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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 July 2009 on Tuesday, August 25th. 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 - July 2009

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



Some observations:

• The real decline from July 2008 to July 2009 was 3.24%.
  
• For the fourth month in a row, the year over year decline was above the normal range, with April being the first time since August 2007 that the decline has been one standard deviation or more above the moving average. This continues the abrupt departure from ever deepening declines which began in April and suggests that declines may be moderating.
  
• 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 25.69% below the peak set in June 2005. This is the result of a 17.06% decline in nominal housing prices and a 10.41% decline in the purchasing power of the dollar.
  
• The cumulative price decline from the beginning (Feb 2003) is 7.78%, which is an annualized decline of 1.25%.
  
• The price is above the estimate for the same month in 2001 for the second time since dipping below it last September.
  

Inflation has played a large part in this year's spring bounce. The year over year change in the CPI-NU was actually negative for the last four months, making the real decline in housing prices smaller than what has been reported by the media. This effect will be temporary, though, as the year over year decline in consumer prices is the result of a deflationary spike from last fall which has already run its course, as can be seen from the following graphs:





The temporary $8,000 US tax credit for home buyers has also likely distorted this year's spring bounce. At the most basic level, it plausibly added $8,000 to the price of homes near the Massachusetts median. However, its side effects may have been just as important, if not more so, in producing the appearance of a particularly large spring bounce. The tax credit in conjunction with the Massachusetts program to facilitate its use as a down payment surely expanded the pool of potential buyers to people who would have otherwise not been able to buy due to an insufficient down payment. It also probably caused a time shift of home purchases which would have been made anyway, pulling demand from the beginning of 2009 as well as next year and swelling demand this spring, summer, and fall. Depressed demand in the winter would have lowered prices there and increased demand in the spring and summer would have increased prices there, and so the apparent rise from winter to summer is artificially steepened. Finally, those who purchased before the credit took affect may have mentally discounted their offer prices to make up for the credit they would be missing.

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:

• http://www.bls.gov/cpi/
  
• http://www.marealtor.com/content/housing_data.htm
  
• http://www2.standardandpoors.com/ ...truncated...
  

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

- admin

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For strong evidence supporting the hypothesis that the somewhat larger than usual spring bounce this year is largely a result of the temporary tax credit, see the tiered S&P/Case-Shiller Index for Boston. The bounce is very pronounced in the low tier, where the credit would have the most impact, and practically absent in the high tier, where it would be a smaller percentage of the price and where many buyers would presumably be disqualified from the credit due to the associated income limits.

- admin

[Renting in Mass]

I think you're right that the tax credit played a role in the large bounce, but to play devil's advocate, couldn't the fact that the bounce is more pronounced in the lower tier be attributed to pent up demand among first-time buyers (who tend to buy at the lower tier). I think first time buyers are nervous that the declines are over and they are going to get left behind if prices start to rise. I know I'm nervous. If you're already in a house you aren't as worried about jumping in at the first sign of an improvement in prices. If prices go up, your house gains value too. But if you're renting, rising prices are all downside.

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