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Boston Bubble Brief: The Real Story for MA - Apr 2009
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admin
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PostPosted: Fri May 29, 2009 2:51 pm GMT    Post subject: Boston Bubble Brief: The Real Story for MA - Apr 2009 Reply with quote

This is a brief report 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. This report is based on the published data of the Massachusetts Association of Realtors, though it should be noted that the S&P/Case-Shiller Index is a superior data source.

The Massachusetts Association of Realtors released their data for April 2009 on Tuesday, May 26th. 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 http://www.bls.gov/cpi/ Adjusting for inflation produced the data represented by the graphs below. Prices for January 2003 and earlier have been estimated by applying the earliest reported median from The MAR, February 2003, against the S&P/Case-Shiller Index for the Boston area. Suggestions for improving this estimate are welcome.

Full Price History



Change in Median Price From One Year Earlier, February 2004 - April 2009

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



Some observations:

  • The real decline from April 2008 to April 2009 was 12.43%.
  • The year over year decline swung sharply from being below the normal range in March to above it in April. This was the first time since August 2007 that the decline has been one standard deviation or more above the moving average.
  • Real prices are once again lower than the same month in any other year in the time period covered by The MAR.
  • Prices are now 33.41% below the peak set in June 2005. This is the result of a 26.42% decline in nominal housing prices and a 9.50% decline in the purchasing power of the dollar.
  • The cumulative price decline from the beginning (Feb 2003) is 17.36%, which is an annualized decline of 3.05%.


This is the first year since 2004 in which there has been a visibly pronounced spring bounce. It is somewhat surprising that the local media has not seized on this and the substantially smaller than usual year over year decline with the same relentless vigor that they used to trumpet the smallest of upticks. On the other hand, those previous upticks were inconsequential when compared to the moving average, and the improvement (for sellers) in April is most obvious in the context of the moving average, so the simple explanation is that they are not fully considering the larger context.

The change in April was substantial, but was it the start of a long term shift or a short lived event? It's obviously too early to draw any conclusions. One possibility that would suggest this is merely temporary is that the relative bump in prices coincides with The Fed's manipulation of the mortgage market which artificially pushed mortgage rates to historic lows. Signs are that this manipulation is unsustainable and is in the process of unravelling.

The S&P/Case-Shiller Index for Boston is likely superior to the data above as it corrects for many flaws that are inherent when using only the median price. The S&P/Case-Shiller Index also has the advantage that futures contracts can be traded against it, thereby offering an unbiased insight into where housing prices are expected to be in the future. It also has more extensive historical data available. The MAR data was used for this report mainly out of inertia and might be replaced with the S&P/Case-Shiller Index in future reports.

As usual, please do try this at home. Double checking of the math used to construct the above graphs and analysis is strongly encouraged in order to help ferret out any errors. The data was derived from the following sources:

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The latest version of this report can be found at http://www.bostonbubble.com/latest.php?id=ma_inflation

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john p



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PostPosted: Fri May 29, 2009 3:19 pm GMT    Post subject: Reply with quote

Wow, this diagnistic tool is great.

I am trying to study and figure out the seasonality of the Spring bump and look at its location from year to year. Although the seasonal bump has the same slope (except 2008), it seems to be displaced in time from year to year, the biggest offset being 2006 to 2007 where the bump slid from May in 06 to February of 07. My first guess is that mortgage rates were in play.

The second thought I had is based on my thermodynamics theory of real estate. Not to waste more of your time on it, but basically, when the economy gets bad and people start to feel the heat, the lower end feels it worse and they tend to deform before those that have more fireproofing, i.e. a large emergency fund that can feed them during the Pilgrim's winter. Last year, the families who held properties in the low end felt the heat first. Well, this year, many an emergency fund has been depleted and many are selling second homes and the declines had affected more of the price points. I think that the concentration of homes on the low end last year dropped the "Median" level simply because there were more homes on the market in the low end last year. Because this year more homes are on the market across the price structure, it has moved the median figure higher. Because of this, I think this current blip does not reflect the price movement but rather, the more uniformally distributed sales across all the price strata.

I think sales activity will increase simply because uniformity exists now between price strata. If someone owned a place that was worth $350k two years ago and is now worth $300k today, last year they might be bumming but this year they might sell because the house they had their eye on that used to be $600k is now selling for $525k. They can absorb the loss because the gain on the other transaction balances it out. Further, the lower mortgage rates were an incentive to trade houses because you could swap houses and refinance at the same time. Two years ago, people didn't want to trade houses because the mortgage rates were in the high 6's and if they had a property most likely they had a cost of capital at around low 5's.

I am very curious to see how this new jump in mortgage rates (past week) will affect sales activity.

Behind the scenes there is a bit of loan restructuring going on via the new mortgage bailout laws that went into effect in March. I think they subsidize people's mortgages to help them avoid foreclosure. I think they are letting them get into 40 year notes and getting the mortgages down to around 31% of a gross family income. I don't know if this policy is just a token gesture that politicans talk about but doesn't affect a broad number of citizens or if it is absorbing a lot of potential properties that would have flooded the inventory of certain price points.
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john p



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PostPosted: Fri May 29, 2009 3:20 pm GMT    Post subject: Reply with quote

diagnostic.
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john p



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PostPosted: Fri May 29, 2009 3:23 pm GMT    Post subject: Reply with quote

Oh, my prediction is that the future of real estate will follow the trajectory of jobs. Jobs, Jobs, Jobs.... If you see an increase in jobs, you'll see an increase in the house prices.... Unless, I'm sorry, the retiring babyboomers get their tax bill and say to hell with Massachusetts and start packing their bags to get a short sale on a waterfront home in Florida.
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john p



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PostPosted: Fri May 29, 2009 3:57 pm GMT    Post subject: Reply with quote

On the second chart, how much do you think the inflation number contributed to this recent, steepest monthly jump in 5 years?
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PostPosted: Fri May 29, 2009 4:35 pm GMT    Post subject: Reply with quote

john p wrote:
On the second chart, how much do you think the inflation number contributed to this recent, steepest monthly jump in 5 years?


Good question. Low inflation has indeed been making the real declines less substantial recently than they have been in the past. That is probably another reason that the local media did not jump all over the spring bounce since they usually only look at nominal prices.

Here is a chart of the year over year change in the CPI-NU:



Official inflation has been low for the last several months, and it is still declining on a year over year basis, but that is due to declines in previous months. If you add in the month over month change in inflation, you can see that the deflationary spike has already passed:



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john p



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PostPosted: Fri May 29, 2009 4:50 pm GMT    Post subject: Reply with quote

This spike you're talking about is most likely based on the price of a barrel of oil, whereas gas cost a fortune back in July at the top of the peak and when gasoline dropped it sent the inflation number in freefall until the last month. Gas is going back up.

On the one hand, I think that the one element, gas and oil is causing such an impact on the reading that you have to take it into account, the other side of it is that gas and oil affect so many aspects of an economy, especially in Massachusetts. Our commuter rails run on diesel and when the oil went up, they doubled the parking fees at the stops.

I'd keep this in mind when thinking about selecting a property. If your prospect house is a "Hummer" that is far from the city and far from a commuter rail stop you could be in trouble, whereas something closer to the job centers might be more attractive. The old drafty houses might be harder to sell too.

Better keep those windows shut at night, this recent cold spell has got the furnaces fired back up.

Thank you again so much.
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JCK



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PostPosted: Fri May 29, 2009 5:02 pm GMT    Post subject: Reply with quote

john p wrote:
Well, this year, many an emergency fund has been depleted and many are selling second homes and the declines had affected more of the price points. I think that the concentration of homes on the low end last year dropped the "Median" level simply because there were more homes on the market in the low end last year. Because this year more homes are on the market across the price structure, it has moved the median figure higher. Because of this, I think this current blip does not reflect the price movement but rather, the more uniformally distributed sales across all the price strata.


john,

do read calculatedriskblog.com?

They have exactly the same theory re the median prices, i.e., that median prices are going to start rising owing to changes in the mix of sales, but that real prices will be continuing to fall.

I'm watching the Case Shiller as it should avoid any problems with the median price being distorted by the mix of housing.
Also, it looks at "Boston MSA" rather than "Massachusetts," my area of concern. And finally, since they created the Condo index, I can't criticize them for ignoring the condo market!
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PostPosted: Sat May 30, 2009 11:51 am GMT    Post subject: lack of understanding of inflation Reply with quote

<<That is probably another reason that the local media did not jump all over the spring bounce since they usually only look at nominal prices.>>

This is EXACTLY true in my experience. Its not that they only look at nominal prices, its that they either don't understand the concept of inflation adjustment, or, they think it too difficult to discuss in their publications.

I was talking with a manager of sales of one of those LARGE newer Cambridge high-rise condos who was trying to sell me. I tried to explain the concept of prices being adjusted for inflation, and he had NO IDEA.

Slightly off topic - but the average American really does not understand or feel this concept very much either because prices change so slowly. (Except Gas, and they blamed the politicians for that.) With all the money being printed in Washington, I predict much higher inflation combined with no growth, and that equals higher prices that no one can afford.
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nickbp



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PostPosted: Sun May 31, 2009 2:18 pm GMT    Post subject: Reply with quote

JCK wrote:
And finally, since they created the Condo index, I can't criticize them for ignoring the condo market!


There's also a C-S tiered price index (low/midrange/high) which covers bos.

I think the division between prices is regularly updated, but I haven't looked into how it's calculated. Right now, Low-Mid divider is at $242768, Mid-High divider is at $362621.
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PostPosted: Sun May 31, 2009 2:33 pm GMT    Post subject: Reply with quote

nickbp wrote:

I think the division between prices is regularly updated, but I haven't looked into how it's calculated. Right now, Low-Mid divider is at $242768, Mid-High divider is at $362621.


What I remember reading elsewhere, but haven't verified with S&P/Case-Shiller, is that the tiers are produced by sorting the sales by price and then placing one third of the sales in each tier.

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admin
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PostPosted: Sun May 31, 2009 3:14 pm GMT    Post subject: Reply with quote

admin wrote:

What I remember reading elsewhere, but haven't verified with S&P/Case-Shiller, is that the tiers are produced by sorting the sales by price and then placing one third of the sales in each tier.


OK, I just looked it up, and this is essentially correct. There are additional details in the S&P/Case-Shiller Home Price Indices Methodology paper:

Quote:
For the purpose of constructing the three tier indices, price breakpoints between low-tier and middle-tier properties and price breakpoints between middle-tier and upper-tier properties are computed using all sales for each period, so that there are the same number of sales, after accounting for exclusions, in each of the three tiers. The breakpoints are smoothed through time to eliminate seasonal and other transient variation. Each repeat-sale pair is then allocated to one of the three tiers depending on first sale price, resulting in a repeat sales pairs data set divided into thirds...


See the paper for additional details.

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john p



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PostPosted: Mon Jun 01, 2009 2:28 pm GMT    Post subject: Reply with quote

JCK:

I haven't done too much reading on the calculatedrisk.com site. I just glanced at it. Some of the predictions seem pretty doom and gloom. My impression is that although things are pretty slow right now, that they will turn around. I'm not allowing myself to embrace the notion that it could get much worse.

It is kind of funny, in politics people sometimes just fatigue on an issue and people say "I'm done with this". I've been at meetings where an issue is still open and nothing is resolved, but people just move on to another issue because they are saturated with the discussion, and they pick it right up again at the next meeting... Politically speaking, I think people are sick and tired of feeling depressed about the economy. I think many people feel that you need to have good times to have good spirits and myself in particular, it is hard for me to be completely happy and comfortable if that dark cloud is overhead. I'm finding that the human spirit battles back despite the dark clouds. I think the realistic viewpoint is to be sunny inside but keep your rain gear on if the clouds are still dark...

As far as the risk goes, I think we're going the "Reset Button" route. It is like the teacher giving a test where enough people failed and the parents called the Principal and complained so the Teacher gives a new test. The risk in my mind is what method will we reset? Politically, people did not want GM to fail initiallly, but over time, the fundamentals didn't work on that business model so it was like watching them on life support.

As far as the housing market goes, I think that people politically support certain correction and bailout notions, but I think that people will fatigue and say enough is enough.

The biggest risk I see is that we have this global economy and it is the corporations that are pulling everyone together. Because we are intertwined it is hard for one nation's health to not affect another. In the long run, I believe that globalization will create a peaceful world, but on the pathway there, unless we have common rules and modes of behavior and limits of governments to disrupt free trade, we are going to have problems. As an architect we are now working with an International Building Code. Much of this Code is based on common codes adopted by areas such as Massachusetts, simply because the behavior of fire or standard building materials is consistent. Imagine trade without standards. Imagine people melting down and mixing in other materials into Gold. There needs to be standards to define the different Carats.

Doctors and engineers are better at working globally. Think about how a scientist names something. They use Latin roots to describe something scientifically so people who understand these building blocks of the Latin roots can get the meaning. Politicians name things after themselves because they are typically poisoned with vanity. The more the politicans in our global economy pull our modes of behavior away from a fair black and white basis they more we will have tensions. This is where I see the most risk coming from. From a Military viewpoint, people who have nuclear weapons make the laws to decide who can and can not have them. Is that fair to the nations who don't have these weapons? Well this strategy only works for so long, and not very long if we play the same hand on economic terms, meaning if we start to devalue our currency for self serving purposes and impose political pressure on other nations with the backdrop of our Military, we have increased the global pressure cooker. I see the lazy delusional selfish people in our nation putting us at risk because Scene 1 is that the lazy people leech off the workers in our own nation, and Scene 2 is that they look for another host and exploit other outside our country, and that is where we will face resistence.

I am very curious to see the reaction of the Unions to this whole GM Chapter 11. I mean if you look at the States or industries with the worst financial situations, you'll often see the higher concentration of Unions. Politically, I wonder how the Unions will try to frame this. I mean the Unions are so bad right now that they want to control how their Union Members vote by making them do it in front of them. I used to comment on the Unions pushing casinos in Massachusetts because to me it was a tell sign that they were so selfish that they didn't care that hundreds of other people would have to lose so that they could gain. When a group becomes a predator where they take off someone elses plate that is when they start to go bad and become a poison to whomever they affix themselves.
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ruby23
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PostPosted: Wed Jun 17, 2009 8:26 pm GMT    Post subject: Jump due to Inflation, Foreclosures, short sales, and Spring Reply with quote

john p wrote:
On the second chart, how much do you think the inflation number contributed to this recent, steepest monthly jump in 5 years?



I think that inflation, foreclosures, short sales and the spring season in the NE can attribute to the jump. However I agree they will continue to fall unless Jobs are created. My town has had several companies close up shop and move to Mexico. Sounds like a good idea!!
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GenXer



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PostPosted: Wed Jun 17, 2009 9:57 pm GMT    Post subject: Reply with quote

Inflation is probably double what CPI numbers are. I've seen this from plenty of sources, and this is confirmed by my own informal observations (having been buying food for the past 5 years, and quite a lot of it - the same brand, so I know that prices have literally jumped, sometimes even upwards of 50% on some items, and never came down after the oil went down). Currently 'potential' inflation is waiting to explode, and while we do not know when that will happen, this year it is definitely NOT 0%.
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