bostonbubble.com Forum Index bostonbubble.com
Boston Bubble - Boston Real Estate Analysis
 
 FAQFAQ   SearchSearch   MemberlistMemberlist   UsergroupsUsergroups   RegisterRegister 
 ProfileProfile   Log in to check your private messagesLog in to check your private messages   Log inLog in 

SPONSORED LINKS

Advertise on Boston Bubble
Buyer brokers and motivated
sellers, reach potential buyers.
www.bostonbubble.com

YOUR AD HERE

 
Go to: Boston real estate bubble fact list with references
More Boston Bubble News...
DISCLAIMER: The information provided on this website and in the associated forums comes with ABSOLUTELY NO WARRANTY, expressed or implied. You assume all risk for your own use of the information provided as the accuracy of the information is in no way guaranteed. As always, cross check information that you would deem useful against multiple, reliable, independent resources. The opinions expressed belong to the individual authors and not necessarily to other parties.

Boston Bubble Brief: The Real Story for MA - Dec 2008
Goto page 1, 2  Next
 
Post new topic   Reply to topic    bostonbubble.com Forum Index -> Greater Boston Real Estate & Beyond
View previous topic :: View next topic  
Author Message
admin
Site Admin


Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston

PostPosted: Fri Jan 30, 2009 1:23 am GMT    Post subject: Boston Bubble Brief: The Real Story for MA - Dec 2008 Reply with quote

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 Decmeber 2008 on Tuesday, January 27th. 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 2008

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



Some observations:

  • The real decline from December 2007 to December 2008 was 15.49%.
  • The year over year decline in December returned to the cusp of the normal range again. The rate of decline has been deepening for a little over a year now, and time will tell if the returns to the normal range in October and December signaled an end to the deepening in the rate. The rate remains strongly negative, however.
  • Real prices are once again lower than the same month in any other year in the time period covered by The MAR.
  • Prices are now below the estimate for 2000 for the first time since they rose above it. Estimates for 1999 will be added to the chart once the gap between 2000 and the current year is more visibly pronounced.
  • Prices are now 32.60% below the peak set in June 2005. This is the result of a 26.42% decline in nominal housing prices and a 8.39% decline in the purchasing power of the dollar.
  • The cumulative price decline from the beginning (Feb 2003) is 16.36%, which is an annualized decline of 3.02%.
  • For the past five months, housing price declines have come amidst general price deflation. The dollar actually gained value in August, September, October, November, and December on a month over month basis making house price declines less pronounced in real terms. This is likely temporary.


The S&P/Case-Shiller Index for Boston is likely superior to the data above as it corrects for many flaws that are inherent when using only 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:

The text of this post and the associated graphs are Copyright 2008 by bostonbubble.com with all rights reserved, except as stated here. You may reproduce each graph individually or the text of the entire post as a whole (including graphs) under the Creative Commons Attribution-No Derivative Works 3.0 Unported License. You may additionally scale the graphs to fit your work. Alternatively, if you remove the bostonbubble.com signature from the bottom left hand corner of the images within this post, those modified images (and only those modified images) can then be distributed under the Creative Commons Attribution 3.0 Unported License. In all cases, attribution should be made via a hyperlink to http://www.bostonbubble.com/forums/viewtopic.php?t=1694 or http://www.bostonbubble.com/ Quoting excerpts of the text is also allowed provided that the quotes would normally fall under fair use. To request other terms for reproduction, please post your request in the original thread at http://www.bostonbubble.com/forums/viewtopic.php?t=1694

The latest version of this report can be found at http://www.bostonbubble.com/latest.php?id=ma_inflation

- admin
Back to top
View user's profile Send private message Send e-mail Visit poster's website
Teavo
Guest





PostPosted: Fri Jan 30, 2009 2:32 pm GMT    Post subject: Reply with quote

So... are the 1999 estimates getting warmed up? Looks like we're going to need them. And soon.
Back to top
JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Fri Jan 30, 2009 2:37 pm GMT    Post subject: Reply with quote

Admin,

What are your thoughts at to what a reasonable CPI adjusted price should be? I know you've stated before that there were significant run-ups in prices prior to 2000, but the market was down for almost a decade prior to about 1997, so you'd expect at least some movement following a long down period.

At what point would you think prices are fairly valued?
Back to top
View user's profile Send private message
Teavo
Guest





PostPosted: Fri Jan 30, 2009 3:02 pm GMT    Post subject: Reply with quote

I know the question wasn't directed at me, but if I may chime in...

I think prices will be at fair value when they are back in line with rents.

There are many ways to calculate this, but a reasonably simple one is to compare what you'd have to pay per month to buy a given house (including all maintenance, taxes and tax deductions) and compare that to the monthly rent for that same house (or the most similar house you can find).

When the buy payment and the rent payment are not too different, then you've probably reached fair value. In my location in the Boston area, we're not there yet, but it's getting closer. About another 10% (maybe 15%) drop will do it. And since prices are still falling, I'm patiently waiting.

The nice thing about looking at it this way is that it takes into account the effects of interest rates and the economy, yet it's pretty easy to evaluate.

If you want to get more into the details, here is an excellent online calculator that does the math for you.

And thanks again to Admin for creating this chart every month. I always look forward to it and find it extremely useful.
Back to top
JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Fri Jan 30, 2009 3:27 pm GMT    Post subject: Reply with quote

Teavo wrote:
I know the question wasn't directed at me, but if I may chime in...

I think prices will be at fair value when they are back in line with rents.

There are many ways to calculate this, but a reasonably simple one is to compare what you'd have to pay per month to buy a given house (including all maintenance, taxes and tax deductions) and compare that to the monthly rent for that same house (or the most similar house you can find).

When the buy payment and the rent payment are not too different, then you've probably reached fair value. In my location in the Boston area, we're not there yet, but it's getting closer. About another 10% (maybe 15%) drop will do it. And since prices are still falling, I'm patiently waiting.

The nice thing about looking at it this way is that it takes into account the effects of interest rates and the economy, yet it's pretty easy to evaluate.

If you want to get more into the details, here is an excellent online calculator that does the math for you.

And thanks again to Admin for creating this chart every month. I always look forward to it and find it extremely useful.


Teavo,

Thanks for the message. I think it's difficult to do this calculation for two reasons.

First, the mortgage interest tax deduction is worth variable amounts to different people. If you make $150k, the interest tax deduction is worth more than if you make $75k, because of the higher marginal tax rates.

I've used that calculator as well, and find that it's extremely sensitive to your predictions for future home appreciation/depreciation, inflation, and return on alternative savings. I don't necessarily trust my ability to forecast these values, so I can make my own condo purchase either look like a brilliant move, or a folly by messing with the percentages.

Frankly, at this point, I'm glad I bought, and didn't put downpayment money into equities (as many housing bears were urging just a short time ago...).
Back to top
View user's profile Send private message
JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Fri Jan 30, 2009 3:59 pm GMT    Post subject: Reply with quote

I should note that admin was NOT among the people to suggest putting downpayment money into the stock market while renting, based on a quick perusal of this site.

So kudos to him on that one! And thanks for the monthly update.

But I definitely saw a lot of self-congratulatory posts from housing bear renters bragging about their stock market gains while waiting out the housing bubble. (Well, at least prior to 2008.)
Back to top
View user's profile Send private message
admin
Site Admin


Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston

PostPosted: Fri Jan 30, 2009 4:00 pm GMT    Post subject: Reply with quote

Teavo wrote:
So... are the 1999 estimates getting warmed up? Looks like we're going to need them. And soon.


Yes, they are on the spreadsheet I used to create the charts. I left them off this month because they would have compressed the rest of the chart. I'll add 1999 in once the most recent price gets a little further below 2000.

JCK wrote:
Admin,

What are your thoughts at to what a reasonable CPI adjusted price should be? I know you've stated before that there were significant run-ups in prices prior to 2000, but the market was down for almost a decade prior to about 1997, so you'd expect at least some movement following a long down period.

At what point would you think prices are fairly valued?


That's a good question. I've been wondering that myself for awhile and don't have a good answer, yet. My best guess right now is that when the price to income ratio is back to the range it was in before the bubble, then prices will be fairly valued. So, if inflation adjusted prices returned to 1998 levels, that would seem fair to me. However, they may be fairly valued even before reaching that level given other complicating factors, like the lifting of rent control in 1995 and the limited depth of the historical housing data. In other words, we are close, and we may even be there already. That is just the top of the fairly valued range, though - there is plenty of room for further declines within that range. An eventual over-correction wouldn't surprise me either, though I'm not necessarily going to wait around for one.

Teavo wrote:

The nice thing about looking at it this way is that it takes into account the effects of interest rates and the economy, yet it's pretty easy to evaluate.


Comparing monthly payments doesn't account for interest rate risk, though, and right now I personally think that interest rate risk is very high. The Fed is gaming the market to push mortgage rates down, and I think that they can only afford to do this in the short term. That's not a problem for their actual goal of funnelling money to banks to rebuild their balance sheets while they still can, but it is counterproductive to their ostensible goal of helping to "stabilize" housing and helping consumers. Their policy will lead to inflation which will push interest rates up in the long run.

JCK wrote:

Frankly, at this point, I'm glad I bought, and didn't put downpayment money into equities (as many housing bears were urging just a short time ago...).


As a card carrying bear, I want to note that my suggestion on this board (and elsewhere) was to not invest a down payment in equities or anything else that would be volatile over the short term. Putting money that you will need in the short term in a long term investment vehicle is generally a bad idea. I like FDIC insured CDs and I-Bonds, myself.

- admin
Back to top
View user's profile Send private message Send e-mail Visit poster's website
admin
Site Admin


Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston

PostPosted: Fri Jan 30, 2009 4:01 pm GMT    Post subject: Reply with quote

JCK wrote:
I should note that admin was NOT among the people to suggest putting downpayment money into the stock market while renting, based on a quick perusal of this site.

So kudos to him on that one! And thanks for the monthly update.

But I definitely saw a lot of self-congratulatory posts from housing bear renters bragging about their stock market gains while waiting out the housing bubble. (Well, at least prior to 2008.)


Looks like we crossed posts. Thanks for the kudos.

- admin
Back to top
View user's profile Send private message Send e-mail Visit poster's website
Teavo
Guest





PostPosted: Fri Jan 30, 2009 4:25 pm GMT    Post subject: Reply with quote

JCK wrote:

Frankly, at this point, I'm glad I bought, and didn't put downpayment money into equities (as many housing bears were urging just a short time ago...).


Yikes, downpayment money - or any money that you expect to access within a few years - should never be placed into a long-term investment like the stock market!

I'm not just saying that because stocks have tanked lately. It's always the case: short-term money needs to go someplace boring and low-return and safe.

My downpayment savings are safe in a humdrum money market account. The interest rate stinks, but at least it's a positive number.

Anyway, glad to hear you didn't put your nest egg into the stock market. Smile
Back to top
Teavo
Guest





PostPosted: Fri Jan 30, 2009 4:35 pm GMT    Post subject: Reply with quote

admin wrote:
Comparing monthly payments doesn't account for interest rate risk, though, and right now I personally think that interest rate risk is very high. The Fed is gaming the market to push mortgage rates down, and I think that they can only afford to do this in the short term. That's not a problem for their actual goal of funnelling money to banks to rebuild their balance sheets while they still can, but it is counterproductive to their ostensible goal of helping to "stabilize" housing and helping consumers. Their policy will lead to inflation which will push interest rates up in the long run.


Agreed, and if you check out the online calculator I linked to you'll notice that you can take this phenomenon into account by adjusting your expectations of how the real estate market will perform. Since you expect that interest rates will rise (and I agree with you) that would imply housing prices will feel a downward pressure from rising rates. So in the calculator you can simply enter a lower figure for your expected rate of increase in housing prices.

You can even enter a value for the rate of inflation in Advanced Settings > General > Inflation Rate.

This calculator has it all! It is also an excellent floor wax and dessert topping. Very Happy

JCK - you're right that the calculator results are sensitive to the estimates of future real estate price behavior, but that's the nature of the question itself, not a problem specific to that calculator.
Back to top
JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Fri Jan 30, 2009 4:49 pm GMT    Post subject: Reply with quote

Teavo wrote:
Yikes, downpayment money - or any money that you expect to access within a few years - should never be placed into a long-term investment like the stock market!


Agreed. There were two types of idiots going around ca. 2006: the ones suggesting doing a no-down-payment/IO loan setup, so you could invest your marginal dollars in the market and make a killing.

There were also those were doing essentially the same thing while renting, also to make a killing.

My only advice is this: don't buy more place than you can realistically afford, regardless of market conditions. If the price drops, you'll still be able to make the mortgage payment and wait things out (potentially painful, but at least you don't lose your home). If prices go up, you'll come out ahead of renting, almost certainly.
Back to top
View user's profile Send private message
irishmaninboston
Guest





PostPosted: Fri Jan 30, 2009 5:25 pm GMT    Post subject: graph Reply with quote

Great job (as always) with the graph and figures,

My 2 cents
Eventually you will have to put the price estimates for 1997 and 1998 on the graph, maybe even as far back as the mid 90’s
Back to top
JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Fri Jan 30, 2009 7:58 pm GMT    Post subject: Reply with quote

Teavo wrote:
JCK - you're right that the calculator results are sensitive to the estimates of future real estate price behavior, but that's the nature of the question itself, not a problem specific to that calculator.


Definitely a fair point.

I'm just pointing out that this is a difficult, three variable (inflation, rate of return on savings, rate of return on home appreciation) problem, and that even small changes in your assumptions about each can make a huge difference in what decision you should make. In an expensive, competitive market like Boston that's more supply-constrained than say, Austin Tex., I don't ever expect the decision to be a no-brainer.
Back to top
View user's profile Send private message
Renting
Guest





PostPosted: Sun Feb 01, 2009 11:58 pm GMT    Post subject: Reply with quote

Mean reversion. What price level (and corresponding year)?
Back to top
Teavo
Guest





PostPosted: Mon Feb 02, 2009 2:25 pm GMT    Post subject: Reply with quote

My personal estimate is that the market has another 10-15% to fall (and that's if there are no especially bad economic shocks coming). Once admin includes 1999, 1998, etc. in his chart, we can see where my and everyone else's estimates fall in terms of corresponding "reversion" year.
Back to top
Display posts from previous:   
Post new topic   Reply to topic    bostonbubble.com Forum Index -> Greater Boston Real Estate & Beyond All times are GMT
Goto page 1, 2  Next
Page 1 of 2

 
Jump to:  
You can post new topics in this forum
You can reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum


Forum posts are owned by the original posters.
Forum boards are Copyright 2005 - present, bostonbubble.com.
Privacy policy in effect.
Powered by phpBB © 2001, 2005 phpBB Group