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Boston Bubble Report: The Real Story for MA - October 2006

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PostPosted: Fri Dec 01, 2006 2:11 pm GMT    Post subject: Boston Bubble Report: The Real Story for MA - October 2006 Reply with quote

This is the ninth 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 September 2006.

The Massachusetts Association of Realtors released their data for October 2006 on Tuesday, November 28th. 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

Based on the adjustment for inflation, prices fell 3.68% from one year earlier and are now 12.58% below the peak set in June 2005. The year over year drop was noticeably lower than previous months. However, the apparent mildness is at least partially attributable to the particularly large dip in October 2005, which is evident in the price history graph below. October 2006 marks the fourteenth straight month of year over year price declines with appreciation remaining far enough within negative territory for even nominal prices to remain negative.

As with some previous months, the price decline reported by The Warren Group was substantially steeper. The Warren Group reported a nominal decline of 6.9% between October 2005 and October 2006 for single family homes, a fall from $335,000 to $312,000. Adjusted for inflation, this is a real decline of 7.8%. The Warren Group's data is more comprehensive than the Massachusetts Association of Realtors' data as it includes all sales rather than just Realtor affiliated MLS sales.

October 2006 marks the second straight month that the monthly change in the CPI Northeast Urban series was actually negative, thereby dampening the real decline of home prices. However, the minor deflation should not be misconstrued as an indication that The Federal Reserve has inflation under control and has the leeway to reduce interest rates should lower growth recommend it. The Federal Reserve gives more weight to the core inflation measurement, which excludes energy and food, and which is still uncomfortably high. In fact Charles Plosser, the president of the Philadelphia Federal Reserve Bank, said on Tuesday that additional rate hikes may be necessary (see this MarketWatch article).

Unlike the previous two months, the inflation adjusted price for October 2006 is slightly higher than for the same month in 2003. In the previous two months, the 2006 prices were actually slightly below prices from the same month in 2003. October 2006 was still well below 2004 and 2005 levels, though.

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

Full Price History

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

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

Extrapolating from the most recent two months, it is conceivable that one could expect price declines to end soon given that the declines have been decreasing. However, how prices behave over the short term is largely irrelevant as the longer term problem of unsupported prices remains and will continue to weigh on the market until corrected. Possibly the most important questions to answer are: are prices supported by incomes and are prices supported by rents? Current prices remain higher than their historical relationship to incomes would support, and so near term price increases, while possible, would not be justified. A comparison to rents would also be very valuable - reference suggestions for area rental data would be very much appreciated.

Nevertheless, The Massachusetts Association Realtors was busy this week spreading assurances that prices are "stabilizing." Some notable quotes from their November 28th press release:


"It appears as though the market correction may be about over," observed Wluka. "Prices have stabilized in the single-family market and probably aren't far from bottom for condos. For any one who has been attempting to time the market, this wouldn't be a bad time to jump in before mortgage rates start inching up or supply levels begin to drop."


For the better part of this year buyers having been waiting out the market, expecting a major correction, while lots of sellers were holding onto false hope of selling their home for a higher price than the market would bear. That's led to some pent-up demand, and now that it appears prices have stabilized, buyers have started to move forward...

This isn't the first time that The Massachusetts Association of Realtors has predicted that prices have stabilized, though. A little less than a year ago in their December 2005 report they wrote:


The predictions of steep price declines in home values that were made this fall are largely unfounded. While the current
median price is 5.6 percent below the record high monthly median of $375,000 set in July and August 2005 (due to month-
to-month price declines in September and October), prices rose 1.7 percent in November and have stabilized in December.

Of course, history proved them wrong with respect to the stabilization. In inflation adjusted terms, so far all of 2006 has been below the equivalent month's price from 2005, starting in April prices were also below their 2004 equivalents, and they even dipped below 2003 levels in August and September. Whether they were wrong or not about the lack of "steep price declines" remains to be seen as the depth and duration of the declines unfolds, although the discontinuity with incomes could certainly be corrected by a steep decline.

Their track record of previous advice that they have offered to prospective market participants is similarly poor. There is a nice compilation of past quotes from the Massachusetts Association of Realtors at The Massachusetts Housing Market blog. Of particular note, the quote from August 15, 2005 says:


we don’t anticipate any decline in prices in the foreseeable future, unless the economy slips into a recession.

The timing of that statement could hardly have been worse as the very next month, September 2005, was the first month to exhibit year over year price declines in inflation adjusted terms. Year over year price declines have continued to this day for fourteen straight months. The prescience of this statement recalls the infamous "permanently high plateau" quote which was delivered shortly before the great crash of 1929.

It is also seems improbable that the market correction could have ended so quickly. The previous downturn took six years to fall from peak to trough in Massachusetts in terms of prices over incomes. The current correction has only been in progress for fourteen months. It seems improbable that the run-up in prices which has been of much greater magnitude than before would be corrected with a correction that is so much briefer and shallower than before. In addition to the remaining income disparity, there are also more negative factors on the horizon, and one of particular importance is the unusually large wave of ARM resets which will occur in 2007.

The Paper Money blog has some additional insight into why "stabilization" is a mischaracterization of present market conditions. Of particular importance is the number of sales, a number which has been plummeting and continued to do so in October. In fact, the number of sales is on track to post a record yearly decline in 2006. Bear in mind that lower volume can bias the median prices upward since the median only captures what actually did sell rather than the what would have sold if the prices had been low enough to support a normal volume. To see just how low sales have been and how high inventories have been, check out the long term graphs from The Massachusetts Housing Market blog updated for October.

Unfortunately, the MAR's talking point of "stabilization" was echoed by the local media without noting the track record of their previous predictions. There also was no prominent mention of how plausible the prediction is when viewed in a historical context, although this is somewhat out of scope for how news is generally presented (rightly so or not). The best dose of reality was provided by The Warren Group, which some outlets juxtaposed with the MAR. While accountability for past sales pitches would be preferable, comparison to The Warren Group is at least better than nothing. Chief executive Timothy Warren summed up their distinctly more negative report with: "We're still headed down, but not quite so fast" (see The Boston Globe article).

Kimberly Blanton, the author of the recent Globe article entitled End of housing decline near? Drops in price and sales moderate, hinting market may be starting to stabilize which repeated the MAR's positive spin on the market, hosted a live online chat on Wednesday the 29th (for which a transcript is currently available). In it, she revealed that she was in fact not predicting stabilization and in regard to the optimistic references to it in the title: "Frankly, an editor threw that in & I'm not sure why." The participant who posed the question she was responding to, posited his own reasons why that spin was thrown in.

I also asked my own question about stabilization during the chat:


In terms of annual appreciation, what percentage would you expect from a "stabilized" market? I ask because in their December 2005 report, The Massachusetts Association of Realtors said that prices had quote "stabilized", but so far in 2006 we've had a string of year over year price declines.

While my question was not reprinted, I believe that the following is Ms. Blanton's response to that question (it appears in the transcript without a leading question):


Anyone who tells you a market stabilized -- my story suggested it was possible in today's Globe -- take it with a grain of salt. But as I understand it, about 5 percent appreciation is a benchmark tossed around in the industry.

The need for those who talk of stabilization to quantify it is important, otherwise they can prop up their track record by retroactively defining it as whatever actually occurred. For example, one could say that the market is stable so long as it isn't experiencing double digit percentage price declines. Potential sellers would hardly consider that a good enough situation, though, as single digit price declines over a prolonged period could also severely impact equity.

Ms. Blanton's suggestion of a 5% annual appreciation benchmark seems reasonable as that is slightly higher than inflation, which is in line with historical trends. However, the October data upon which the stabilization claims were based is nowhere near this level. Prices declined 2.0% in nominal terms and 3.68% in real terms. What criteria is The Massachusetts Association of Realtors using to determine what constitutes stabilization?

At the risk of straying too far off topic, it is also an interesting exercise to review the accuracy of the National Association of Realtors. In the fall of 2005 they put out a group of Anti-Bubble Reports including one for Boston. As with the Massachusetts Association of Realtors, 2006 proved their assurances wrong:


Price declines in the local market are unlikely according to our stress test.

Of course, this was incorrect.


The local housing market will experience a price decline of 5% only under
extreme unlikely scenarios. For example, mortgage rates rising to 9.1% in
combination with local job losses totaling 5,000 could lead to a price decline.
Also, due to heavy job losses in the recent past, job recovery does not help if rates
rise to 10%.

Rates are still low and employment has been increasing since they wrote their report.


The local market is more likely to appreciate at an above-normal rate

This wasn't even close.

In summary, permanent optimism does not make for accurate financial advice. Nor would permanent pessimism, which is why a comparison to historical data is important. Hopefully this report can be of some small help to that effect.

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 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 signature from the bottom left hand corner of the two 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 or 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

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