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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 January 2009 on Tuesday, February 24th. 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 - January 2009

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

Some observations:

The real decline from January 2008 to January 2009 was 18.32%. This was an all time record for the period covered.
The year over year decline in January returned once again to below the normal range. The rate of decline continues to deepen.
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 35.51% below the peak set in June 2005. This is the result of a 29.50% decline in nominal housing prices and a 8.53% decline in the purchasing power of the dollar.
The cumulative price decline from the beginning (Feb 2003) is 19.98%, which is an annualized decline of 3.70%.
Month over month inflation was positive for the first time in six month. The stretch of general price deflation occurring in the last five months was 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:

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

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Phil O. Math · Guest

As always, wow. Thanks for doing this.

It's funny how at the beginning of this decline, it wasn't until you adjusted for inflation that you saw the true story of home prices. Now, with nominal prices having fallen so much and cpi inflation being so low, you don't even really need to adjust for inflation.

However, once the deflationary pressures of deleveraging have abated, and the zero interest rate policy and quantitative easing takes hold, nominal prices and real prices will once again show a dramatic divergence.

Thanks again.

Phil