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Boston Bubble Report: The Real Story for MA - September 2006
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PostPosted: Fri Oct 27, 2006 8:51 pm GMT    Post subject: Boston Bubble Report: The Real Story for MA - September 2006 Reply with quote

This is the eighth report in what may become a series 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. Reports are based on the published data of the Massachusetts Association of Realtors. The first report was for February 2006 and the previous report was for August 2006.

The Massachusetts Association of Realtors released their data for September 2006 on Monday, October 23rd (ahead of schedule). 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/

Based on the adjustment for inflation, prices fell 7.66% from one year earlier and are now 13.02% below the peak set in June 2005. While the year over year drop was not as large as the 10.18% drop between August 2005 and 2006, it was the third largest drop on record being edged out of second place only slightly by the 7.79% drop between July 2005 and 2006. Contrary to what is usual, inflation was actually negative in September 2006, which helped to lessen the drop for a change. September 2006 marks the thirteenth straight month of year over year price declines with appreciation remaining well within negative territory.

September 2006 also marks the second straight month that real prices have been below their 2003 levels. Consequently, September 2006 is now the lowest real price on record for any September as the data on The Massachusetts Association of Realtors' website only includes the median beginning in February 2003. It would be beneficial to use more extensive data sets for further analysis - recommendations are welcome.

Adjusting for inflation produced the data represented by the graphs below:

Full Price History




Change in Median Price From One Year Earlier, February 2004 - September 2006

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



There is no indication from the actual price data that the declines are over or even moderating. Year over year price changes would need to return to 0% before the declines are over, appreciation is far enough into negative territory that this would require an abrupt leap, and the movement of YOY appreciation from month to month has generally been gradual rather than moving in leaps. There is also no indication that declines aren't going to continue to grow deeper as the slope of the graph is still pointing solidly down.

Nevertheless, there was much ado this week about a report from Moody's which asserts that housing prices are at or near a low in the Boston area. Our local condo bull reported on this in the forums where there has been some discussion of it already. The Boston Globe highlighted the following as the most important point:

Quote:

Most important, the state's economy, badly hurt in the recession earlier in the decade, is bouncing back strongly. The state has added 33,000 jobs over the past year and 61,000 since the labor market hit bottom in December 2003. The technology sector has been particularly strong, with payroll employment growing nearly 5 percent in the past year. A growing economy and improving job market translate into more home buyers.


While employment growth may be a plausible reason for optimism, it is questionable as to whether it would be sufficient to buttress the real estate market for two main reason. First, while employment within Massachusetts has been growing since the bottom in December 2003, that growth has been relatively slow (0.34% annually) and there is a long way to go until all the jobs which were lost since the peak in February 2001 are recovered. Second, employment in Massachusetts declined at an annual rate of 2.20% between February 2001 and December 2003 and real estate prices boomed anyway. If a substantially larger decline in employment was not enough of a dominant factor to depress prices, a modest increase may have a similar lack of effect. The following graph puts the recent increase in employment into perspective:



Others also disagree with the optimistic assessment from Moody's, including industry insiders. The Middlesex North Registry of Deeds said "It is unlikely that prices will increase or stabilize until the present inventory shrinks." (For a nice graph of the inventory situation, see The Massachusetts Housing Market Blog's September Price and Inventory Stats.) Terry Egan, editor of Banker & Tradesman, also said: "We're extrapolating numbers that we've extracted so far. That’s what the statistics are showing us. It's accelerating rather than receding. We don’t expect it to end in the near future."

All of this is secondary to some extent, though. The core question is what is the true value of property? If current prices are too far above their true values, then focusing on employment or any other secondary input will only serve to distract. (Similarly, analyses of price movements, such as this report, don't really address the core question either.) Possibly the most important questions to answer are: are prices supported by incomes and are prices supported by rents? Improving secondary factors such as area employment should also lead to corresponding increases in incomes and rents, so a comparison of these fundamentals to housing prices removes the guesswork as to how much the secondary factors affect the big picture.

As usual, please do try this at home. Double checking of the math used to construct the above charts and analysis is strongly encouraged in order to help ferret out any errors. The data was derived from the following sources:

The text of this post and the associated graphs are Copyright 2006 by bostonbubble.com with all rights reserved, except as stated here. You may reproduce each graph individually or the text of the entire post as a whole (including graphs) under the Creative Commons Attribution-NoDerivs 2.5 License. You may additionally scale the graphs to fit your work. Alternatively, if you remove the bostonbubble.com signature from the bottom left hand corner of the three images within this post, those modified images (and only those modified images) can then be distributed under the Create Commons Attribution 2.5 License. In all cases, attribution should be made via a hyperlink to http://www.bostonbubble.com/forums/viewtopic.php?t=153 or http://www.bostonbubble.com/ Quoting excerpts of the text is also allowed provided that the quotes would normally fall under fair use. To request other terms for reproduction, please post your request in the original thread at http://www.bostonbubble.com/forums/viewtopic.php?t=153

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SoldAtTheTop
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PostPosted: Sat Oct 28, 2006 6:18 am GMT    Post subject: Bravo! Reply with quote

Excellent analysis as usual... keep up the good work!
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samchady
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PostPosted: Sat Oct 28, 2006 2:55 pm GMT    Post subject: Very good analysis, and one idea Reply with quote

I used to do a lot of analysis for my old job. I could sway the managers by how I presented the data, or, the savy managers would ask that I make the data look different by how I presented it - again not changing the data.

Your graph of the jobs vs. time in my opinion is not presented correctly, or is presented in a way to make it look like a "mountain" of jobs were lost. I do agree that we lost jobs and I want them back, but, it was something like a 6% loss (depending on how you do the math from peak to trough) and your graph to the casual observer makes it look huge. I want to make clear that I believe your data and in your integrity, but the style its presented will sway people to say, "Oh my, look at what is gone." If I made the Y axis equal to a total range of 5 million, I could make it conversely look like it was just noise or a small blip.

My recommendation is to normalize the data about a % change like one of your charts, or increase the Y axis range a little bit, or even make the Y axis equal the whole range. Also - if you could put some time markers on the X-axis like you did with the other charts.

Thanks for your work!
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PostPosted: Sat Oct 28, 2006 4:32 pm GMT    Post subject: Reply with quote

samchady,

I do see your point, but I'm not sure that I agree that a different presentation would have been better. The graph wasn't meant to demonstrate that Massachusetts has lost a "mountain" of jobs. Rather, it's main purpose was to show that:

  • The total recent increase in employment is small relative to the decrease that preceded it.
  • The rate of change is also much smaller in the current increase relative to the preceding decrease.

I do like your idea of showing year over year changes, but that wouldn't achieve the first objective unfortunately, as that would only illuminate the rate of change rather than the total accumulation.

Starting the Y axis at zero would make the points being illustrated harder to see. While it would put the data in perspective of the entirety of all jobs in Massachusetts, my points in the text only deal with relative changes, so the entirety of the job market isn't applicable. Of course, I see your point that applicability might be inferred by a casual observer who doesn't read the text, but I'm not sure what can be done about that without making the main points harder to see.

I do agree that labels for the X axis would have been nice. I just left those out due to time constraints.

Feel free to post your own charts if you want. The employment data is at http://www.bos.frb.org/economic/neei/neeidata/empstn.csv

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gadgetmaniac
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PostPosted: Sat Oct 28, 2006 9:03 pm GMT    Post subject: Moody's numbers Reply with quote

I would be really curious to see the raw data used by Moody's. Does anyone have more access to their numbers or know what sources they used to compile them?

The Boston Globe article states that the Moody's numbers are for the Boston area only. By my first glance, these numbers seem very different than the numbers for Massachusetts overall. For example, "Finally, the number of homes on the market, a figure that has been on the rise for five straight years, is beginning to decline." Obviously, this is not what we are seeing in numbers for the state issued by MAR.

Is there really such a big difference between the greater Boston market and the rest of Massachusetts? Is there a source from which we could get better data for the Boston market specifically, as opposed to numbers for Massachusetts as a whole?
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renting in ma
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PostPosted: Mon Oct 30, 2006 3:40 pm GMT    Post subject: i'm not as sure a you Reply with quote

i have been following this story for almost two years and predicted the slowdown (to anyone who would listen) way earlier than the news sources did.

i read repeatedly on blogs about how things are crashing/going to crash(-30+%) , and many people in the rest of the country think that MA stinks and no one should want to live here anyway.

that being said, i follow this story closely and on the ground day to day (at least in andover where i live). i bring to this study the experience of having lived through the last crash.

right now prices are down 5-10%. houses are still selling, and people are paying for desirable houses. i just don't see any evidence (other than statisical models) that we are in anything but a gradual down/flat period. things are so much better than '89-94 around here.

i'm not being an apologist and i want prices to go down more because i want to buy. i just am not convinced.
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AgentGrn



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PostPosted: Mon Oct 30, 2006 4:54 pm GMT    Post subject: Reply with quote

I think we're still pretty early into this "soft landing".

There is still a very severe problem with affordability in Massachusetts. As much talk as there is about the so-called "high tech" job growth, a majority of MA employment is not high-tech ... or medical ... or union labor.

Even so, a hypothetical couple making $100k per year should only make reasonable provisions for a $250k-$300k house. If you factor in job uncertainty where the lost of one paycheck leads to foreclosure, then perhaps a reasonable value is more along the lines of $200k-$225k. Nowadays, finding something livable not in a scummy section requires a lot of good luck and perhaps divine intervention.

This is a far cry from the $400k "starter home" as mentioned in some news media.

[rant]
Part of the problem is rooted in greed. Add in our drive-thru society and people want it all, now ... so they overleverage which is fine until the ARM resets or one person gets laid off. At the end of the fight, they lose everything they gained, and thensome.

The audacity of people who claim "the sky is not falling" (http://www.telegram.com/apps/pbcs.dll/article?AID=/20061030/NEWS/610300327/1055/OPINION) are partly responsible for making the prices sky high to begin with.

I am in a position to wait for things to crater. I'm in a month-to-month agreement in my cozy apartment and when the right house comes along at the right price and the right time, then I'll be ready to buy. I do not, however, feel compelled to support the greed of another who in some manner has helped to lock me out of the market.
[/rant]
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PostPosted: Fri Nov 03, 2006 5:04 am GMT    Post subject: Thanks for the graphs! Reply with quote

It's probably about time to add the 2002 data line to your graph of inflation-adjusted median prices, eh? Shocked
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Mike



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PostPosted: Fri Nov 03, 2006 12:58 pm GMT    Post subject: Reply with quote

The MA Association of Realtors only has the monthly median home price data going back to Feb. 2003. They have average sale prices going back to Jan. 1999 though.
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Mike



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PostPosted: Fri Nov 03, 2006 1:12 pm GMT    Post subject: Reply with quote

I just sent MAR an email requesting the data set for monthly median SFH prices dating back to Jan 1999. Maybe if they got more requests, they will act upon it. Go to www.marealtors.com and click on "Contact Us" on the top if you want to try.
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PostPosted: Thu Nov 23, 2006 11:55 pm GMT    Post subject: Reply with quote

Quote:

Is there really such a big difference between the greater Boston market and the rest of Massachusetts?


I wouldn't think so. Here's a population density map of Massachusetts:

http://en.wikipedia.org/wiki/Image:Massachusetts_population_map.png

It certainly looks like the Greater Boston area is heavily dominant.

Quote:

Is there a source from which we could get better data for the Boston market specifically, as opposed to numbers for Massachusetts as a whole?


I am not aware of a better source, but if somebody else recommends one, I'm open to suggestions for future reports. Something narrower than all of Massachusetts would be nice, although judging from the map, using Massachusetts numbers to approximate Greater Boston is probably a good start.

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PostPosted: Wed Nov 29, 2006 2:50 pm GMT    Post subject: update? Reply with quote

The new MAR numbers are out at:

http://www.marealtor.com/content/upload/AssetMgmt/Documents/Member%20Resources/Research/Monthly/Oct06MLS.pdf

Any chance for an update of the data? This is one of best plots out there...
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admin
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PostPosted: Wed Nov 29, 2006 3:04 pm GMT    Post subject: Reply with quote

Quote:
Any chance for an update of the data? This is one of best plots out there...


Thanks. Yes, an update is coming, probably on Friday. You can subscribe to the RSS feed if you want an alert when it's available (although that will get you all the other news too, in case you don't want that).

I can give you a little preview right now... Prices inched slightly above 2003 levels in October and are still well below 2004 levels. The year over year change was 3.68%, which is a bit milder than it has been. However, the apparent mildness is at least partly attributable to the particularly large dip in October 2005, which you can see from the older graph above.

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PostPosted: Wed Nov 29, 2006 4:45 pm GMT    Post subject: median price info for 2003? Reply with quote

admin wrote:
I can give you a little preview right now... Prices inched slightly above 2003 levels in October and are still well below 2004 levels.


Where do you get Median price info for 2003? I thought the MAR used average in 2003.

--wsb
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PostPosted: Wed Nov 29, 2006 4:50 pm GMT    Post subject: Reply with quote

Quote:
Where do you get Median price info for 2003? I thought the MAR used average in 2003.


They did indeed use the average in their 2003 reports and only started including the median in 2004. However, their reports also show the prices from 1 year earlier, so the 2004 reports also contain prices from 2003.

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