bostonbubble.com

[nickbp]

I've been using neighborhood demographics to guess if a given neighborhood is overpriced. I suppose it's a variation of looking at price vs median income:

First, get an idea of who you'd expect to live there (age, income, single/married, etc). Once you've got that, divide the typical list price in the area by 3 to get an approximate yearly gross income. Then think about whether the required income matches the demographics of the area.

Example: Lots of triple-deckers are currently in the range of $300-$350k. Dividing that by 3 gives us a $100-$120k income, which is a lot for the stereotypical young bachelor who would want to live in such a setting. I'm sure there's plenty of older or richer people in Boston making that much, but are they the sort who'd shop for a triple-decker? But what about young professional no-kid couples? It wouldn't be much of a stretch for them... And so on.

This is totally a speculative game with only a tenuous basis on reality, but I figured I'd share.

[JCK]

Income metrics only really work for first time buyers. If you've owned for 15+ years, you can purchase a place far in excess of 3x your income, because you have substantial equity.

So you need to look at income + the ability to make a downpayment.

Also median prices in Boston have been well above 3x income for at least the last 20 years. Admin put together a graph showing this a while back. I think the price/income ratio peaked around 5x during the bubble, but even during the early 1990s slump, prices stayed around 4x.

Just my two cents to add to your game.

[GenXer]

No need to go very far. I think almost every neighborhood with half decent houses is still overpriced. Aside from a deal or two, houses are simply not selling (because they are not being sold). Wait until we get back to the usual volume for sale (which right now is possibly a third of what it used to be), and maybe then we'll see what the prices do. Right now, Newton hardly moved, for example.

[ConcernedCitizen1]

Also re triple deckers don't they have somewhat different attributes in that investors would buy them for the income. So one would have to look at the income yield vs other alternatives? Are you saying triple deckers are 300-350k for the whole thing or for 1 condo? Only in Charlestown or a really fancy Southie one or maybe JP would you get that pricing for 1 condo. I think.
Re the ongoing point that Boston will "always" stay at some higher than national average income multiple: I really think you have to sit down and make your estimate if you think the factors that led to that high multiple in the 80s and 90s are going to continue. If you think there will be big job creators going forward like there were in the 80s and 90s then go ahead and punt. I think it is not right from a fiduciary perspective to keep claiming that Boston will always be at a high multiple. I'm not saying that one should wait forever for prices to fall to 3x income in Boston, but I'm saying you have to have KNOW that you are betting that Boston will be able to hold its own against competition from other parts of the country (and world).

Does it make sense from a diversification basket to have your income and your house (your biggest asset) riding on the same bet? Do you want your financial rate to rest on the chance that Harvard MIT and their offshoots will keep creating jobs and the Taxachusetts government won't do their best to kill job creation?

Why not try to buy a cheaper house and hedge yourself by seeking diversification? One of my former colleagues and I had dinner the other day and his view is that every country in the OECD is like GM and Chrysler. An ok-ish company crushed by unsustainable welfare payments. Not enough revenue to pay for the outgoings.

What diversification do you have if this is true? Do you want ALL YOUR ASSETS tied up in an expensive house that may or may not protect you from inflation?

You might be right on high multiples persisting, you might be wrong, but I think people should also try to get some diversification in their book. If you and every other person in town can live with 5x income permanently fine, but I don't think this is true. If it was, wouldn't we have a HIGHER SAVINGS RATIO in the US?

[Guest]

Further to this, I just really want to get into this diversification thing because I think it is so scary how much effort people put into housing and how little into other asset classes. What % is the average person's net worth comprised of housing? I think it's extremely high. Therefore the average person has their main asset and their income source incredibly correlated. This worked fine when the US was controlling the world and the world economy (1850 to present) but we have to be ready now for global competition and a new world order and you need to get some diversification. Yes, BRIC equities dropped by more in the recent route but with more financial education one could have had more exposure to the many years in this decade when BRIC outperformed OECD equities massively. And now, from the bottom in the autumn 08 Brazil and China and copper etc are up 50%+ vs 20 something for developed equities. I'm just trying to highlight the gains that could be available to a portfolio that can't happen if all your money is betting all your eggs on "Weston" and "Newton" outperforming every other asset class in the entire world.

[nickbp]

[JCK]

[john p]

I had a cousin who had a triple decker. He asked me about 15 years ago or so to move in and I think he was going to let me have a floor for like $600 a month. I was paying $400 a month so that was a big deal and I said no. I found him a tenant (who would pay more than he offered to me)and that person had a relative who was interested so the next thing you know my cousin has two floors rented out and he decides that he can get the third rented and he moves to the suburbs and builds a brand new house in a community that has a top ten school district. This guy works for the State and doesn't make much at all, but once he started getting cash flows in a triple decker that was willed to him he was doing A-OK. His new home was worth more than three times his salary because he had cash flows from the triple decker.

Most people forget that Boston is pretty old and old people die and give their home to a relative. If they don't give one kid the house, they divide the house and the kids get a share of the sale, which gives them a down payment on what they want. New buyers compete for the stock that gets put on the market, some get a down payment and others don't. Further, the kids that had mom and dad pay for college don't carry student loans and with this new generation more and more and more kids pay student loans even people that typically didn't in years past, that has an affect.

New buyers need to also note that during the Dukakis age, you couldn't kick out a deadbeat tenant if they didn't pay, destroyed your place, dealt drugs out of your property whatever. Renters could get away with being complete animals and could have a million friends come in and stay with them, people wouldn't touch rentals. This is why certain areas turned into armpits despite being so close to Boston. Then the yuppies came and they invented this word called cappucino and coffee started costing more than 30 cents. You know you can get two hamburgers at McDonalds for the price of a large coffee? You started to see Starbucks showing up and the kids with the long sleeve shirts with the t-shirts over them and the knitted hats would show up with their lap-tops and all of a sudden, Somerville wasn't Slumerville anymore. Anyway, yuppies started to buy these places and the old school families started to cash out and buy properties in the suburbs. It bewilders me still to see people paying top dollar for these places. Then when I saw the yuppies buying these tiny shacks in Wellesley for like $800k I was thinking, really, how smart are these people?

[Boston ITer]

Back in the 60s/70s, a good job had meant that you could continue to make payments on your house. Today, it means that you may have to split town, to keep it. That's a huge paradigm shift which is why the dynamics of housing will be a lot different for an actuarial fellow, back in 1970, vs one today whose job was sent to one of the Canadian holding firms.

Today, 3x to 5x spells disaster for the professional who isn't a typical doctor, law partner, tenured govt crony, Harvard/MIT prof, etc. If one isn't certain about one's $150K-$250K/yr income locally, then it might be best to forget about that house.

[balor123]

[balor123]

[nickbp]

[GenXer]

As far as students, there aren't any where there aren't universities (i.e. inside 128 but outside of Boston, Brookline and Brighton. No students in Waltham and Newton. Mostly young people. Has anybody checked lately? The workforce is turning very young and very indebted. They marry the same, and buy houses almost right away. They get a bump from parents, but they never learned to deal with money, so they are debtors for life. I've seen this happen time and again. This is the future. A family that makes 150k but is so poor they can't afford anything because their 2 kids are in private schools with 40k a year tuition. Even buying a 3.5x income house usually translates into something a lot higher because of all of the repairs and the work on that house. Inheritance is there, but its not a huge contributor. Most people just sell these houses and move. I think recessions are great because they favor the prepared and they facilitate wealth transfer. Unfortunately, the government is meddling again, so the only ones getting rich are the cronies working for the State and Federal governments.

I think I mentioned elsewhere that 3x income is relative - which income, before or after you've been laid off? If you are making 200k, buying a 600k house is a lot more risky than if you are making 50k buying a 150k house. The higher the salary, the higher the risk. Ever thought of that? Its not the relative percent that matters, but absolute $! Its much harder to find a 200k job here without having to move. Also, many people move within 5-7 years, which is not a good overlap with house prices (and most can not help it - jobs move, so do they). By the way, cronies may be rich, but being rich doesn't make them smart. They do the same stupid things everybody else does, and they get burned too.

[nickbp]

[balor123]