bostonbubble.com

[john p]

Hey what do I know?

http://www.youtube.com/watch?v=vc3LphELwQI


I've got to get back up to the "Ham" to have some of that Lizzy's Ice Cream and some of Jake's St. Louis Ribs.

[GUEST]

25% additional drop is simple... affordability.

Affordability as it relates to income/mortgage rations
affordability as it relates to rent/buy

when people no longer look at real estate as their best investment.. and realize they need to get past the 0 to negative savings rate... the market must adjust.

just llok at median home prices vs median income--

I am not sure it will happend but from a rational perspective...

[admin]

[john p]

Let's see if we can figure this out.

There was this economist John Keynes:

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

In his theories he talks about government intervention to help the economy through means such as lowering interest rates (like we've seen) and investment in infrastructure i.e. the Big Dig. He also monitored employment levels and balanced them with what he considered an "Equilibrium"

In the same vain, think about home ownership levels and if we are above or below historical equilibrium norms. When I consider a fundamental basis, I think about affordability in order to reach equibrium. For example if equilibrium is "X", and we are "X minus 5%", I consider what it takes in order for 5% to make it into the affordability strike zone. I don't think that everybody will be able to afford a home, just like not everybody will be employed. I think we might have unacceptable levels of employment or home ownership, but we need to think in terms of reaching the equilibrium and not utopia.

In doing this, I think it is important to not ignore the gorilla in the room and if there is some creep and exposure to a major correction, that is what I am asking you guys to help me understand. I see much of the gorilla in the room correction taking form in currency devaluation.

In addition to Keynes, there is this thing called Say's Law, from a French economist named Jean Say's.

http://en.wikipedia.org/wiki/Say%27s_Law

The basis for this Law has to do with a theory that goods and services are traded for goods and services. Money is just the medium. The thing he says (no pun intended) is that without supply, you have no demand. For example, if you're a little kid going to lunch without a snack, you can't trade snacks with other kids. My mother used to give us these God-awful saltines with peanut butter (which were worthless compared to twinkies and devil dogs and the like).

In the vain of Say's Law, think about trading. Think about the current housing stock. I see you guys talking about the Capital Gains Tax and if the older folks who own most of their homes can get a break on capital gains, they might be induced to sell at a greater loss. Also think about goods to goods trades such as if someone is retiring and they can get an absolute steal on a house in Florida, they might bounce out of Boston for what we think is a loss. Their loss in their Boston sale is a complete double gain in Florida. Think about goods to goods, alternatives. If price points above and below your price range are moving up or down it creates pockets of opportunity for negotiation. What can the seller gain on their end. That's the mindset.

Again, I'll tell you my macro plan.

I believe that our Nation ought to induce the construction of new planned cities, and retirement communities on the outer edges of the suburbs of existing cities (to loosen up supply in the commuter areas by creating supply for retired people to retire).

I think we ought to have developers by massive tracts of land and have a zoning and planning guidelines for a full built out city. Then, they start on the edges of the city with low rize construction. Because the construction is low rise, the infrastructure cost would be lower, and as the growth was "trained" inward, the size and scale of the buildings, open space, and infrastructure would grow in proportion, almost like a fractal. Investment stays in line and proportion with growth. As the development moved inward, the land would be worth more and more and the sale of the property would help fuel the development of the infrastructure. I believe that if the development followed principles of urban design such as balances of open space and density, floor to area ratios, and balances of the number of schools, hospitals, and densities of residential units so you have the right about of 10 year olds to be able to play together in a certain walking distance, etc. With new "intelligent infrastructure" we could make the cities much more efficient and people could get back and forth to work more easily and businesses wouldn't lose profits because their workers are stuck on overcroweded highways etc. Think about buildings spiralling inward from low rise to high rise and open space and infrastructure like monorails coming inward with it. Imagine skyscrapers of housing and offices with an emerald necklace type openspace designed at the scale of Central Park. This is all possible. This is being smart about capitalism. It is about finding a home for all that M3 that is floating and evaporating. It is about preventing bubbles by allowing a place for the demand to have a pressure release. It is about constructive infrastructure investment and not creating a Boondoggle to spend money just to spend money. I think it is about balancing capitalism with democracy and not having major paradigm shifts between robber barron and socialism.

[guest]

Rent vs Buy...

To quote NAR realestate is highly localized that being said i do not have the time to look at every local to see how it equated but here is the boston avergages:

"The entire state of Massachusetts, and the Boston-Cambridge area in particular, is known for its extremely high cost of living. The overall cost of living here is 240% of the national average, with apartments ranking 48% more expensive than the national average. The average rent for two-bedroom, two-bath luxury apartment rentals is $1,900, and the average price for more modest one-bedroom apartments in older buildings is around $1,000."

Boston 2bedroom apt averages out at about $450k.

90k down (20%)
Monthly payment: 30 Years
Interest rate: 5.750%
Loan amount: $ 360,000.00
$ 2,100.86 a month
Tax $400 per month
Insurance 100 per month
Condo fee (est) 200 per month

per month spending of $2800 per month with a 90k outlay.

now-- you say but you build equity? and I say you have to pay for problems.

Now lets just work on the assumtion that housing should equate to 35% of you takehome.... which i think and historically is way out of line.

you will need to take home approximatley $8400 per month... now I am pretty sure that with taxes, even on a family that equates to around 135k...

so what is bostons median income: The median income for a household in the city was $39,629, and the median income for a family was $44,151. even if these numbers are 2005 numbers...
WTF

so that is why i think 25% is justified-- we are not only talking about the upwardly mobile-- 67% of the population owns homes

If my numbers are off-- flame away-- I wasted to much time at work today to do thorough analysis--- i need to get a BIG raise if i want to buy in a nice neighborhood

[Sam Chady]

Your 35% assumption (which I have seen typically is 38%) is done on income BEFORE taxes, and you calculated it on after-tax income and then figured how much you'd have to make before taxes.

That will dramatically lower your number.

[john p]

If you're talking qualit of unit, apples to apples with the $450k unit which yields a $2,800 per month mortgage, taxes, condo fee, and insurance outlay to the rental condo for $1,900 per month, you should consider that you get a tax shelter on interest on the mortgage, which is most of the $2,100 portion, the property tax is sheltered. I think you could get like $650 to $750 or so sheltered per month, so the two come much closer together.

I wouldn't touch any condo right now unless it overlooked the ocean or the Boston Public Garden, or was in a really great, great neighborhood.

Ask yourself if the percentage of new buyers is growing faster than the supply of new homes in Boston. We have traffic jams now for the same reason we have a housing bubble. We planned the highway system based on a one car, one earner household. Further, because they squeezed spending on infrastructure, we did not expand our roadway capacity with the trickle of growth of new drivers every year. When assessing and benchmarking, think about how we didn't grow supply like other areas of the country during this bubble, and to understand the relationship between the median salary for the State with the median house price of the State, as you mentioned, you need to get out and drive all around the State. You need to see the thousands, and thousands and thousands of homes in places like Taunton, Dedham, Woburn, Peabody, Springfield, Lawrence, Lowell, Worcester, etc. You can get places in many areas dirt cheap, so if your eyes is focused like a lazer in Brookline or the South End, you're dealing with an entirely different set of numbers.

The question is, are the babyboomers hogging all the available houses and a greater percentage of the current younger generation is stuck out in the cold.

The point that you made the 25% statement before your "thorough analysis". It's better to kick these things around among the girls before you take them in to real negotiations. Doing your homework isn't a waste of your time, if you can support your positions, you'll end up with an ability to get a great deal whenever you do decide to pull the trigger.

Let's think about what a kid out of college gets for a starting salary. I dont know, say $50k. Maybe within 5-8 years of renting and saving with some cost of living raises and promotions, what would they be making? Maybe add in the wife or partner and come up with a median salary for the buyer. Also keep in mind that this State has gone through a metamorphis from a blue collar area to a white collar area. Because it has been upwardly mobile in the past couple of decades, and a whole lot of new starter supply hasn't really gone online, you're dealing with a whole different segment of the population.

Here's a real example: My wife is from Virginia. I decided to float the notion of relocating back in 2005. When I went to interview, the salaries were much lower than in Boston. Real estate prices in Virginia had just gone significantly up in the prior 2 years. The problem was that the salary structure was based on the people that already lived there; people that had bought places a few years prior when prices were much less. So just because I entered the scene late, the numbers didn't have to align with me, they had to align with the population already there.

If you took people's median salary and compared it to their current median mortgage payment, (not everyone is looking to buy a house right now) you'd see that we have millions of people in Massachusetts with very small mortgages, even much lower than the rents you're talking about. The majority of people have short mortgages because they bought before the bubble, and now with their excess capacity they're saving and their savings are growing at the investment rate of 8-10% and they are becoming "ownership rich".

[JCK]

The other important point is that median income is a very poor measurement. You're really only interested in the income levels (and wealth) of the people with which you're competing for housing. That's who you need to stack yourself up against, not the average person in Boston. I'm sure there are plenty of students and elderly that bring the median numbers down. The former aren't competing with you for housing at all; the later may be house rich and income poor (and probably could outbid you, even though their income is low).

It's a tough market out there. I agree with john that you shouldn't sit on your hands hoping for a 25% drop in nominal prices, because I think it's a stretch.

[john p]

The only way I see someone getting that kind of discount right now is to take advantage of the current psychology (fear). If you wait until someone tells you it's safe to go back into the water, the sellers won't be as afraid either and won't likely give you the "fear" discount.

I'm not sure about my position because there might be a gorilla in the room that I think is an organ grinder monkey. All I'm saying is that aggressively lowballing now might absorb the gorilla related drop as well as the risk that we rebound or flatten, in which case you'll just be prolonging your future mortgage term because you're renting longer.

If you want 25% off, think about what the interest rate will be when prices do drop to that. Realistically, that would be at least an 8% rate, so today, if you got 15%, that might align with your expectations. So, what the hell, lowball to 20%... There will be a handful of people that get major deals, maybe that could be you? It's not going to happen if you don't do anything.

When David Learah of the NAR say's that housing will continue to drop for the first time, he might have the George Costanza "double zero" batting average zero, mush, and it might go up.

Here's another reason why you should consider lowballing, what if you buy a house at 85% of it's market value now; it drops 5% in a couple years as you say because the rest of the market goes down 20%; you can trade up because what you want will be 20% less and what you're selling will only be 5% less. This is the beauty of a mixed market; in a mixed market you have people with different philosophies and outlooks, so if you search around you'll find margin.

[barryshaft]

Interesting points albeit flawed in some areas.

as for median income/median home prices-- those are median 2 bedroom prices so i do not see an issue. And try buying a house in boston... that is not even realistic regardless of the number chose

Population in mass is decreasing across the board-- regardless of where you live.. so doesn't that effect demand?[/url]http://www.boston.com/news/local/articles/2006/12/22/states_population_growth_on_stagnant_course/[url]

Agreed that 25% is unlikely but with recesion????

This discussion reminds me of the dot com stock message board-- ABC is going to 300 this year or sell it short now.... guess what some times there were right and sometimes wrong[/url]

[john p]

It's a mixed market so two people with the same exact strategy might end up with totally different results.

I think that seeing through the immediate tough years and having a long term view makes sense. If you buy something and five years later you're making a good deal more, you've made it through the first Pilgrim's winter. Guess what, with your extra money you can start to put more into your 401k and start to get the 8-10 percent gains.

Knowing that when this market bottoms it will most likely flatten for a while, I can see why many would wait to find a flat spot before they buy. Given the fact that we have significant peaks and valleys in our real estate seasons, it is hard to find the smooth time period where we can see a straight line for a period of time. For sure, sales will go up for the Spring, but relative to last Spring or drifting further is the question. My point is that there are some factors that could suggest an uptick in certain price points and locations. My point is that people that were confused overreached when we were in a sellers market frenzy, so I think the best deals are when we're in a buyer's market frenzy.

[JCK]

[Guest]

Using the assumptions of a 450K house:

90k down (20%)
Monthly payment: 30 Years
Interest rate: 5.750%
Loan amount: $ 360,000.00
$ 2,100.86 a month
Tax $400 per month
Insurance 100 per month
Condo fee (est) 200 per month

You take the interest payment in the 1st period (this only goes down) and have $1,750. Deduct 20% for the interest deduction (this takes into account the loss of the standard deduction) and you have $1380. The taxes you cite are too high. In Boston they would be about $200 ($10 per thousand with residential exemption for first $220K), in Cambridge lower. Insurance is usually included in condo fees. Being generous and saying $300 for a condo fee would give you a total cost of $1880, about $1000 less than what you are saying about about the same as your $1900.

Now, there are principal payments and the downpayment but this is like putting money in the bank UNLESS prices go down. But buying a place makes economic sense now what is to suggest these prices drops?

Now the reality is that those condo fees are high and that places I see selling for about $450K would rent for at least $2000, more like $2200.

If you take $2200, then you are saving about $320 a month. Multiply this by 12 and you have $3840 per year. On a $90K investment, this is about a return of about 4% per year. Not great, but this ignores growth. Assuming a balanced market with 3% appreciation, this ammounts to a 15% return on the 20% downpayment--total return of 18%. Now there are repairs and the like and transaction costs, but nevertheless, the differential in the cost of owning versus renting is nothing like it is being portayed as. Also, over time the interest payments go DOWN and rent will go up. As equity builds, this becomes more of an income asset (saving rent) and less of a growth vehicle. I'm not sure what numbers you would expect in an AFFORDABLE and balanced market? If homeowners are getting 15% off the top from NORMAL appreciation on a 20% downpayment, what % should they reasonably expect from simply living in a place they own rather than rent? These differentials materialize later on as interest payments drop and rent increases.

I also had an earlier post regarding cap rates for residential owner occupied property. So far, no one has addressed my questions. I'm interested in these issues and think there is a lot that gets glossed over. People seem to forget how expensive rent is in this city when talking about how expensive it is to buy.

Personally, I see the market going down for a while but right now we are in the irrational phase of decline (in Boston). If you look at the cost of servicing a mortage in the Boston area according to CSI it is now the lowest since 2001 (indexed for inflation) and near the average for the last 20 years (indexed for inflation). In Cambridge, according to the Warren data, we are back to 1999 in terms of the cost of servicing a mortgage. I'll post the data if people are interested. The cost is down 20% since 2000. That is the combination of lower prices, inflation, and lower interest rates. Buying a house today with a mortgage is really not appreciably more expensive than it has been over the last 20 years.

Also, where you see prices declining in Dallas and Charlotte, which are two cities with strong economies and home prices that have barely beat inflation over the last decade, this signals to me that this dynamic has taken hold. I don't see it going too far or lasting so long as most homeowners are simply unwilling to take the hit. Prices will be mostly flat for a few years before starting to increase again. Four years of flat prices are really equivalent to a 10% decline in real prices. I just don't see the rational basis for some 35% decline in prices.

I would like to know what people think.

[balor123]

Interest rate is very optimistic. Most people don't have perfect credit and most don't have 20% to put down. Taxes are a little conservative but not much. Range is about $300 - $400/mo in surrounding neighborhoods for that price. Condo fees only carry master insurance. You still have to pay to insure your unit so the $100 stands. Condo fee of $200/mo can be pretty low. Consider Repton place ~$300/mo. Assuming any appreciation over the next few years is optimistic, especially considering stagnating wages. True - if you stay in a condo for a while then it makes a decent investment. For me the crossover seems to be about 8 - 10 years.

Where'd you hear that there are price declines in Dallas? Home prices in Texas have matched inflation for well over 20 years now. That's what makes their growth sustainable. For Boston to continue with above inflation appreciation of homes, one of a few things must happen:

(1) higher density housing. The city doesn't have infrastructure to support more people.
(2) salaries have to increase. They could but they are not. Most families here are already two income and the debt to income ratio is already very high here.

[JCK]