people pay whatever Wendy's asks.

Here's the best takeaway: The "median" price level will align with the median income's ability to reach the median mortgage payment which will be a function of median house price and prevailing mortgage rate. The fluxuations due to interest rates will just settle around a monthly payment growth rate of 3% year over year. Now, if the quality strata of homes used to follow the income strata during the years that those homes were built, as the rich get richer, the rich will pay more for homes that aren't that far apart in quality. It's kind of like a forced curve grading system (which I was thinking about when people were talking about the academic systems). I think abstractly, people might have been thinking about the forced curves of quality and how they broke the fundamental rules and just assumed everyone deserved an inflated grade; gravity in grading didn't apply.

If that didn't get through, try it this way, if poor man is 1 and rich man is 100 in 1975 say, the quality of house increments from poor man to rich man ranges from 1 to 100. If now poor man is 1 and rich man is growing at a faster rate to 300 and they are choosing from the same housing stock because no new housing has been built, although the rich man is buying relative to his income he is paying 3 times more in dollars to dollars what the rich guy paid for the same house. I think Shiller's matched pairs is detecting the change in price due to the new dynamics in the redistribution of wealth. This last guy's post, jayman, is pointing out in my opinion, that the wealthy are being lifted by their wealth. If this was a building skin, it would be a curtain wall, like the John Hancock Building. Each floor hangs, like a curtain on a curtain rod, mullions that have glass between them. The market is being suspended by the growing wealth of those that are ownership rich and get that extra 8 to 10 percent on their investments. If the Federal Reserve did not put so much slack in the system (flood the economy with wealth M3 supply) the inherent tension between the rich and poor would have resulted in a corection of either wage inflation or a stock market crash. By allowing more slack, the wealthy drifted up like a hot air baloon while those that live month to month felt the gravity of inflation and never got off the ground. If there is going to be a crash, I think it will be more the wealthy who paid $1M for a house that should have been worth $500k. The story in the past few years should have been price level to income level. I think some towns are more inflated than others, and the bigger they are the harder they will fall in my mind. All it is going to take is some emerging nation to have their government nationalize some of the private investment. The rich will want the Military to step in and there will be a debate about how we use our Military and how the rich aren't doing the fighting so they should shut up etc. Then some of the wealth will come back to the USA.

[steverino]

Fascinating how tightly people like to grip their delusions.

Warren has town-by-town statistics out now. The drops in sales and median prices in places like Newton, Cambridge, Arlington, and so on are devastating. Cliff dive time.

"But the good towns are immune...."

Tell it to the good doctor, he can help you.

[john p]

http://www.rebeccablood.net/archive/2002/incometable.html

http://en.wikipedia.org/wiki/Gini_coefficient

http://inequalityusa.blogspot.com/

http://en.wikipedia.org/wiki/Pareto_principle

http://en.wikipedia.org/wiki/Pareto_distribution

[Hard Rain]

Jayman,

Perhaps you should get your facts straight before you call out others.

1) 315 otis sold for 992,000.00 on 3/21/2008 (not over a million)

2) 12 Harwich sold on 4/1/2008 (not March)

I asked for the addresses to check your facts not out of laziness....

[john p]

http://wwwcsif.cs.ucdavis.edu/~kramer/code/trf_gen3.html

http://seb.soc.cas.cz/publikace_download/publikace/standardy2003_a30.htm

http://angrybear.blogspot.com/tax_prog1.jpg

look at these four together, Capitalism as a big suction machine like a tornado:

https://www.imf.org/external/pubs/ft/fandd/2001/12/images/wade-c1.gif

http://digital.library.okstate.edu/oas/oas_image_files/v58/p81_87Fig1.jpg

http://www.underthemeso.com/gallery2/7862-3/1__DSC6966.jpg

http://apollo.lsc.vsc.edu/classes/met130/notes/chapter14/graphics/suction_vortices.jpg

Tornados are formed when the different air strata have different characteristics and the energy created at each strata's fault line forms a tornado vortex. I think the change in incomes created activity and excitement at the price points which created an energy that created uplift. The turbulence created turbulence.


http://www.weatherexplained.com/Vol-1/Tornadoes.html

from above link:

[Guest]

Hardrain-

Okay I'm little off but not much. What was your point anyway? That houses in Newton are going to drop a long ways?

Steverino- not delusions but facts. Warren report does not show dramatic drops in many towns.

I think there is a bubble as much as the next person. I held off buying a home until last year and would have waited longer but my lowball offer was accepted.

I have been involved in these discussions for years, and it's just not as simple as some people make out. People have been predicting the 25%drop for three years. So maybe we're down 10%. Are the houses cheap now? Will they be in three years? I doubt it, and I'm making less money anyway because my company's doing crappy.

I was around for all the gloom and doom of the 80's/90's (RE), 1987 (Stocks), 1997 (Stocks, FX), 2001 (Stocks) and now (pick'em). It's never as bad a people say, and it never gets as bad.

[Guest]

Hardrain-

Okay I'm little off but not much. What was your point anyway? That houses in Newton are going to drop a long ways?

Steverino- not delusions but facts. Warren report does not show dramatic drops in many towns.

I think there is a bubble as much as the next person. I held off buying a home until last year and would have waited longer but my lowball offer was accepted.

I have been involved in these discussions for years, and it's just not as simple as some people make out. People have been predicting the 25%drop for three years. So maybe we're down 10%. Are the houses cheap now? Will they be in three years? I doubt it, and I'm making less money anyway because my company's doing crappy.

I was around for all the gloom and doom of the 80's/90's (RE), 1987 (Stocks), 1997 (Stocks, FX), 2001 (Stocks) and now (pick'em). It's never as bad a people say, and it never gets as bad.

[admin]

[Jayman]

Admin-

Actually if you want long term RE data, and you want to talk about in real terms, look to this article:

http://www.nytimes.com/2006/03/05/magazine/305tulips_shorto.1.html?scp=8&sq=amsterdam+real+estate&st=nyt

So is your point (which is Schiller's right?) that everything has to return to the trend line? I guess I would agree, but there are several ways to get there:

1. Home prices fall

2. Underlying variables rise to meet the home prices (which could happen if inventory is removed and prices just stagnate forever.

3. There are not enough variables and when added the calculation is different.

4. The data is wrong

I am more in the camp that 2,3, and 4 could be a factor in the Boston area. This is not a "can't happen here" song. I just can't believe that Las Vegas, with open areas being built up with large numbers of the same homes has the same dynamics as Boston when I see these trends. Here's another example. On a purely GDP basis the US is richer than most of Europe. But there are many factors in their lifestyle that doesn't get quantified. So while rent vs. own trendline is out of whack, it's not just about a roof. As far as the data I think a lot of it sucks and is misused. Here's a good example "the average person" can't afford a home. Well cops are supposed to be average people and look at all the ones that make $150-$250K working in Boston. I know a guy that makes $150K but lives in a $1.2 million home. How does he do that? trust fund. Where does that fit. In NE almost all the homes are different. It's hard to do apples to apples across towns, ages of homes, etc.

[Rick West]

Hello Hard Rain,

This is Rick West with Redfin. Thank you very much for reading and discussing the analysis. We greatly appreciate your thoughts and feedback.

In response to your concerns about how rebuilt properties were categorized in our analysis, the age of the properties was determined by the ‘Age’ field, taken directly from the MLSPIN.

Regarding the specific rebuilt properties that you mentioned, the sale at 74 Fairmont Avenue was categorized in our analysis, as a one-year old property with 7607 square feet that was on the market for 79 days (not a 96-year-old property with 3424 square feet). 34 Beecher is a townhouse, and was not included because our analysis was restricted to single-family homes. 75 Manet is not located in one of the focus areas of the analysis. 66 Forest Ave was treated as being 56 years old (compared to 128 years-old from the previous sale record).

Best Regards,
Rick West

[john p]

You're not Rick West. If you're really Rick West then who won the World Series in 1963?

Where'd you get the name Red Fin? I get that it is "Nifder" spelled backwards, but is it that obvious?