bostonbubble.com

[Guest]

I am glad to see these differing viewpoints and debates on the site. I know it is a result of the tumultuous market and the increased media coverage. But lets get everyone on the record and we can see where things are in 1-2-3 years.

My Predictions:

I am a bear and have been a bear for a long time so I know my view will be looked at as pessimistic but I think this market will sustain at least another 20% drop over 2005 prices (getting us to 2002 price range). Although in certain scenarios I could see that even more severe.


Why?

1. Credit crisis
a. Harder to get mortgages
b. Inability for small business to get loans
2. Home price depreciation
a. US will not longer be able to use home as a piggybank
b. Hundreds of billions has been pulled out to help fuel all domestic markets and it is simply not available anymore
3. Disconnected fiscal policy
a. As recent as 2005 bernanke was quote “we have strong fundamentals and have never had a decline in national home prices”
4. Inflation
a. Gas costs $3.50 a gallon—anything dependant upon it will go up and reduce your ability to spend
b. Oil and gas heating are going to price people out of the new England market alone
• I had a $800 heating bill one month this winter and 2 at $600, what is that gonna look like next year?
5. World Economy and global competitiveness
a. China and India have nearly 3millon white collar jobs
• We might not be able to fill them but where is the high placing replacement (Walmart)
b. Speaking of Walmart, if the Yuan is not longer artificially depressed we will see a 15-20% jump in all goods from China (90% of walmart goods)
c. Education: We graduate more personal trainers (anatomy phs, etc)from 4 year colleges than math and engineering students
• We graduate 10k math majors a year and need 50k in teachers alone
6. Changing Demographics and migration
a. Babyboomer retirement
b. Sun belt migration
c. Increase
7. Mass job creation
a. Poor at best
b. Was ranked in the lower quartile for last 7 years
8. Housing hold outs
a. The longer they hold on the longer it will take for the market to adjust. At some point there will be an avalanche of houses on the market
9. Alt-A mortages—The resets there, in 1-3 years are even more significant than the current arm issues we are seeing

[john p]

I predict Massachusetts bottoms out this year.

I think the FED will lower rates one more time to catch the spring season and offer a lifeline to the May foreclosure wave. The key for the FED is that house prices don't drop way below 2005 prices because if banks are stuck upside down they have a real problem. Inflation can correct itself in months to follow, but the key is to have a softer landing for the foreclosure wave. Moreover, if rates drop, people in a higher rate who do have good credit will refinance. Part of the problem is that there is no credible, real fundamental grounded bond for investors to connect with. If refinances are given to people with good credit, the investors have a bond with a reliable, sound borrower. Lowering rates is the only way to reach them.

I do see people desperate to sell, and because of it, I think you'll see handfuls of homes lower than other comperables in the market strata. I think those homes will be snatched up quickly by the pent up buyers looking for a bargain. Next, I see the quick sales creating activity where decent values move, and then the sellers left on the sidelines will drop their prices to meet the buyers level, the comps will be set early and fast and the rest of the chips will fall in line. I think buyers and sellers will come together this year. I do see deals and approx. offers accepted ranging between 5-8% off of asking.

I think most of you are spot on with the macro concerns, which makes me wonder why I think what I do...

[CJ]

It's still too early to tell. Yes, the FED can and probably will lower rates more, but that does not mean mortgage rate will get lower. In today's inflation problem and no one will be interested in buying their re-package mortgage products now, I don't see banks will lower their mortgage rate more.

I met 2 realtors this week. They all said it's a tough time. However, I don't think the l market will sustain at least another 20% drop over 2005 prices. I would say something like 2002-2003 prices. This already happened in many towns (2003-2004 prices).

There are some buyers are waiting (like myself), but most of my younger friends (25-35,highly educated) will not be able to buy a house next few years. If they are not be able to afford a starter home, it's hard to see the price will remain.

Personally I do hope it will bottom soon.... probably next year? So everyone can move on.

[Paperboy]

I predict the prices will drop at least another 25%, before you see any uptick. We all have less money to spend on housing thanks to the uptick in the price of fuel and food. Combine that with the tightening standards and you have the perfect storm.

The Fed is causing inflation to soften the realestate landing. Which is taxing everyone for the benefit of the few upside down borrowers.

The house priced at $400K will head back towards the $320's.

[john p]

When you think about government intervention, you need to think about both ends of the yield curve.

click on the yield curve 101 button:

http://money.cnn.com/markets/bondcenter/index.html#

With winners and losers in this economy, think about how the banks can make an incentive to get the winners capital now. I see people who are wealthy thinking about refinancing with a shorter term i.e. rich people getting an incentive to refinancing with a 10 to 15 year not as opposed to a 30 year note. I think this might play into our future...

[samz]

I predict that many towns in Massachusetts will take a beating in the next year, but that the usual cadre of desirable towns will not (e.g., Arlington, Lexington, Belmont, etc.). Here's my reasoning, inspired by the cosmological concept of "heat death": http://en.wikipedia.org/wiki/Heat_death

For these towns, there are fewer buyers now, but also fewer sellers, creating a kind of price stalemate. People who have nice houses and don't need to sell, won't try to sell. People who need to sell will have one of two experiences: if their house is relatively crappy it will sit on the market a long time and eventually sell when things get better (and/or for a lot less than asking). If their house is nice, though, the few buyers that are out there will all jump on it, supporting the general price structure (and giving realtors anecdotes to show that the market is "hot").

The really bad news, in my prediction, is that this dynamic will cause home prices to plateau at the current high levels for a very long time. Inflation will march on, though, slowly eroding the real value of those homes. People who buy in now may feel like they did ok (since nominal prices won't drop), but 10 years down the line they'll realize it was a horrible investment -- or maybe they won't.

I really hope I'm wrong. I think we'd all be a lot better off if we just took our lumps now, so that there's room to grow again (see Big Crunch: http://en.wikipedia.org/wiki/Big_Crunch )

[Guest]

"I do see deals and approx. offers accepted ranging between 5-8% off of asking. "
So, "5-8% off" after 120% rise is a "deal"?
Are you realtor, dude? Confess!

[Guest]

http://finance.yahoo.com/real-estate/article/104925/The-Brighter-Side-of-Housing

Economists at Goldman Sachs say home prices are likely to level off by late 2009. They also point to improving affordability. Goldman's chief U.S. economist, Jan Hatzius, says the share of a typical family's income needed to pay mortgage payments on a median-priced home averaged about 17.5% from 1993 to 2003, before jumping to 26% in 2006. The figure now has fallen to 20% and is likely to keep declining as home prices fall.
Mr. Hatzius estimates that average U.S. home prices have fallen 15% since the second quarter of 2006 and projects they will fall an additional 10% before stabilizing late next year.
But he also sees a risk that home prices will fall further, particularly if the foreclosure problem proves worse than already expected.

[john p]

http://www.boston.com/realestate/specials/07_08_march_ytd_sales_single/

It said that the last market correction in the early 90's (which had a recession) prices dropped a total of 10.2 percent. That is not alot. Look at about 1/2 the way down on this link below. In the same report it says that the MAR reported an 8.4% house price drop in the past year.

http://www.boston.com/realestate/news/articles/2008/04/29/housing_prices_keep_falling_as_slump_enters_its_third_year/

This is the third year of price drops guys; price drops in the midst of inflation which pronounce the price drop. Further, interest rates are better now than they were in 2006 and 2007 so the lower houses are more affordable (unless you can argue that inflation is eating into people's take home pay) which is true, but most on the sidelines have most likely been getting 3% pay increases a year or so so people are most likely in a better fundamental position than in 2005, 2006, and 2007...

So, almost three years of price drops, three years of buyers on the sidelines with pay increases, pent up demand, lower interest rates, and this latest article (attached above) showing many towns having price increases in 2007. So all of that, and you think that it is not possible to bottom this year? This makes me think of Admin's talk of the weight of herd behavior despite fundamentals. What we might be dealing with is the weight of common perception regardless of whether it is based on reality or not.

No, I am not a realtor. If you take the 5-8% off of asking and you add it to the already drop from the 2005 peak, it is quite a substantial drop. I am not sure where the guest is thinking that we had a 120 percent rise; think about the corresponding interest rate. Some of you might not remember double digit interest rates. I don't beat the war drum either way, in fact, I was bearish when people were bullish, check out my old posts.

In a prior thread I demonstrated that when you take the median house price year over year and the prevailing mortgage rate year over year, the actual mortgage payment year over year increases at a straight line slope of 3% since 2000. The 3% aligns with most inflation numbers as well as salary growth. Now think about the equation: one side has available homes, the other side buyers with a reach height, as I described at a steady 3% mortgage payment year over year. Because interest rates are better this year, the majority of buyers can reach for a higher house price. If, by waiting, they see better and better quality to choose from, they wait; the majority of them wait. Once you start to see the good supply being snatched up quickly, you'll get a sense of the pent up demand on the sidelines.

Action and inaction both have risks. Inaction could mean dealing with higher interest rates, so big deal if house prices drop 20 percent more if you have to pay a mortgage rate of double digits.

Think long and hard about that affordability reach limit. Many people aren't buying because they can't afford it, they just aren't sticking their arms out and expect prices to fall into their laps.

I've said this before and I'll say it again, imagine where you honestly think this thing is dropping to. Think about the interest rate where that would be possible, think about how long that is going to take to get there and factor your wait as years you won't be knocking off your mortgage i.e. if you wait 5 years, you could have been 5 years into your mortgage payments. Factor that all in and low ball to that amount minus a bit. I think your best advantage is to low ball when everyone else is afraid. If you wait to get a written invitation, you'll miss your opportunity.

[StallionMang]

^ I'm sitting on a lot of cash and an 800 credit score. Can't wait for interest rates to rise. Damn this "support the economy, hop in the SUV and spend the tax rebate" BS..

[stillRenting]

My prediction:

Mass. median single family house sale price in December 2008 will be at about $250,000. That’s a drop of about 24% from Dec 2007. Another 5% drop will occur for Dec 2009. It will level out from there but not rise again above today’s prices until 2012 to 2013.

[CJ]

john p,
I think some of your points are correct. I don't think another 20% drop is very possible (probably another 5-15%). However, you should know even interest rate is still low (comparing to pre-bubble years), there are simply not enough buyers with 2 incomes can support today or next year's price. Home ownership is about 67% which is very high. It's hard to imagine it will get even higher.

Just to exchange some ideas!

[john p]

Thank's CJ. My fear is that I know a real lot about some stuff, but might be missing a key piece of information that totally unbalances my equation of thinking.

Where do you find statistics on the percentage of home ownership? I'd be curious to see a chart of it.

As far as the one or two earners thing, I see a married couple giving it 3-5 years of two salaries, and a financial plan that at the end of the 3-5 years, one earner can swing the mortgage.

Whenever the dialogue switches to this on this blog, we often hear about how a particular industry is in the marketplace i.e. if an industry is a national commodity and living in a higher cost of living area is risky because the commodity industry doesn't keep pace with the region's cost of living. Also, if an industry is to be a "alpha" role, what are the long term sustainable prospects of it?

I buy that "Superstar Cities" concept to some degree, but the long term creep between a Massachusetts and say Virginia, makes Virginia increasingly more competitive for some industries. If emerging areas are too speculative, they might end up in our position anyway... I think Massachusetts is expensive but we're not at Gold Rush growth where we're going to see boarded up buildings in Post Office Square.

I think we've already had a big correction, and because lots of Massachusetts is ownership rich and are raking in money from investments in emerging nations, I think that the concentration of wealth will maintain certain levels of stability. I do see tons of internal tension and stresses within income levels here. My hope is that if everyone has a decent ability to negotiate for themselves, you won't see the rich rip even more wealth away from the working class. If the working class can defend themselves economically and not have to resort to political/socialistic levers, the area will moderate naturally. The reason why I think we might get a socialistic administration is because the current administration are using political/capitalistic robber barron levers to help out the rich instead of letting the rich feel the correction like the working class always have to.

[balor123]

How come the admin hasn't posted a prediction here? He seems to be the most knowledgeable here and I would like to see his (her?) opinion. I would like to know when he plans or would suggest buying given no other constraints.

It is also worth noting that predicting the bottom isn't alone enough to make a buying decision. You need to know how quickly prices are dropping. Ignoring transaction costs, it can still make sense to buy even if prices are dropping if build equity faster than prices drop.

[admin]