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Boston Bubble Brief: The Real Story for MA - Oct 2008

 
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PostPosted: Fri Nov 28, 2008 4:01 am GMT    Post subject: Boston Bubble Brief: The Real Story for MA - Oct 2008 Reply with quote

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 October 2008 on Tuesday, November 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 - October 2008

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



Some observations:

  • The real decline from October 2007 to October 2008 was 14.06%.
  • The year over year decline in October was within the normal range for the first time in a year. Declines had been in the process of deepening and are now within that deeper range.
  • Real prices are once again lower than the same month in any other year in the time period covered by The MAR.
  • Prices continue to be below the estimate for 2001.
  • Prices are now 29.51% below the peak set in June 2005. This is the result of a 21.08% decline in nominal housing prices and a 10.67% decline in the purchasing power of the dollar.
  • The cumulative price decline from the beginning (Feb 2003) is 12.52%, which is an annualized decline of 2.33%.
  • For the past three months, housing price declines have come amidst general price deflation. The dollar actually gained value in August, September, and October making house price declines less pronounced in real terms. In fact, consumer price declines set an all time record in October.


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:

The text of this post and the associated graphs are Copyright 2008 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-No Derivative Works 3.0 Unported 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 images within this post, those modified images (and only those modified images) can then be distributed under the Creative Commons Attribution 3.0 Unported License. In all cases, attribution should be made via a hyperlink to http://www.bostonbubble.com/forums/viewtopic.php?t=1567 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=1567

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

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Phil O. Math
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PostPosted: Fri Nov 28, 2008 9:20 pm GMT    Post subject: thanks again Reply with quote

Amazing. Inflation-adjusted prices down almost 30%.

I have friends who live in Charlestown, Beacon Hill, Back Bay who still have no idea the significance of these declines. They still believe that declining home prices are and will continue to be experienced in the outlying areas but NEVER within the unassailable battlements of the high end market.

Now everyone is too distracted with talk of the recession and financial market turmoil to consider the impact on the price of real estate.

Prices will return to their historic relationship to incomes and there they will remain.

Phil

Good luck to all. Tell the truth.
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PostPosted: Sun Nov 30, 2008 2:56 pm GMT    Post subject: Re: thanks again Reply with quote

Phil O. Math wrote:
I have friends who live in Charlestown, Beacon Hill, Back Bay who still have no idea the significance of these declines. They still believe that declining home prices are and will continue to be experienced in the outlying areas but NEVER within the unassailable battlements of the high end market.


Here's a simple proof that declines in "prime" neighborhoods are very possible: it happened last time. Real prices on condos in the Back Bay, Beacon Hill South End, and North End fell at least 30% during the last downturn, possibly more (the data I found doesn't look like it goes back far enough to include the last peak).

Also, if prices in those neighborhoods are justifiable, sustainable, and permanent, why did they experience explosive growth at the same time as prices everywhere else in the country? Shouldn't they have already been at their potential beforehand if they are justified by the persistent wealth of the inhabitants rather than the general credit bubble? I am very wary of buying in the Back Bay or Beacon Hill right now because of this. I was living there during the first several years of this decade and I remember at the time seeing a local real estate paper touting that prices in the Back Bay had actually doubled over the last year. Why did it happen only then if the neighborhood has been a bastion of wealth all along? I think that may have been the first clue that tipped me off to the existence of the larger real estate bubble. (In retrospect, the doubling in prices was probably a doubling of the average, skewed by some new development(s) coming on line - the rise in the median was also dramatic, but not quite that dramatic.)

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PostPosted: Mon Dec 01, 2008 4:44 am GMT    Post subject: Reply with quote

Quote:
I'm gonna tell you a story
I'm gonna tell you about my town
I'm gonna tell you a big bad story, baby
Aww, it's all about my town

Yeah, down by the river
Down by the banks of the river Charles
That's where you'll find me
Along with lovers, muggers, and thieves


http://www.ncjrs.gov/pdffiles1/nij/188741.pdf

In this Dept. of Justice Report (above)it describes the wave of crime in Boston starting in the early 80's and peaking with the introduction of Crack Cocaine.

This report shows some of the history of social policies that actually led to the breakdown of the family structure.

http://www.neoperspectives.com/welfare.htm

Some of these neighborhoods in Boston were pretty damaged and family values were just things to laugh at like a Leave it to Beaver episode. When Crack hit, it just tore those areas apart and some of the desperate addicts went on the hunt to the richer neighborhoods. Lots of people fled the City.

It is interesting that you see more native Massachusetts younger people around 35-45 wanting to live outside the City because they remember when it was much more dangerous. Younger people and people from outside Massachusetts aren't aware that Boston had some real crime problems and feel more comfortable living in the City.

I think the wave of house prices that you noticed coincided with the gentrification of the poor people that took place in many cities and a reinvestment in these areas because there was less crime.

Crime is the biggest source of potential real estate drops in the city, and second to that is solvency due to a deep recession.
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PostPosted: Mon Dec 01, 2008 1:59 pm GMT    Post subject: Reply with quote

When I lived in the Back Bay this decade my apartment was broken into once and there was a gang fight outside my building once which culminated in somebody getting shot in the face. There were some other minor incidents as well. When I lived there while in school last decade, the building I lived in was routinely broken into on the order of once a month (probably due in large part to it being entirely student occupied, but still not a particularly good sign). My point is, if crime were my main consideration, I would still avoid the Back Bay. I wasn't even aware of the past problems either until you pointed them out just now.

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PostPosted: Tue Dec 02, 2008 3:19 pm GMT    Post subject: Reply with quote

Wow, I wouldn't have thought the Back Bay had those types of problems. Of course, the biggest magnet for crime is street money (mostly related to drugs). On the one hand you have desperate junkies "rolling" someone for money and the other, you have people in your neighborhood buying drugs, creating the market that absorbs and attracts drug dealers. When cocaine went mainstream i.e. the movie "Blow", there were more muggings in upscale neighborhoods.

If you think about the likelihood of drugs making a comeback in the mainstream and upscale neighborhoods, I'd think about how dangerous and addictive they are. The ones that pose less risk like marijuana tend to be more mainstream. The big draw for drugs or alcohol abuse is for escape and just a release from a reality that is a big overwhelming burden for some. With today's turbulent economy, I'd bet a lot of well off people are feeling strain. Initially, drugs serve as a release of bad emotions, but when used as a crutch, it becomes mentally and physically addictive. Bad times causes mental trauma and that leads to drug or alcohol abuse and your bars are frequented by angry drunks, you see kids growing up with abusive parents and these kids become bullies, and if the area becomes a pressure cooker, the kids need to form gangs just for protection because otherwise they would get picked off one by one by bullies or other gangs. When things get to this point, I think Obama's "Hope" theory is right, because hope is the positive light at the end of the tunnel that gives people the strength to weather the storm. I honestly would feel more confident if Obama had a plan so this hope isn't a mirage, because if people put faith in him and he doesn't deliver, it might make people more cynical. I guess I've been stung a few times in my life to just put faith in flowery words and I'm a bit more guarded in that respect. Today, expectations are high, and I don't hear of any plans that would really engage today's reality very well. I think Obama's going to just create stimulus like Dick Morris says, like it's methadone to ease the pain and stretch out the inevitable. Adding massive spending when we're already way too deep in debt is really walking a tightrope and our safety net is getting thinner and thinner.

My recent posts have been more about psychology because during times like these you need to understand the emotions because they are a main part of the fundamentals of today. If you can understand peoples hopes and fears and quantify the probability of them, you can empower yourself to make good decisions. Hopefully, if you're a nice person, you'll pass along some self defense skills to help out your family and friends. That is how I think you build a social fabric, by helping each other out. During times like these, I tend not to like the politicians that offer a mirage of hope without any plan especially from someone that hasn’t paid the price to stand up and make such a claim. I prefer people that offer real skills of self defense and don’t sell themselves as a shoulder to cry on or Santa Claus, or someone poisoned with vanity that wants you to worship them. Money problems will turn to drug problems which will turn to crime. We need to stop the flow of drugs, and teach people to be better capitalists so they don’t get ripped off by greedy predators and make people accountable and responsible for their actions and take their civic duty responsibly. A government of the people can’t survive when we have hero worship, because people inherently need to be weak to worship someone. Predators try to get the upper hand on you by talking down to you or trying to make you feel inferior; politicians try to do the same. Obama is just a politician and if people sit back and expect miracles without expecting to lift a finger and also expect a handout, the government of the people will weaken because the structural load will fail to transfer to these weak and rotted members. In a government of the people you don’t strengthen a superstructure “dream team”, you strengthen and empower the individuals.

If these bailouts are approved, it will send a terrible message to individuals and pose the risk of a society moral hazard. I mean what police officer would want to put his/her life on the line to defend a community to enter a crack house that most likely has dozens of automatic weapons in it when their President was a coke head? I mean how do you convict someone for possession of cocaine because you could argue, hey, this person could reform themselves and be a future President? How do you expect a young kid to say no to a drug dealer when the drug dealer can say, hey Obama took cocaine and it didn’t hurt him? The ray of hope is the person who weathers the storm and comes out the other side stronger and reaches back to help others. In today’s tough times, we have a Governor saying it is good to gamble. It would be fine if people took responsibility for their actions, but we’re bailing out Ivy League graduates in these Financial Institutions for taking risk, how is that any different than bailing out some idiot that gambles away their paycheck at a casino? If you think what I’m saying is b.s. that is fine, it will just help you gauge what percentage of this irrational exuberance is temporary or what is overstated. We’re caught in the world of irrationality, turbulence and fear.

Think about the Bailout vote. Our “leaders” were given a shock wave of fear and were told that the economy would collapse. The politicians we choose are lawyers, bullshitters, and others poisoned with vanity. These idiots have no understanding of the economy and were easy prey. They don’t know what they were voting on and turned it into a pork barrel bill. They have no idea about the basis of the decision and today, there is no guidance or regulation or defined intent to spend the money in any specificity. These morons don’t even know what they voted on. This is when you need experienced and smart people in the pocket that don’t cave in. These idiots aren’t strong because the people who put them there weren’t strong. Our founding fathers were strong because the Revolution forged them. Ben Franklin’s autobiography starts with quite a bit of discussion about his uncle, a man who had a reputation of being honorable, smart and fair, a person who others would ask to mitigate their disputes. It is interesting that the first impression Franklin makes is a very strong member of a society that he admired. The values that that man passed on to Franklin made their way into the foundation and frame of our Nation. If the members of our society are like a weak wood, we can only do certain things and we might collapse under significant load, but if people toughen up and we become like steel we can fundamentally reach our goals and carry our burdens. In these bailouts, we need to think about moral hazards and what that might do to the strength of our members in this government of the people.
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PostPosted: Thu Dec 11, 2008 3:17 pm GMT    Post subject: Reply with quote

john p wrote:
Wow, I wouldn't have thought the Back Bay had those types of problems. Of course, the biggest magnet for crime is street money (mostly related to drugs). On the one hand you have desperate junkies "rolling" someone for money and the other, you have people in your neighborhood buying drugs, creating the market that absorbs and attracts drug dealers. When cocaine went mainstream i.e. the movie "Blow", there were more muggings in upscale neighborhoods.


Check out this article from today's Herald:

Cops bust alleged Back Bay drug ring

http://news.bostonherald.com/news/regional/view/2008_12_11_Cops_bust_alleged_Back_Bay_drug_ring/

Also of tangential relevance to this site, one of the men arrested was listed as a vice president of Kush Real Estate.

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PostPosted: Thu Dec 11, 2008 6:27 pm GMT    Post subject: Reply with quote

That's too bad. You know you can make forecasts about stuff based on street smarts but when those logical formulas start to render real people it just makes you sad.

What is dangerous is when word gets out that a certain area is a good area to sell drugs, the hard core groups try to circumvent the friendly white collar dealer and do some direct selling, so you get a criminal presence. I remember the theater district over by the Wang Center had some shady people asking if you wanted drugs or hookers back in the early 90's.

The real danger is when the economy goes south and people rely on that escape and when the money runs out before the addiction, people don't pay back the drug dealer or someone rips off someone or cuts and mixes the drugs and pisses off people.

It's like people when they're facing tough times need to have the strength to keep their eyes open and weather the storm versus need some escape. This is when people need their friends and support systems to help them through tough times...
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