bostonbubble.com

[Boston ITer]

Hello, I figured I haven't made an inflammatory post for some time so here it is.

Let's make one thing clear... there are no more high earning, real career tracks in eastern Massachusetts, outside of being a doctor or lawyer at a pre-existing established outfit. And as far as doctoring goes, you'll do a whole lot better in the midwest w/ an MD than in Mass, regardless, as many of those more outpost-like medical facilities, from St Louis to Indianapolis, routinely outbid the crowded & oversupplied Boston area hospital system, for better salaries and benefits. Realize, not all doctors are tenured MD/PhDs for the Harvard/Tufts research network; the incentives to stick around aren't so great.

Ok, now that I got the mandatory high paying careers out of the way, let's look at the rest. Our MF/Bulge Bracket: State St, Fidelity, Putnam, MFS, Thompson, Scudder, etc, are all laying off and moving capacity elsewhere. In the end, we'll be a much leaner financial town when the dust settles; the problem is that these industries used to supply the so-called immune towns with their well off residents.

Next, our much vaunted technology sector: Boston Scientific, Genzyme, Wyeth all have overcapacity problems and like their IT predecessors, during the dot-com era, are letting people go, and moving capacity to cheaper locales. Fortunately, the presence of Whitehead/Kendall, will keep a critical mass of this industry, however, consider this... once an idea is formulated at let's say a Whitehead offshoot, what are the chances for a VC partner, wanting the first clinical kit, harvested in a Singapore facility, for distribution to international clintrials? You see, the world's changed since the 90s. Also, with the overspecialization required for these jobs, the chances are that they won't create mainstream jobs, the way that a DEC did, in prior decades. All applicants will be narrowly qualified than board based.

And as for mainstay firms, realize that EMC's laying off and they hired a lot more than an equivalently sized biotech firm.


Ok, the point of the above diatribe was this, I keep meeting people who want to buy 'something' but yet, they keep forgetting that there's no job market. What gives? How did the whole concept of a housing market get so inverted. It's the jobs which result in a housing market, not vice versa. The one, buying a house, isn't getting Boston Scientific to open a new development center. It simply doesn't work like that.

[GenXer]

You have a great point. However, I must correct you. All of the 'outfits' with lawyers are letting go all over the country, and in MA as well, though of couse there arent too many such lawyers. Also, a lot of lawyers 'flipped' (pardon the pun) to real estate in MA in the past 10 years, and they will be hurting.

Wanting to buy != (or <> if you prefer) actually plunging. Many people are looking for good deals, and in some cases it makes sense if you have strict rules on how you go about doing it. It is not easy, and most probably could not afford it, but those who can will be ok. There is no way to time the bottom. It will most likely descend some more, but it is hard to say how much more. Prices are still not down, so very few are buying (unless you want to live in Lynn and are buying something for $250k).

As unemployment grows, there will be less incentive to buy, and only those left standing after prices come down will be able to buy. Those who plunge without adequate planning will get hurt, just like the rest.

[Hard Rain]

"Ok, now that I got the mandatory high paying careers out of the way, let's look at the rest. Our MF/Bulge Bracket: State St, Fidelity, Putnam, MFS, Thompson, Scudder, etc, are all laying off and moving capacity elsewhere"

The few of these companies that remain in business will be shells of their former selves, the charade is over....

[Boston ITer]

[Guest]

New economy, assets follow the jobs. The notion being that an area with higher than average, costs of living, is a desirable employment destination. That sort of puts the cart ahead of the horse but that's where we are in a credit bubble economy.

[WestCoastXPlant]

OK, I'll play Devil's advocate that is. I agree with you in sentiment.

I'm young and qualified (i.e. under 35, have a degree that differentiates me a bit). I have a family. I'm allergic to the Bible Belt
Where do I go? I'm highly mobile and recently moved to MA...We made a list of cities and it went like this:

1. Vancouver, Canada
2. San Fran, CA
3. Raleigh, NC
4. Boston, MA
5. "The Valley", CA

which of these places would _you_ pick (or any other for that matter)? My point is, nowhere in the country is the economy booming -- I could move anywhere for a job, but there wasn't a state that was much more attractive than MA (I know they call it Taxachussets but try CA for comparison). And if you're already here and you DO have a job (still) and decent savings...how long would you hold out? What do you do with your money in the meantime? CDs? Bonds? Mattress?

so as I said at the get go, I agree with you in principle...but I think your argument should be that noone should be buying a house now, not that noone should be buying a house in MA.

(PS. for what it's worth, I had job offers from several cities listed above, and my impression is that the pay offered is generally proportionate to the cost of living -- i.e. standard of living probably won't change much. The notable exception was Canada, where pay was on average quite a bit lower, but friends who live there said it's mitigated quite a bit by things covered by taxes)

[john p]

Massachusetts has the highest debt per capita of any State. Basically past administrations have swept the cost of things under the rug for future generations to pay.

I think this perspective regarding the lack of jobs is very important. I would also add that there is a lack of credit (on those overreaching).

http://online.wsj.com/article/SB123655575807665985.html

Ken Lewis wrote a great article in the WSJ yesterday.

He states that credit is flowing, but not for the people that overextended in earlier years. Basically, the banks have raised their standards to pre-bubble norms.

What I don't buy about his argument is that he is raising the bar too high too soon. I think that there should be a graduated correction downward.

The people getting credit are the wealthy investors that are buying distressed assets, so this predatory practice is continuing in a new realm.

[Boston ITer]

[WestCoastXPlant]

[john p]

You know, it isn't just the salary relative to the house price that alters the Price to Earnings ratio, it is the rate of increase in the salaries that give people the comfort level to overextend a bit because they can "grow into their mortgage".

If a generation of buyers get a sense that they are going to get 5-7% pay increases or more for at least the next five years, they will push the envelope of prices because they know they'll make more in a short time. Of course this course can only projectile upward so far before it runs out of steam and catches the resistance of competition with other areas. I think a lot of guys on this blog are questioning the sustainablity of the "Superstar City" notion. As a local, it is nice to hear about more professionals want to come here and build their careers, but if these people can get a significantly better quality of life somewhere else and those opportunities arise, things could happen. During the last boom, recruiters would call professionals here and people could see the type of house they could get down in say North Carolina and they'd jump. Often times they'd pick up the phone and call a few colleagues and recruit them down as well, maybe picking up a commission for a referral.

In the end, the younger generation will see their pay in three ways:

1. sustainablity - do I have job security and what is the nature of it i.e. am I going to be a "lifer" or am I going to get 5 year technical "gigs". Additionally, does my industry have a life cycle and do I need to reinvent myself. Beyond this is regional sustainablity and macro level economics sustainablity (most important).

2. cost of living adjustments - this component in a raise is just the rise in the water level due to the inflation index. Meaning, if I didn't improve, my company would need to pay me this increase so I wouldn't effectively have less buying power and go backwards in compensation.

3. performance - the premium above the cost of living adjustment that I feel I will get because I am young and growing.


Lets break down the real estate bubble related to the above.

We were coming out of a long flat decade where house did not increase almost at all so there was latent heat building up. Because they ended rent control, the earning potential of rentals skyrocketted (changed the nature of the asset). More and more women were earning faster in the last decade raising up the household incomes. We had lower interest rates to increase the buying power and create upward pressure on homes. When they had the internet to do job seeking, the competition drove up salaries. When the M3 (money supply) skyrocketted it created a wealth effect increasing the macro economy. With the rise of China we got goods cheaper, which increased our buying power. We had all this new wealth and no where to park it other than what was available.

This last point I wanted to give its own paragraph. It is kind of a new line of thinking for me. It relates to velocity. When people get a haircut it follows a rhythm. Buying a home, buying stocks are a different nature. I see people buying and selling homes related to a staircase of affordablity. When you go up a stair in a building it is usually 7 inches high because that corresponds to a natural average step height . What is the average natural step height to make someone sell their place and get into another one? Regarding mortgage rates, I think the rule of thumb is that you need to have a half a point drop to make refinancing worth it because the origination fees eat into the savings to make that transaction worth while. Basically, the lowering of mortgage rates increased the velocity of home buying because if someone needed say $1,000 extra of monthly earning to make it worth while to step up to a bigger place, the Federal Reserve just gave them $1,000 by dropping mortgage rates. People were going from 8 percent mortgages to 5 percent. That frees up a ton of buying power and that unleashed into the market fueled the bubble. The velocity of refinancing and buying in and of itself created competition which drove up prices even further.

I'd say to everyone, think about the components of what the affordability staircase is and what the incentive is for someone to SELL other than desperation and opportunity on another end.

As far as velocity, the next level of thinking is deformation or change of state. If water reaches a certain level, it unleashes activity and boils or freezes. Also, think about learning a new language, you learn nouns and verbs and the density of the words get closer and closer until people reach their stepping stone distance and they become fluent and can easily reach word to word. A market needs fluency to function. When people sit on the sidelines it is not fluent, or fluid. Think about some esoteric term that nobody can understand, that word is a lonely word because people can't reach it, those are some of the houses on the market today.

[Boston ITer]

[john p]

Do you think people get it now?

[StallionMang]

I hate to be optimistic, but How the Crash Will Reshape America makes points that the Metro regions globally attract more educated folks and generate a lot more innovation. Also that housing tends to slow down the velocity because homeowners are less able to move to jobs in their field.

[Boston ITer]