bostonbubble.com

[Curious]

I am currently looking at purchasing a townhouse in Middleboro, MA. The cost is approx. $360,000. It is a 1/2 mile from to Rt. 495 and 1 mile from the commuter rail. It is brand new construction, 2000 sq. ft. has 3 bedrooms, 2.5 baths and a one car garage. The condo fee is approx. $250/month and taxes should be a little less than $300/month. The nice thing about the town house is that we do not have to change anything. It will have the finishes we want and will not reguire any additional expenses to remodel it like an older house would.

My question is this, am I crazy to purchase a townhouse now. We currently rent in Quincy and pay approx. $1,700/ month. Should I wait another year to see what happens with the market?

Thanks in advance.

[Joshua]

You should hold off. Condos are hit hardest when the market goes soft because a lot of condos are sold to people priced out of the single family home market. Once housing prices become more reasonable demand for condos collapses. When the last Mass bubble burst condos that had sold for $250,000 dropped to $40,000.

[Sarum80]

Joshua,
250k to 40k?? Do you have a source for that claim? that is a huge drop, 84% if I calculated correctly. That seems a litle extreme to me.

[Guest]

I remember the early 90's. I know that there were significant declines in real estate prices. But, I do not see support for the kind of decline mentioned.

[john p]

During the last major real estate correction, the only condo's I saw drop at such a dramatic amount were on Revere Beach. This was a bit before my time, but from what I remember hearing, the condos were marketed to serve the professionals that would take the blue line into the financial district for work. The area in and around the beach was suffering from crime and many of these "high end" condos went Section 8 and the yuppies didn't want to share their building with prostitutes and crack dealers. This isn't to say that all Section 8's are criminals; it is that most yuppies want to be insulated from the bad elements that unfortunately good folks that are poor have to face every day. Crime is like the major reason why someone might consider taking this sort of loss.

Check out the bottom chart on this page:

http://mortgage-x.com/trends.htm

Look at the mortgage interest rate and see how it has changed over time. Mortgage payments typically consist of 4 things: principal, interest, property tax, and insurance. During the times where the interest rates were falling, you will typically find that home prices went up. Because people could pay a certain amount for a monthly hurdle, if they paid less in interest, they could afford more in principal (house price). The chart I found to be very useful on this site was the chart that showed the percentage of monthly income needed to service the mortgage payment.

Moreover, to a person that makes a million dollars a year, the tolls or heating oil going up may be insignificant pocket change and the MBTA hikes are just white noise. To people around the median, these cost of living spikes are very significant. The people with the 50,000 foot view down are scratching their heads because most of them aren't affected by these costs so they don't consider them. What will impact higher level home prices are: the economic conditions that bring wealth to the wealthy, the tax shelters that keep Uncle Sam from getting their money and a fresh crop of buyers to buy their old property when they sell.

In a macro level: you have those who are in the (working class) and you have those with old money (investment class) or the rich. The working class needs the money to buy their homes from the investment class. The rich wants to make sure that if they lend their money they get a reasonable amount back over time and that their money doesn't get diluted through inflation. The rich do not want inflation or high taxes. The poor wants quality public schools because they can't send their kids to private schools like the rich so that their kids can be rich (increasing taxes). Wage inflation can help the poor because if their incomes go up, they spend less of their take home pay on their existing mortgage. Home prices go up as a result of the new buying power, the rich get pissed because their future earnings (interest payments to them) get diluted through inflation, so interest rates go up, and then the whole thing needs to be rebalanced again. The FED acts like a Specialist does for the equity market. When the Democrats get in they push the wealth to the middle class until forces of capitalism generate competition needed to excel. When Republicans get into office the gap between middle class and rich get further apart until the rich get fat and lazy (Arabian horse mentality) and forces of capitalism push the capital back to the hands of those who are hungry to move the heard forward again. And so the cycle goes. This gap is what creates “soft stories” or air pockets where collapses take place like the Revere Beach condos…

Lastly, other dynamics get thrown into the mix such as foreign investors and foreign banks. Smart foreign investors put their money in the top dog's currency. If the international language turns into English and the international currency is the US dollar we are totally psyched here in the USA. If every bank holds US dollars, they need on reserve a certain amount established by the Federal Reserve. The money on hand (reserve required) is usually in the form of US Treasuries notes, of which a bit of interest comes back to the United States of America. The risk is allowing foreigners to have more leverage on our economy. The reward, again, is the interest they pay us on the Treasury notes. One can argue that by having a strong Military, we are the top dog and we are the safest sanctuary for foreigner’s money. Think about China, they can change their currency; they can take over a private enterprise. It's a wild card for a rich Chinese person to have all his money in the Chinese currency and he can hedge his bet by having a parachute in US dollars.

We are at a crossroads and are not prospering as we should because we have not adhered to one of Machiavelli's rules of statecraft. "It is better to be feared than to be loved, but you should avoid being despised". We sure needed a strong hand at the wheel in order to maintain respect globally, but we also need a diplomatic front to express our good will abroad so that we are not hated. If people hate us they will is less willing to hold US dollars, speak English, trade with us, etc.

I think our President has to brush up on his charm. I often judge men on how they made the most important decision of their lives: who they choose to marry. I think that this President has chosen an amazing person as his wife and this alone gives me faith that he has the capacity to get out of the penalty box and start scoring goals for us.

[vuky]

[Mike]

[john p]

I thought the same thing regarding that delta. I think things like condo fees might play a big part in the condo equation. Something major must go wrong for a drop of this magnitude. You do have investors who have grand designs for latent areas. If the areas start to turn bad and the developer pulls the plug before the units are sold it may be a liquidation price. If the stock market continues it's lift it will be a better alternative investment than real estate so if investors pull out it will be like a running of the bank for many developers. There will be more than a few developers that get caught with their pants down.

Also, keep in mind that in the market you have a skatter diagram. If the average drop is 9 percent say, some might drop 20 percent and others go within 2 percent.

Think about why areas go bad. If the cost of living is so high, the poor need to pack into smaller quarters. Just do the bottom up calculations (that no politicians or economists ever, ever do). Do it, add up how many people earning minimum wage or close to it you would need to pay the rent and for food and heat in any of today's typical apartments. Then ask yourself, who is that desperate that this type of living is acceptable. To some, what we see as complete squalor, is better than what they have in their home countries. Then, add the desperation to the equation; desperate times require desperate measures; desperate people are more prone to commit crimes. Desperate people are more likely to want to escape their reality for brief periods so drug dealers can prey on them. When you have drugs, you get organized crime, then you get competition, gangs, etc. and it is way too unsafe for Buffy and Jodi. This is what caused the exodus from the cities in the 70's. If people don't drop a dime on the criminals, the urban centers will rot out. There could be reverse gentrification in some neighborhoods. If the cities don't get their arms around crime and get the education system up to varsity speed significant drops in housing prices could happen in the future.

[housing_not_politic_chit]

"Wage inflation can help the poor ..." - John P

Life vests can help ocean liner passengers...

Wage inflation lags price inflation.
Currency risk can be hedged with non-dollar based investments.

Inn't this supposed to be about housing though?

[john p]

I'm not sure why I am offering help. I have not met anyone that has gotten the deal on a property that I got. I got my deal well ahead of the curve. Check my posts a year ago and benchmark them against what the MAR President was saying. I guess I was a bit pissed at the propaganda they were dishing out and I want to empower the people behind me. I wouldn't be ungrateful, if it weren't for people like me throwing the first punch it wouldn't be as easy for others to follow. The bubble wouldn't have burst if it weren't for some people with some brains and balls. If you think what I am talking about is unrelated to housing you need to do some homework. Ben Bernake, who is the guy who runs the Federal Reserve is very concerned about the housing bubble. Both Republicans and Democrats in our State are concerned about the economic impact of unaffordable housing. There are so many people out there that want to screw you, if you have some brains you can tell if someone is trying to help, and to them you should show some respect.

[Same_guy_again]

"The bubble wouldn't have burst if it weren't for some people with some brains and balls. "

Would it have kept inflating? How long?

[john p]

The bubble was unsustainable. The delta between incomes and home prices made them out of reach. As you pointed out, wage inflation lags price inflation. The bubble could correct quickly (burst) or slowly like the air leaking out of a balloon. If it leaked out slowly, the correction could take a decade because incomes are that low and grow at a slower rate. If wage inflation does kick in, it will decrease the amount (time, dollars) needed for prices to lower. Although wage inflation would help dampen this situation, the FED hates inflation. Funny how people only associate "inflation" with consumer prices and wages, but don't consider the inflation of housing costs, transportation costs, gasoline, medical expenses, day care. This stuff can go through the roof and economists sip their tea unnoticing. So yes, wage inflation is an important factor and it is related to housing... I think it would be better for the economy if it corrected as quickly as it went up. Think about it, it is a paper loss to most; the only ones that would really suffer from a quick correction are those that bought recently that need to sell in near future. If it goes slowly, a lot more people will be out in the cold for a long time until wages catch up. Even though peoples house "values" brought them paper gains in their net worth, they hold onto the notion of the value as if they actually did something to earn the money. It is either pure greed or people brainwashing themselves to think that they deserved the increases in home prices. Either way, their gain is another’s loss, a younger generation that actually has to pay for that enormous paper gain that occurred in a matter of 3 to 5 years. (The greatest change in home prices in the history of the United States)

Even though you would read articles by experienced professionals that the Boston market was 30 percent overvalued (see attached CNN); you'll find that realtors control the pricing by pressuring the buyers to not offer less than 5% off telling them that they would be insulting and wasting everyone’s time.

http://money.cnn.com/2006/01/23/real_estate/most_markets_more_overpriced/index.htm

If it's 30 percent overvalued, how long will it take for house prices to come back to equilibrium if the air leaks out slowly? We will have an entire generation (Y) here in Massachusetts that will get rear ended. If it is 30 percent overvalued why shouldn't people be able to ask for 30% off?

Further, when you build your knowledge and you see others that claim to be "experts" and you see them interchange national and state figures or compare inventory levels from early spring season to just before holiday season to make people feel that the window of opportunity and selection for buying is closing. (People take their homes off the market before the holiday season and put them on the market just before the spring selling season). An experienced realtor would know that so they would only construct that to manipulate people's perception. Why other "professionals" wouldn’t jump in and say hey you're using your knowledge to manipulate and hurt people. It is not illegal but it is certainly shady. When shady people graduate to top levels of a "professional" organization it speaks volumes about the character of their industry. Knowledge is power, and that needs to be tempered and guided by honor if that industry wants to be treated with respect and honor. The National Association of Realtors claimed that last year the median home price would rise over 6% last year. Is that responsible? They were either incompetent or unethical. In neither case were they professional.

My frustration is based on opening my perspective up to not just the plight of the young urban professionals, but of the regular working families that play by the rules. The past two years in Boston have had the highest crime rate in the past decade. They have a Mayor that cares and many in the school system and police force that care too, but as people become more desperate, they will take more desperate measures. If we get gangs in the city our schools will suffer, you will have robberies, gay bashing, more murders, etc.

The reason why the conversation surrounding housing spills over so much is because the scope of the problem and the influences has as well.

Interest rates- relate to trade overseas, currency, pressures of inflation

Incomes- growing international and national market intermixing, local pricing models get diluted with outside competition.

Taxes- overspending, war, Fed's cut money to States, States cut off money to towns, property taxes increase. More tax breaks for the rich create a greater separation of rich and poor creating changing strata of incomes and as a result home prices etc. When poor get too poor you get crime and as people leave you get depressed areas.

The responsibility also belongs to the consumer as well. If people allow themselves to act dumb, it affects more than just them, it throws off the whole market. In order to be a responsible citizen in a capitalistic democracy you need to be a smart consumer. If professional organizations do not behave in an honorable manner, we need to create governmental agencies to provide oversight and that means more taxes. Taxes suck.

[Same_guy_again]

OK JP,

My childish intent was to see if I could keep you running in circles. I don't agree with the political themes you attach to your theses. Next post would have been:

"Funny how people only associate "inflation" with consumer prices and wages, but don't consider the inflation of housing costs..."

Aren't rents included in the CPI?

Instead I'll appeal to your compassionate side. If I'm a Realtor(R) and a mother of two how do I deal with 30% fewer units sold? What is my motivation when I meet with a potential seller?

[john p]

Hey Socrates, what am I like a dog that is supposed to chase his tail for your amusement? Hardy har, har. What do you think of all of this smarty pants? I find it amusing to see people live their lives on the sidelines. People like you who watch others on the dance floor and make little jokes are the ones missing out. So be brave, if you don't like my themes what are yours and how do the pieces fit into place. Think about Bush's supporters: Pharmaceutical companies, financial companies, big oil companies, military contractors and then look at where the wealth went in his tenure. I am not a socialist, I am not a communist. I fear that socialistic and communistic mechanisms will be attractive because of the mess this lopsided approach has given us. I am not in favor of rent control, I fear it, but it may again, be a reality if people get too greedy. The only way we can thrive in a capitalistic democracy is if people are educated and are good consumers. So chime in anytime with your thoughts. I am all for elevating the level of play and understanding, so let's hear from you.

I honestly have explored this stuff with an as open mind as I could and the perspective I have obtained is what making this stuff come out. I aired my grievances at the Festivus Pole already so rehashing this is painful and it annoys me that you find this amusing. However, I will represent your interest despite your inclinations and incur any resentment so that I may save you from the vassalage of your delusions. Unless you are a realtor, in which case I would say maybe you need to feel the pain that you industry has given to so many. What is your motivation for being on this site if you are? If your industry has been greedy and feasted you'd better have stored something for the famine. I have met honorable people in the industry and I had one help me get my home. He will continue to get return business because he conducts himself with professionalism and respect ad he was able to manage someone like me. In a normal market you get more balanced professionals.

CPI does cover primary residence rent, but rents and mortgages have split (there is a whole section on this website).

[Guest]

I think on a cold wet February day in Boston a car salesman would sell for a dollar commission. The business cycle and disruptive internet technology are creating winter for Realtors. On average we’ve taken a 20% pay cut during the past 6 months as sales volume declined. That does not account for new members of the work force.

Realtors are attributed with propping up prices. Sellers set the prices. Their expectation is to sell for what their neighbor sold for in August 2005. The neighbor’s house and lot are a little bigger, their bathrooms were newer, but there is some intangible reason this house should be worth a bit more than it was. It was just painted two years ago; there are built-in bookshelves; something.

Mortgage brokers are attributed with predatory lending. An ARM had been the better deal since 1999, but 17 straight increases in the federal funds rate from its forty-six year low should have been sufficient to tip people off. What’s a federal fund rate? For the biggest financial commitment of your life you can get on the internet at the library and find out. Technology impaired retirees have not been driving the market. Bureau of Labor and Statistics data shows that the march from 50% to 60% home ownership was lead largely by the under-35 age bracket. There is very little excuse for losing to foreclosure on a stated income negative amortization ARM with a six month teaser rate.

The recent chairmen of the Federal Reserve Bank are attributed with triggering the bubble with money thrown from helicopters. For six years it apparently punished savers with low bond, CD and savings rates plus higher inflation risk. At the same time it apparently rewarded spenders with cheap credit. I doubt all of the last 6 million new housing units would have been built without that policy. When the cycle finishes, savers who stuck to their guns will be rewarded with auction priced McMansions and spenders who stretched too far will have to start over. Spenders in this story are not just the poor, they are also buyers on Hummers on HELOCs. The Central bank does not move quickly and it does not make auto loans.

George Bush is attributed with rigging the economy in favor of industry and the wealthy. If you work in industry and contribute to a 401k, an IRA, or a tuition plan, he’s been on your side.

I'm here because I like to be. Tell me you are not having fun.