bostonbubble.com

GenXer · Joined: 20 Feb 2009 Posts: 703

Myth: You will always get atleast 'inflation' if you stay in a house long enough...

I'm going to start collecting these. When there are no buyers, prices go down as low as the market allows. We are in (mostly) free markets. Even with government interference (which for all intents and purposes can be assumed to make the matters WORSE, and almost never better, unless its an 'unintended' consequence they simply did not anticipate), offering price is what you are willing to pay for a given house, and should never be anything but your own financial situation reduced down to what you can afford to pay. If everybody followed THAT formula, we would have a better agreement between sellers and buyers. In other words, lowballing is a good thing to do in a down market. This may not work when there are plenty of buyers, but when there aren't - the market will allow the spreads to be much larger, so there may be much better deals than the statistics may suggest.

Will there be people overpaying? Of course. Will there be bidding on several good deals? Of course! Is there a lack of good inventory at prices below the current median in many places? Of course. Will this last forever? Nobody knows, but as inventory/foreclosures pick up and the number of buyers remains low, let's see what will be available then, but the offer is always the same: you can afford X - bid X, just like on ebay. If the market supports higher price, you will be outbid. Otherwise, you will win. Keep bidding X until you get what you want. Pure and simple - this will never fail you.

admin · Posted: Tue Mar 31, 2009 5:00 pm GMT Post subject:

StallionMang · Joined: 29 Apr 2008 Posts: 54

>> I figure out what the property sold for in the late 90s and then compound that number by 4.5% per year (2% plus an average 2.5% inflation over the period)

PaperEconomy has a tool which does this for you - http://www.papereconomy.com/Calculator.aspx . Shows nominal and inflation-adjusted.

admin · Posted: Tue Mar 31, 2009 9:30 pm GMT Post subject:

GenXer · Joined: 20 Feb 2009 Posts: 703

JCK · Joined: 15 Feb 2007 Posts: 559

That calculator is pretty much guaranteed to be wrong. In Newton, home prices are maybe 10% off peak; in East Boston, they may be 50% off peak.

That calculator takes the average (about 25% off peak) and spits out a number.

Unless you live in the hypothetical average community, it will be wrong.

admin · Posted: Tue Mar 31, 2009 10:26 pm GMT Post subject:

admin · Posted: Tue Mar 31, 2009 10:45 pm GMT Post subject:

...Also, I think that the real value of the calculator for a buyer is not in identifying an exact present value but in raising flags. If a seller is asking substantially more than appreciation for the area would justify, then you need to be able to answer "why?"

- admin

GenXer · Joined: 20 Feb 2009 Posts: 703

I don't think the 'why' can be answered by a calculator. A number of different events led to a certain price level of an index or of the house. The problem with this calculator is that it requires you to start on an index to begin with. If you are far away from the index, you will get erroneous results. This was my point. You can not use it for anything meaningful at all, unless you know 100% that you have started ON an index to begin with, and even then, I'd still argue it is worse than useless as it generates some random numbers in response to a random input which may or may not reflect anything based on reality, and the problem is, we don't know that its output is related to an actual price of the house.

I still argue that the 'upper bound' is your income times a multiple (which is probably a combination of your 'employed' multiple and an 'unemployed' multiple), or if you will a 25% of your after-tax monthly income, or some such measure which is based on affordability. This is like trying to price a stock - its price is different every day, and there are no fundamental reasons why you need to take the HISTORY of the stock price to price the stock today! Its a fallacy to even consider doing that. Indices can be used to look at what happened before, but today the price of that house is what anybody is willing to pay for it - completely disconnected with the past index price (or the projected future one!). Only in aggregate can the prices be compared to an index, and even then with some caution.

We can invent any imaginable 'reasonable' price we wish, be it the starting price plus inflation, or what have you. Houses are not bonds. They are not guaratneed to produce income. Even though we may not mean that houses give us 'inflation' by using this upper bound approach, we are implicitly assuming it, whether we mean it or not.

The only way to price a house is by making an offer.

admin · Posted: Wed Apr 01, 2009 1:24 pm GMT Post subject:

GenXer · Joined: 20 Feb 2009 Posts: 703

There are people who believe that they can price a company by its balance sheet. This is essentially what you are saying. I'm not arguing with that reasoning. Your price will be different, however, from somebody else's price. This is what makes our markets tick. There is NO objective price for anything. You can build a science on evaluating the balance sheet of companies (which is what Financial industry does), but when the company's stock collapses, you DO throw the baby out with the bathwater, so to speak - all the fundamental analysis becomes irrelevant, because the price may sometimes 'represents' the actual objective value of a company, but when it does not - the price can be off by a huge amount which is simply what anybody is willing to pay for it. Because we never know when this is the case until we actually try to buy a house, the results of the calculator are meaningless (because we never now when they are right vs. when they are not).

Notice that I'm not arguing about being 100% correct here - I'm trying to point out that a price can be off by a huge amount which may not be apparent from the cost of building a similar house (i.e. the house 'balance sheet'). If you use 10 calculators which provide incorrect outputs, you are not increasing the quality of information. Sometimes it is ok not to rely on any information other than the most objective one - what will somebody pay if this house was sold right now. Unfortunately, you don't see this until the house is actually sold.

admin · Posted: Wed Apr 01, 2009 2:28 pm GMT Post subject:

Nick · Guest

I think that the "insulated" areas could have had less sub-prime borrowing, so prices in those areas aren't competing against as many short/foreclosure sales. However, Alt-A/Option-Arm mortgages will be resetting throughout 2010-2012, and those types of mortgages were given to people with above sub-prime credit, so the "safe" towns could be exposed when that wave hits, not to mention the potential onset of more unemployment. Does anyone have some numbers on how mortgages are distributed? I remember the NY Fed having a map applet on their site, but I didn't really get much info from it.

That said, I've noticed a lot of Redfin listings in "crash" neighborhoods which have been priced 5-10% above what the same place sold for in 2004-2005. However, I suppose it's possible those places have gone though some serious remodeling since then..

Contribution to the off-topic discussion:
I attended public school K-12 in Kansas City and it was fine. K-8 I was in a total immersion French program, 9-10 I was at a charter school, and 11-12 I lived and studied at a public university in a state-run Academy program. This was all free.
While white flight in the midwest was largely manifested as a mass migration to suburban public schools. I'm thinking that the Northeast migration was to catholic/private schools instead.