bostonbubble.com

[admin]

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 April 2011 on Tuesday, May 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 - April 2011

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



Some observations:

• The real decrease from April 2010 to April 2011 was 11.06%.
  
• Prices have resumed their downward trend after a period of twelve consecutive year over year increases. Those were the only year over year increases since August 2005 and they all occurred consecutively and after the most recent renewal and expansion of the home buyer tax credit. The moving average turned negative this month for the first time since the end of the tax credit. Price declines are once again the norm after being briefly interrupted by the government playing Weekend at Bernie's with the housing market in what was actually one of its many backdoor bank bailouts.
  
• Real prices are once again lower than the same month in every year in the time period covered by The MAR. Additionally, the real median has plummeted back below the estimates for prior years and is now the lowest it has been since the estimate for 2000.
  
• Prices are now 35.94% below the peak set in June 2005. This is the result of a 25.35% decline in nominal housing prices and a 14.18% decline in the purchasing power of the dollar.
  
• The cumulative price decline from the beginning (Feb 2003) is 20.50%, which is an annualized decline of 2.77%.
  

Of note in this month's release from The MAR, their historical data for past comparisons has been revised substantially. The nominal median for March 2011 was revised up from $273,475 to $275,000. The nominal median for April 2010 was also revised up from $295,000 to $305,000.

Also of much significance this month, the volume of sales has changed quite a bit from last year. Single family home sales plunged 20.0% year over year in April. This makes the median even less reliable than usual given that the mix of what is selling is almost certainly changing, and that necessarily distorts the median as a consequence of how it is calculated.

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://www.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

[Renting in Mass]

[admin]

[Renting in Mass]

That poster would be awesome on so many levels.

On a more serious note, what is your gut telling you about the housing market right now? When I look at just the local housing market, I feel like we're closer to the bottom than the top. But when I try to look at the macro picture (Fed policy, interest rates, etc.), I go in circles and feel like I have no sense of what the future holds.

[admin]

[Renting in Mass]

[GenXer]

Actually, right now the prices are 'stable'. When interests rates rise (only a matter of time now), prices will start falling sharply. Only the availability of cheap credit keeps prices from falling further.

[Renting in Mass]

[Beaumontv]

admin, if you are calculating the loss range probability, monte carlo is fine. I would suggest you assess the loss on a leverage basis. there is an inflation trap you have to watch as well. this will be sort of a long term american put option model.

Let's say you decide that rates will go up a lot (a la 1983). In this inflationary environment, you want to have as large a loan as possible so that you can pay it off with highly devalued dollars in the future. $100,000 owed today might be a small sum in ten years when the dollar is worth less. So a bigger loan is a good play.

However, if you look at the loan as a leveraged investment, it might not be such a good idea. Let's say you put $1,000 down on that $100,000 mortgage. If the home price increases by 2% (or $2k), you just made a 100% profit on your $1000 investment. hooray! but if it drops $10,000, you lost 900%. Not so good.

The point is that the more you borrow, the more you amplify your losses. This is the same as when a hedge fund borrows money to make investments. You wouldn't borrow from your credit card to buy gold, right?

But you also have to offset the gain/loss with the inflationary effect. if the scenario in your monte carlo simulator includes inflation, then you might have certain "gains" by having a fixed rate mortgage if rates increase. Then you have to offset this with the loss of the decline in housing prices.

Housing prices might stay flat during high inflation. Whatever the assumption, make sure you capture teverything or the model will have bad blind spots. Let us know if you find a balance point.

I keep thinking of Zimbabwe. you could have taken out a $1 trillion mortgage in 2005 and paid it off for the cost of a stick of chewing gum in 2010. At that point, leverage and everything else mattered little.

[balor123]

Americans are too accustomed to thinking of their economy as a closed system: rising rates => rising wages. The two are not strictly related. Prices and interest rates can rise without wages. In that scenario, leveraging up is a bad idea because you are trapped with a home that you have trouble paying off and which you can't sell to someone else. With a large trade gap, this scenario is a real possibility.

[GenXer]

That's right - worst case, rates rise, wages don't.

Don't kid yourself - Fed has very little actual control. They can lose it faster than we can say 'inflation'. And then all bets are off (or in that case I hope that I have enough cash to buy 30-year treasuries yielding 15%).

Compared to what prices can do in the future, I guess 8% is 'stable'. The error rate on that 8% is huge though, so these prices are far from stable at this point. I was thinking the 'immune' towns like Newton. People continue to believe that prices can never go down further.

Beaumontv: Monte Carlo with what statistics? House prices have very fat tails, and unless you use at least a semblance of a fat-tailed distribution, your results will be worse than useless. However, making it much more complex is that the actual distribution is multifractal (i.e. many different distributions alternating between different regimes). For stress-testing purposes you may be fine, but none of these results will mean much. Besides, probabilities are useless since we don't observe them. What you want are conditional expectations (probability of a loss greater than a certain amount).

[admin]

[Beaumontv]

GenXer

for multiple regimes there are a few ways to tackle it (bayesian distributions for example) which I wont get into. My point wasn't to get into the leptokurtosis or polymodal or fractal nature of market simulations. Rather I wanted to point out the way one profits from having debt in inflation and the amplification of losses from leverage. You guys are wayyyyy more sophisticated than most folks in that you thought of this already. Usually I get a bunch of blank stares when I mention either one of these factors.

[GenXer]

Yes, admin is very thorough. I won't let you off the hook too easily though. Bayesian won't work here. Predictions are futile.

There is no math as of this moment that can tackle a multifractal random process. Nothing even close. There is never enough data to accurately predict your slopes, and no math to figure out when regimes switch. I keep my hand on the pulse, and I have to disappoint you.

All we can do is predict the past (even that is near impossible). This is why I am always open to bets on the S&P Case Schiller index - my bet is that nobody can consistently predict the future outcome (thus, I bet that if anybody tries, they'll be wrong most of the time, and by orders of magnitude).

[BeaumontV]

GenX

No one can predict the future. I think we can agree. what I think the admin wants to do is get odds on the future, which we can do. Given current events, the probabilities for some outcomes get better or worse.

Just because one cannot predict does not mean that calculating probabilities is futile. I think the admin is just trying to see what is more or less likely. But I do not want to speak for admin.