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Description: MA SFH July median down 10.7% nominally YOY, sales down 10%
URL: http://paper-money.blogspot.com/2008/08/collapsedachusetts-existing-home-sales.h ...truncated...
Info/Broken?: http://www.bostonbubble.com/link_info.php?id=1876

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[Guest]

Is that the biggest nominal drop this cycle? How does it compare to past busts?

[Renting in Mass]

The previous post was me (I forgot to log in).

[admin]

[john p]

I think what you're seeing is fewer people coming to the table to deal, and the greater number of transactions being at the lower end of the price structure, which is skewing the numbers, a tad; just a tad.

I see this for two reasons:

First, people understand the price structure meaning they look at the houses for sale and can say, my place is better than that one but not as good as this one so my price is right around here. That part is the easy part, knowing how much to accept below the "asking price" structure is a wildcard and until you have lots of comperable recent sales, people feel uncomforable with offers or with how much they can get the place they're going to move to. I used to think that Florida sales plunging would help loosen inventory here, but it is not to the amount I would have expected because of the whole Homesteading Tax Laws which mean that a person with the same house as yours who bought ten years ago might pay less than half the property taxes you do.

Second, and MOST IMPORTANTLY, the cost of capital is so much higher than what they most likely have. We saw a ton of sales when interest rates were dropping because people were selling their homes and trading a mortgage with an 8 percent mortgage rate and getting a 5% rate. The lower rates were a HUGE incentive to sell their home. Why would someone today sell their place if they had a 5% rate and get into a new mortgage with the current rate of 6.5%? Why would they do that unless they had solvency issues or had so much cash they could put a huge amount down and were paying less interest where the rate meant less? This is why the people coming to the table are mostly people that are having solvency issues like those that got caught with an ARM.

For a house today selling for $550,000 and having a buyer that would do a 5% down, 15% second note (piggyback to avoid PMI) at 8.25% and a primary note of 80% at 6.5%, their mortgage would be around $3,900 a month including property tax and insurance.

For the same house in 2004 when you could get 5% mortgage on the 80% note and 8% on the 15% piggy-back note with a 5% down payment, to get to the same $3,900 monthly payment you could pay as much as $630,000.

A 1.5% jump in interest rates drops the price of a 2004 $630k home to $550k in 2008.

So guess what, if you bought a $630k home in 2004 why on earth would you sell it for $550k unless you were in financial trouble.

Check out this house currently selling in the mid 500's, see that it "zillowed" in the low to mid 600's in around 2004.

http://www.zillow.com/homedetails/99-Fairway-Dr/57181252_zpid

http://www.isoldmyhouse.com/index/MA/143458.html


Unlike the last correction in the 90's, we don't have the job losses that we did then and as long as people are working they'll sit tight and prices will be stickier. The ARMS are the killer right now.

[john p]

If I didn't bore you with that, let's take the alternative out for a test drive:

Say you decided to not buy in 2004 and save/invest and rent. I'm not going to hit all the details, so fill those in in your mind, just trying to do a quick acid test for what it may be worth...

If you were going to buy a $630k home, you most likely were going to have to have 5% down right, so that's what $31.5k. So say you invested $31.5k and it grew 15% since, you'd have $36.225k when you sold, so you'd have made a whopping total of $4,725 dollars, of which after taxes would be $3,000. (I used the growth of the Dow Jones which was at about 10,100 for 2004 and about 11,600 now). I could/should have chosen the S&P but didn't ....

Anyway, the big savings is the little big you'd be able to squirrel away each month by renting cheaper and having a smaller nut (note the two squirrel references).

So, after the tax shelter for interest and real estate taxes the $3,900 mortgage monthly payment feels like a $3,100 monthly payment. So you now have to look at what you could rent for $3,100 a month. No, in my opinion you'd be spending more than $3,100 a month rent for the same quality of life for a house like that. If you got a nice 3 bedroom in the Charlestown Navy Yard, you'd be north of that figure.

In reality, in order to save you'd really have to be living in an apartment that isn't as nice as a house like I showed above, so you'd be sacrificing for 4 years of quality of life. If you wanted to be in the ballpark and live kind of comfortably, you'd be looking at say a $2,600 a month rent. If you were able then, to save $500 per month, you'd have the $24,000 (48 months saving $500) plus the $3,100 you got on interest from investing your down payment. So you're sitting pretty now with say $27,500 of money saved/invested and the $31,500 you had originally for the down payment in 2004. Those two figures add up to $58,600.

Let's now compare what you're monthly payment would be if you put down $58,600 on the now $550k home versus the 5% down on the $630k back in 2004 (with the cheaper cost of capital). In the end, that savings will end up giving you a cheaper payment of $210 per month, and that doesn't even take into account that you'd already be on year 5 of a 30 year note.

Prices will have to drop a lot more to really make a big impact in my view. Honestly, that is still in the cards. I was hoping that the cost of capital/ mortgage rates would have been lower than 2007 and that would have really made a difference with respect to affordability and that $210 a month savings might have been like $500 a month and you'd have seen a lot more people buying.

[Renting in Mass]

John, can you summarize your argument? I'm not clear what you are trying to say. Are you saying that prices are still too high and are likely to come down further? Or are you saying that the prices aren't that high when compared to rents, and now isn't a bad time to buy?

In your second example, shouldn't you account for equity lost due to price decreases?

[john p]

In summary, if you bought in the low 600's in 2004 you enjoyed a lower cost of capital and suffered higher prices. These exercises were aimed at determining the net effect of lower prices and higher interest rates relative to affordability (what the monthly payment would be). It also modelled out the two options of either buying in 2004, or renting for four years and buying now, in 2008. The result of my findings tell me that if you lived in a $2,600 rental for four years and saved $500 a month and invested your down payment amount in 2004, took all your savings and investment and used it to increase your down payment, you'd save approx. $210 a month in your mortgage. To some that is a big deal, I'll let you judge if what that means to you. The other part of the finding was to determine how much a $630k home in 2004 would drop to compensate for the premium in mortgage rates (approx. 1.5% increase). I determined that a $630k house in 2004 with the lower interest rate would have the same mortgage payment of a $550k today (with the higher mortgage rate). This summary is not that concise.......

Anyway, my thing is "Reach Height" which is what is the end mortage monthly payment, and what I'm finding is that that is staying pretty constant.

If you can live cheap and really save about $1,000 or more a month, I'd wait and save. If you're renting an expensive place and need to live a posh lifestyle buying now might not be awful.

[Renting in Mass]

Thanks John

[admin]

John P,

I realize you were just going for a back of the envelope type of analysis, but I think that some of the things left out would tip the scales a bit further in favor of renting. One big thing is that you're comparing rent to just mortgage servicing cost when there are other significant expenses that come with owning. Maintenance, property taxes, and insurance come to mind. Also, as Renting in Mass pointed out, the loss of equity in the buying scenario is substantial. The waiting and renting scenario yields a lower cost basis and also reduces the risk presented by future declines.

- admin