bostonbubble.com

[balor123]

Price to income doesn't matter if interest rates are steady over the term of the loan. With most people moving back to 30yr loans, this implies significant risk to home buyers because they won't be able to sell their homes for anywhere near their purchase prices if the buyers have to take out a loan at a much higher interest rates. Who knows - we could have low interest rates for 30 yrs but I wouldn't bet on it. A more favorable scenario is one where you pay a lot for your home but because of low interest rates can stay there for a while. Rates then rise and you can't sell it for what you bought it for but that's ok because you have equity so don't have to (and hopefully you haven't done a few equity loans in the mean time).

This, by the way, is one of the pervasive cultural differences between the conservatives and liberals (coasts): liberals don't care about debt because they argue you can always roll it over while conservatives worry about the prospect of not being able to roll it over. Not surprisingly, the places which fear a high national debt also fear high mortgage debt. Conservatives tend to favor low cost policies while liberals like to make policies and let the market solve the details. Sadly, we rarely seem to have a balance of the two.

[Kaidran]

OK, so I'll try and explain how I see the price to income problem again. I completely see the point about how we got to this situation. How people lucky enough to buy in Newton 20 years ago paid a reasonable mortgage and now sit on a much more valuable asset. They may be retired or simply dont need as big a salary to service their debt. Now my problem is this: if someone wants to buy their house they need to come with substantially higher assets. That could be either a large downpayment from a previous sale or a significantly higher household income to be able to borrow more. So over time the average income has to constantly increase to justify prices or prices cannot be supported and will fall.

If we say that "immune" towns are retaining their value better than other towns, which seems to be the case for whatever reason. Then the ability of the immune towns to draw people with bigger savings might decrease over time, since most wealth seems to be in peoples houses. So the leaching effect to the immune towns from the surrounding areas is weakened as the surrounding "non-immune" house prices drop.

I have noticed that interest rates are particularly low for the Boston area. National average rates from Bankrate used to approximately equal the best rate you could get in Boston. Today the best rate you can get here is significantly lower than the national average. I'm not sure if this is a sign that Boston mortgages are viewed as safer than the rest of the country or if they have trouble selling them here now. It does look like it has changed from last year though. If rates go up then obviously there will be a further downward pressure on prices. With the state of the world I really dont know where interest rates are going. I had thought they'd go up after the MBS purchasing ended but I'm guessing they will hover where they are until the fed raises the rates or people start buying more of them.

I dont mind buying a house that does not appreciate but I really hate the idea of buying a depreciating asset. It just feels like I'm giving money away to someone that just happened to buy sooner.

[balor123]

That's the idea - to slow housing declines so that existing homeowners don't have to take such a big loss. We know that the correction must eventually occur so the buyer absorbs the rest (or splits the loss with the next buyer).

[john p]

I think you've got the logic arranged correctly, like you've got the plumbing diagram arranged correctly, now it's a matter of understanding the size and lengths of the pipes and what the flows are.

Some dispositions seem like they are ready to act, but take longer than expected. Before on this blog, people used to liken the housing market to global warming in that waiting for prices to drop was taking much longer than they expected. I used to describe it like being on the first car of a rollercoaster where you were looking down the hill when all the people behind you were still looking up. Admin used to talk then about how the irrational exhuberance going up may provide its own self weight going down and the market may overreact downward. I'm mostly sticking around to help people but to also see this cycle through.

Also think of viscosity. They used to call the market as being "sticky" or being like honey on an upside down see saw where people would be like why aren't prices dropping the whole economy is upside down?

The next realm of my thinking was a combination of velocity and properties of materials. JCK used to talk about "velocity" in the market and I used to think about the speed of a roller coaster as the speed went faster and slower with the hills and dips. I had a sense of this from playing lacrosse. When you cradle a ball your speed through the cradle changes (faster going downward and slower going upward, following the laminar flow of forces). I likened the market to whenever there was velocity in the market, buyers and sellers were on the same page as to what the values were, things seemed to move.

Beyond that was "property of materials". If the market was "sticky" it wasn't moving (liquid). What were the forces then to heat it up or sieze it up? Obviously, jobs were the biggest force to heating up a market (for failure, almost like melting a steel beam to where it loses all of its structural properties). Think about it, if one third of a town has people with mortgages that are more than what their homes are worth (they are upside down), it really only matters if they HAVE TO SELL. If they don't, they just say "shit, that sucks my house is worth less than what I owe, too bad, so sad". I think things aren't dropping steeply because although unemployment is high, the real people that are feeling the heat are those that are unemployed AND bought during the bubble. If you lost yor job and say bought ten years ago and have equity in your home and most likely a decent emergency fund, you can refinance now with the fantastic rates and you're going to be ok because you've got like a 2 year emergency fund. In architecture we call this "fire rating". Sometimes we construct columns with reinforced concrete or spray on fire proofing to steel columns for say a 2 hour rating. What I've been saying, kind of what you alluded to, is that that fireproofing is wearing thin. MPR's perspective is that the government is writing policy to provide that added insulation. People now want to know if the government can keep on spraying it on? This is why I have been trying to get buyers to focus on government interaction, because they are affecting the behavioral properties of the market.

The question is why? Part of the reason is that we own shares of these banks and actually a lot of the risk in many of the mortgages that are out there, so now our government has a share in the value of the homes and a self preservation interest in keeping housing at a certain value. Those that bought mortgage backed securities five years ago understood this, they understood that if Uncle Sam was buying all of this and going to absorb all this risk, then they were almost guaranteeing and insuring it knowing full well that the taxpayers would bail them out and government would do everything in its power to keep the market afloat. When the credit markets siezed up and the government went in to Bailout mode, many who were waiting for the market to correct naturally were pissed and using terms like "Moral Hazard" in that if you worked hard and played by the rules you could get screwed.

The younger buyers want the market to drop significantly and for the markt to behave naturally because for capitalism to work, it needs brakes and if every time things need to correct downward and the government steps in and prints money to inflate the situation, it really makes financial planning and responsibility difficult. For example, if I am designing a building using A36 steel, I know the properties of that material or if I'm using Douglas Fir, it has a fiberal stress that is associated with it so I can predict the behavior under load. If the government is running around with a blow torch melting the steel or chipping away at the wood, it becomes a wildcard. As I dug deeper, I found that a lot of the financial supports that created the stability in the housing market had been chipped away at over the years, and to my surprise, it was by the same people that claim to want to help the people. When they lowered standards for lending, allowed for Adjustable Rate Mortgages, they were allowing too much risk into the market, and then when they accelerated the purchase of these subprime loans, it swamped us. When I found this out, I hit a political headwall. People were not ready to square up with the structural flaws because they weren't exactly sure and these were the same people that shared their values so they didn't want to consider if the decisions were flawed. I think right now, I'm calming down and understanding that when there is a structural flaw there isn't much a bad policy can do, a bad policy and a structural flaw will be obvious in time and people can't ignore the problem for that long. My emotion is about having to see more suffering in the meantime. The only thing that keeps me from being too pissed is that even if you had the right policy, you need people to actually believe in it, almost like how a team needs to buy into a coach's game plan. (Awesome Celtics Game last night by the way).

What I'm saying is the most important thing for the younger generation is for the Global Market to have a "building code" of finance whereas indiviudals, corporations, investors, creditors, debtors have some sense as to what the ground rules are. If you think that is naive, then I would recommend learning how to read the dynamics within this turbulence and learn how to survive in the Wild West.

Getting back to your observation, look at the immune towns like the oasis in the desert. Although the puddles after a rain storm dry up, if there is a structural reason to support an oasis i.e. like location, location, location it might no so much dry up, but it will drop in water level somewhat.

So guess what you've got to do. Look downstream and look at the behavior of the surrounding area. Two or three years ago they had this hot and cold map of the market and it really showed this temperature change in the market. I believed that as the deltas between the towns got too much, it would create it's own 5 o'clock bounce (which happens in Massachusetts when the summer sun heats up the land and at the end of the day, the heat flows right back across the coast to the colder waters of the ocean). If you are on the coast on the summer, at 5 o'clock you can feel a bit of a heat wave as the hot air crosses you. If you can look at the market like a meterologist and understand high and low pressures, you can predict some things down stream. I'm saying that the value towns are doing well now because they are getting the 5 o'clock bounce.

I am actually kind of floored to see the same types of homes in Bridgewater selling for not so far off from Kingston and even areas of Duxbury. Before a house would be like $350k difference, now it is like a $150k difference. I know someone who bought a great house in the $300's in West Bridgewater (which has it's own school system). Mark my words, West Bridgewater will see increases in their MCAS in the next ten years. This is most likely too far for most, but I'm just offering an example.

The last point I am going to make is about "perforations". If a town has a ton of housing stock, you won't see huge changes in the prices, it will just go up and down with the overall macro market. A small town, with a scarcity of housing can see more dramatic changes in prices like a West Bridgewater (8 thousand people) versus say Wakefield with a lot more people. This is why I believe that Austin Texas and Atlanta don't see major house price changes upward, because there are too many perforation for the "static head" to escape. Massachusetts had anti-growth policies and made it less than attractive to build rentals (rent control until the early 1990's) so it created this shortage in housing. I used to think that the baby-boom retiring would create this diaspora to the warmer states, but because we are more of a white collar city, people can work longer, more homes are being willed to their kids, and we have this incredible amount of skilled immigrants who are in our cities working in the professional sector so it kind of is screwing up the understanding of the balance of the ratio of buyers to sellers and historical norms of price to earnings, it is like changing the consitency of the A36 steel. Maybe the market is behaving like a stronger steel because we have more skilled immigrants averaging in the mix, making us like an alloy?

[GenXer]

Dynamics is too complex to be analyzed. There are too many feedback mechanisms in play that govern prices. We can only speculate, but even if we could pin the reason, it still wouldn't matter. This comes back to the fact that value is only what somebody is willing to pay for something. A house is not worth $X - it's worth what the buyers are willing to pay for it. The same way we have no idea what the prices will do in the future - will they keep steady in Newton or will they fall? Will there be some unexpected things happening (i.e. layoffs of public officials and huge unfunded liabilities, high cost of new school in Newton, etc)? Who knows. As long as there is somebody who's willing to pay for something, prices will remain high. The only thing that will drive demand down is unemployment and loss of income to sustain an expensive lifestyle. It may take years for the effect of unemployment to filter through the system (i.e. prolonged unemployment), and at present, the government is supporting the bottom line with unemployment benefits. So, at the very least, let's wait for a couple of years - 10% unemployment will surely NOT help, and the problem will compound for cities and towns which rely on revenue from real estate and taxes.

[john p]

I mathematically can't explain the dynamics necessary to survive and I can't limit my thinking to that which I can.

I think that everyone has this mosaic dynamic thought process and as we get more data we determine what falls into it and what makes us reconsider it, or what's an anomaly.

I think the exercise of trying to figure it out over and over again does give insight. When you start to be able to pick out winners or houses that are priced right and notice how fast they move off the market and then see things fall within the predictions you make more often than not, it's a good sign that your not a complete novice. Granted, even Karl Case gets it wrong sometimes, my guess is that if you make a decent effort it will be be better than if you hadn't.

Basically, I listen to people and if what they say seems to align with what then happens, I find them to be a valued source. So far, I've gathered that if you can have a guy in an orange shirt blow on your dice when you're playing craps, 17 percent of the time you will win half of the time.

[GenXer]

So far, we've only been talking about buying houses by those who's median income is north of $100k, which is probably almost everybody reading this forum. Median income in MA is probably around $50k, and so most people still can't afford to buy anything anywyhere close enough to jobs.

Here's a dose of reality though. Somewhere out there there are people who earn minimum wage, have a single-earner household, and who can afford $500k houses. Did that get your attention?

Wanna know how some Chinese are buying expensive houses in places like Newton? Its really interesting. I found this out from talking to my server at a local Chinese restaurant. The guy works for cash. Him, and his two brothers each bought a house. The brothers bought modest ones, 200k-300k ones. He, as the older brother should, bought a $500k house. He's a single earner, with a wife and 3 kids, and no grandparents are helping him out. Came to US with nothing. Worked for 14 years, earned several hundred thousand working for cash, stashed every bit of it, probably worked all the time, no breaks. He had a $300k downpyament and managed to get a $200k loan which apparently he can afford because he has plans to pay out the loan.

There's something we have no way of replicating, unless we are willing to subsist for 15 years on a fraction of a minimum wage.

Now imagine if you have a 2 earners working in high tech with their grandparents taking care of the kids full time. They can afford some house! So, in fact, prices in Newton may be high simply because you have enough such families being able to afford to buy, and buying regardless of the price (well, almost).

Sure changes things a little bit.

[Kaidran]

Well, that goes back to the size of the pipes argument of John. If there are a ton of people with $300k saved that sacrifice their working life to get into Newton then yes. But are there enough to sustain the recent inflation of prices? I dont know but personally I would be doubtful.

I think that definitely contributes I think the first topic I started here was about something similar, about saving to buy outright and avoiding a mortgage altogether. From my limited view I see people I work with using joint incomes far over average to by crappy fixer uppers in Arlington expecting to flip them in a few years to buy a palace in Newton/Lexington.

[john p]

I would look at in three realms:

First, look at it like playing the hand you are dealt. If you can get a tremendous deal in the current market (relative to other deals), as the price structure moves up or down, you'll always be in a decent value position relative to the other homes.

Second, look at whether the overall tide is in or out and if this is a good time to enter the market to begin with. Realtors will aways say "You never want to time the market", but times are different.

Third, find your weak spot and make sure you've got that covered. For me, I focused too much on the house price and I think I could have gotten another 1/8 of a point better on the mortgage rate at the time. Also, I focused on finding a good deal relative to the market but I didn't predict this huge economic correction. I wasn't aware of how fragile many of these institutions were, as did many investors.

I think many people's blind spot is only looking at certain towns (that everyone else is also looking), or looking during the peak selling months where they won't get the best deals.

Two other types of blind spots are being paralyzed by math, meaning you won't allow your mind to operate beyond the limited mathematical operations you know how to perform. Basically, this means ignoring the contributing factors that seem chaotic, or at least distilling it from your thought process. Many feel comfortable going with their "gut", sometimes too comfortable. I think it is good to listen to guys like Admin and GenXer who are very careful about qualifying data for their analysis, but a scientist also has to realize that the specimen never lies and in trying to use math to observe, there is a limit of what you can throw away from a scatter diagram. My biology teacher said that if the frog has six legs, you put six legs in your lab report, you don't falsify your observation to fit the norm. However, to some degree GenXer and Admin didn't buy during the bubble because when that six leg frog showed up, they said, hey, this frog has six legs, that is too too many from the norm, I'm going to be patient to see if this is just an anomoly. Even if you could get the best deal of the six leg frogs, they were just patient, and that patience paid off better than any wheeling and dealing that may have taken place back then.

Another type of blind spot is mixing and matching data i.e. mixing state data with national numbers, or even data from three decade prior when things were entirely different.

To many of us, INCOME is a huge blind spot. Nobody has really found a reliable source of household income so it is hard to evaluate Price to Earnings ratios.

My technique developed over time is observation of behaviors (and it has a ton of weaknesses). Basically, I look at the wind and watch it blow the sand, and say, hey, that wind can lift that sand, but it can't move that rock. I look at the white caps on the water and know how much the wind is blowing by how it makes the water behave. By watching how one thing influences another, I better understand the interconnectedness and the properties of each factor. Now if the wind can't blow the sand at a certain speed like it did the prior days, perhaps it was just the topsoil that was suceptable to the wind and maybe the strata beneath was different?

I think it is very easy to get overwhelmed and caught up in this type of thinking, but it is important to observe that housing is entangled in quite a bit of our economy and from central banks to political leaders, it is in a lot of powerful people's best interest to keep values at current levels. If the United States owns a lot of these mortgage back securities, isn't it in our best interest to do what we can to hold up price levels? What would the economy look like without government interaction?

I asked my cousin who is about 30 or so if he was going to buy. He and his brother rent a nice old apartment in Somerville for $1,750. You might see these two lugs sitting at the Bern. They said they are waiting for the market to crap out and buy from all the babyboomers who he said were going to be screwed. I remember saying the same thing fifteen years ago. The question is is that big gust of wind going to blow their house down?

http://en.wikipedia.org/wiki/Money_supply

I think that the M3 (money supply) is really the gorilla in the room. When Baylor talked about how certain cultures operated as if credit would always be available and plentiful, you have to consider that maybe people were buoyed with that notion because it was true. I mean if people were willing to buy your shares of stock for prices 200 times your earnings, is that your fault? At a certain point, stupidity and irrationality are the reality. People pay $1,000 for a handbag or a pair of shoes. I mean what is the guy selling them supposed to do, just say I'm going to charge 1.5 times my cost?

Now, looking at that M3 diagram in the link above, that is not healthy, but it is real. Where is all that money going to go? I think a lot of it will evaporate meaning people will cancel their credit cards or not extend into that credit, and some of the debt will be written off. The big question is that if people have been governing themselves with the expectation that they will grow at 5% a year and things are actually going in reverse, how will this resolve? I think that it will be a flat decade to some extent unless there is a critical mass of suffering, in which case they will need to stimulate to prevent riots. The question for me is what will happen to the shoe company that sells $1,000 shoes? I mean this is all they know how to do, they live off of the mark up and the name of the game is getting someone foolish enough to buy them. I'm trying to ask, is Newton that $1000 shoe and at what point is wearing a $1000 shoe going to help you get promoted and get ahead, and at what point is it going to upend your financial well being?

[Kaidran]

I think the idea is that even though the Fed was printing money at an incredible rate it was still dwarved by the accumulated debt losses. That is why you get a lot of bloggers arguming for short tern deflation as prices are linked to the availablity of cash and credit, not just cash. Patrick.net frequently links to this guy and I have to say he makes a lot of sense.

http://globaleconomicanalysis.blogspot.com/

[john p]

This guy is great.

I'm waiting for the headline:

"The White Swan Returns"

[mpr]

[CC]

[Boston ITer]

[john p]

MPR:

Help me understand a little better.

When we have a "Deficit", that means the current taxpayer funds have run out for the year, so when people refer to "taxpayer dollars", I'm imagining that they are meaning debt which will have to be paid off by future taxpayers.

Are you saying that future taxpayers aren't going to have to pay for the Deficit by having to pay down the Deficit portion of the Debt?

It sounds like you're saying that the FED is essentially buying capital stock in the country almost like a venture capitalist at the early stages and when the company starts to turn in a profit, they can then sell these securities?

This is what Bush did with the intitial bank bailout right? Which was pretty much paid back with interest?