bostonbubble.com

[jad]

In the current Massachusetts downturn, some areas have obviously performed better than others. In fact, several of the towns that I am considering purchasing in do not appear to have seen prices fall at all. Sales may have fallen and the mix of homes sold may be slightly different, but in general, prices are selling at about the same price as they would have in 2006. I observe this not only from town-specific data from the Warren Group, but also by watching dozens of individual houses then checking their price history.

The towns are all upper income communities with good schools and good access to high paying jobs downtown. Examples are Wellesley, Newton, Brookline, Needham, Lexington, Weston, Lincoln, and Winchester. Similarly, prices have been stable in Back Bay, South End, Jamaica Plain and Beacon Hill. I’m sure somebody can find some data to show slight decreases in some of these towns, but in general it seems clear that the upper income towns near Boston have significantly out-performed mid to lower income towns and even high income towns further from Boston (Sudbury, Concord, Andover, etc.)

My question is, assuming prices fall another 10-15% in Massachusetts, which of the following scenarios do you think is most likely:

1) The trend magnifies. Even if price declines continue in Massachusetts, these towns will out-perform the market. Even if prices fall, they won’t fall as much as in less exclusive towns.
2) The upper income towns will see about the same drop as the rest of the market. They won’t be immune any more, but will not catch up with the cumulative loss in other towns.
3) The trend reverses. Places where prices have already fallen 20-35% are closer to bottom and will start to rebound even as the upper income communities finally start to see significant price drops.

I personally think prices have to drop in these downs as law firms, investment firms, banks and consulting firms finally have started laying off people and cutting pay. The lower jumbo-conforming rate will also likely have an impact. On the other hand, there is very little inventory on the market in any of these towns and places are still going under agreement. Search for a $600,000-$800,000 home and look at the inventory – it’s not good. The current owners seem able to hold off until they want to sell, so the few nice places that come on the market are snapped up quickly. I would love your thoughts on when / if you see this changing and why.

[john p]

I agree with your last paragraph.

In addition, many people that are wealthy have looked at their ability to get credit as an asset. They learn that by leveraging their credit they can make more. Those that trade on margin grow faster than those that build their wealth brick by brick. It will be interesting to see what percentage of homeowners in these areas are trading on margin and are over extended.

A side note is that with the corporate credit bubble companies were acquiring other companies because if it cost them 4% interest to borrow the money to buy a company and the company they were buying has a 7% profit, that's a 3% margin. The companies that have grown through acquisition may have overpaid for smaller companies and if these new behemoths can't meet payroll because they don't have the working capital, they're going to have to have massive layoffs or go belly up. The banks are the first to experience this credit bubble, but a lot of other companies that have narrow margins will drop next. We've already seen the likes of other retail companies with razor thin margins get swamped out. First it will be the 2-3% margins, then the 3-4% margin companies etc.

I think the smart money is in the small capitalization companies.

[Boston ITer]

Well, for one, the financial services industry in Boston was dealt a huge blow, back in the '01-'03 downturn, and since then, its recovery, esp in MF, was tenuous at best.

I suspect that if the First Boston phenomena re-occurs, in other words, as the big companies engaging in M&A activities, they move their USA headquarters to NY (Swisse Credit-> M&A ->First Boston) but maintain the paper shuffle backoffices, in places like Des Moines Iowa, that we could suffer tremendously.

This time around, however, I don't see the eastern MA bulge bracket: State St, Fidelity, MFS, etc, making it as Boston area mainstays. Likewise, I'm also not clear as to how the Boston Legal Crowd: Hale/Dorr, Sullivan & Cromwell are also going to get their billings, as they also depend a lot on business transaction of the bulge bracket and local client businesses (Staples, Boston Scientific, Bose, etc).

[Prices in MA are insane]

"several of the towns that I am considering purchasing in do not appear to have seen prices fall at all"
You forgot to add one simple word: "yet".
The prices in MA are still insane, even in comparison to neighbor NH, not only by comparing with average household income in the state.
You still cannot find any good single family home in a discent town/city for less than $350,000.
All of those artificial games with "foreclosure moratorium", severe propaganda by realtors and stupidity of folks that listen to "experts" and still buying are keeping prices from falling to the sustainable level so far. But the recession is going deeper and unemployment is growing.
I just cannot see what will support the prices from free fall other than inflating yet another creadit bubble.
I pray that the noble son of MA Barney frank and his comrades that are trying to inflate the bubble now will fail. Otherwise, our country won't survive the consequences of it.

[Hard Rain]

Jad,

All towns are getting hit and hard. Check out Dover and Sherborn with the best schools in the state, they are falling like a rock. Take a look at resales using Mass deeds and you will find losses in each and every town...

[john p]

http://www.boston.com/realestate/specials/mass_housing_gains_losses/

Also, if you go to this site, there is a graphic for "biggest gains and biggest losers"

http://www.boston.com/realestate/?p1=GN_RE

These might be old, and I am not sure where to get current, but it is a cool graphic to show the hot spots and cold spots.

[jad]

Hard Rain - I am using Mass Deeds and don't see homes selling for less than a few years ago in the towns I mentioned (inside 128).

However, according to JohnP's link, even Sherborn is up 7% year over year. Needham, Jamaica Plain, Cambridge, Winchester, Carlise, Hingham, Hamilton, Manchester, Weston, Wellesley, Arlington, etc. all ended 2008 in positive territory. Most of the nicer towns are down 0-10% at most, while the lower income towns are down 10-30%.

[john p]

I think some of these other towns are insulated in that most people have an emergency fund of cash. The problem for them, however, is that if they lose their jobs they might have a hefty monthly nut. It could be a delayed reaction in these towns. What will veil this is that for every person that falls on hard times, there might be one or two that are growing that will take their place in those communities. I'd be curious to see what the ratio is. The other thing though is that maybe people might want these nice communities but would feel safer not overextending for the time being...

[JCK]

Go to:

www.thewarrengroup.com

You'll need to set up a login, but you can see the town-by-town data either for the last 12 months or yearly data.

The towns mentioned by the OP really have not dropped much, although you'll see sales volume is way down.

Dover and Sherborne are quite a bit further from Boston than Newton, etc. I think the prices are falling first in the more distant towns, with or without good schools.

[JCK]

[admin]

A possible omen from California:

[Guest]

The reason you have not seen a significant drop, yet in some Towns, is the owners have elected to sit on them, than to attempt to sell their home in a down market.

Also many of the published numbers do not record rebates on closing cost
and other hidden methods that obscure the true selling price.

I myself was involved in a transaction in 2007 were we paid the buyers down payment, all closing cost and loan origination fees, plus an additonal $5000 for phantom repairs.

We were desperste to sell, so we jumped thru every hoop to sell,
and we are glad we did, because prices in this complex have dropped
at least 25% more since we sold.

We took a loss, but a much smaller loss than if we sold now.

The fall in prices in the so called better Towns will be this year,
you can bank on it.
.
.

[Guest]

"Sales volume is way down" That is the first step. Falling prices is the next step.

[john p]

I think the pre-bubble generation (mid 40's now) were able to afford the bubble prices because if they were college grads, they got 2 times the cost of their college tuition in their first year's salary, they walked into cheap rents, cheap starter homes etc. They got a bunch of green lights. I call them the St. Elmo's Generation. These guys bought real estate before the bubble, caught the stock market bubble, caught the salary bubble of the year 2000. By the year 2004 they were most likely trading up and the extremely low mortgage rates levered up house prices.

When you think about the generation that bought these houses during the peak, keep in mind many could afford what they were buying because they had tremendous buying power, power that the current crop of new buyers don't have.

For 09, I think that new buyers have less wealth and even if they did, I wonder if they would want to wait for the economic climate to calm down before they bought. I imagine that there will be more bargain shoppers out there, but maybe in some desireable areas, the pick of the litter houses might get multiple bids. I think it wouldn't be the worst thing in the world to lose a house in a bidding war early on in the season because after the eager beavers buy, it might be crickets later. If you're losing bids by mid/ late summer I might re evaluate. I mean how do you observe pent up demand other than watching days on market for the houses in your target?

[john p]

http://resources.ketchum.com/web/boomers.pdf