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Signs pointing to price declines.
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JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Fri Apr 24, 2009 1:33 pm GMT    Post subject: Signs pointing to price declines. Reply with quote

I've been at least a little skeptical of the real estate bears, especially after the many blown calls for price drops ("Down 25% in 2008") over the past five or so years. I'm also skeptical about using price/income ratios as a means for prediction. In the long run, those ratios may hold, but I think they're useless for making near-term predictions, which all that anyone is interested in anyway. (Heck, if these ratios were predictive at all, things never would have gotten out of whack in the first place.) What are those sayings? "The market can remain irrational longer than you can remain solvent," and "In the long run, we are all dead."

However, while the bears' timing has been off, I for the first time, am seeing actual evidence that we may be on the verge of serious price drops, not just in areas with high numbers of foreclosures, or areas that are otherwise compromised (e.g., by distance to Boston), but in the prime areas.

Item #1: Sales crashing in prime towns.

I'm looking at towns like Newton, Brookline, Cambridge, Arlington, Belmont. Going to the Warren Group, and using their freely available "town stats" feature, number of sales in most of these towns are down on the order of 50% over 2008. This is the first serious fall in sales that I've seen in these towns.

Relevance: Sale declines generally proceed price declines. If things are not selling and inventory starts building, then prices must follow their way down. I'm seeing a LOT of places hitting the market right now. If low sales numbers hold, and places aren't moving, we're going to see declines. But keep an eye on inventory.

Item #2: Luxury sales crashing

Boston Globe today has an article about the luxury condo sales tanking.

Relevance: If the high-end (finally) tanks, it's going to force the whole price structure down. If those $800k condos are now worth $600k, that's going to force the $600k condos down, etc. etc. This has the potential to radically alter overall the price structure, which has become very stretched out (i.e., you get very little for your money paying an extra $100k from ~$450k to ~$550k).

Item #3: What's happening in NYC

Real estate crashing there. Inventory is marching up, prices are coming down fast.

Relevance: Obviously the NYC market is quite a bit different from Boston's, but there is a natural price relationship between the two. If prices aren't holding up there, it's difficult for me to see how prices can hold up here. I've found condos in Brookline that are asking higher prices than similarly sized places in Manhattan. Something's gotta give, no?

I've generally shied away from making predictions in the past, but I really think we're on the verge of something here.

Keep an eye on numbers of sales. That will tell us where things are going. If sales pick up substantially next month, I retract everything above. Smile
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JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Fri Apr 24, 2009 1:45 pm GMT    Post subject: Reply with quote

My NYC vs. Boston evidence:

Check out this place:

http://www.redfin.com/MA/Cambridge/254-Columbia-St-02139/unit-254/home/21476996

If you know Cambridge, you know that Columbia St. is NOT where you want to live. Narrow street, high traffic, nearish to the projects, dirty. Lots of run-down homes in the area. Hard to imagine spending 3/4 of million to live there. I don't care how nice the place is.

Now check out this place:

http://www.streeteasy.com/nyc/sale/348963-coop-201-east-83rd-street-yorkville-new-york?email=true

According to this thread it closed at $974k

http://www.streeteasy.com/nyc/talk/discussion/10456-201-east-83rd-st-3ef

Yes, it cost a bit more, is somewhat smaller, and certainly has higher monthly maintenance and tax burden. But, for crying out loud, it's in prime Manhattan neighborhood in a doorman building, not a crummy condo conversion on busy street in a lousy part of Cambridge. The ad won't even show the building exterior/neighborhood. You know that's never a good sign...

And prices are still dropping by the week in Manhattan, so I think Boston has to be next.
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admin
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Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston

PostPosted: Fri Apr 24, 2009 2:11 pm GMT    Post subject: Re: Signs pointing to price declines. Reply with quote

JCK wrote:

Boston Globe today has an article about the luxury condo sales tanking.


Thanks for pointing out the article and for the rest of your insights. Here is the Globe article for those who haven't seen it yet:

http://www.boston.com/business/personalfinance/articles/2009/04/24/real_estate_slump_hits_luxury_condos/

JCK wrote:
In the long run, those ratios may hold, but I think they're useless for making near-term predictions, which all that anyone is interested in anyway.


I'd like to clarify that I am indeed interested in the long run, and so the ratios are relevant. I am concerned about the resale value of a potential purchase and therefore what it might be worth in 5, 10, 20 years, etc. In that context, the price to income ratio is more prescriptive than predictive. That is, if it is significantly higher than normal (as it is), it is a flag to be cautious about buying because the resale value may suffer. It's obviously not a good predictor of price movement when the time period you're looking at is near term. It can help tell you if you are likely to get a good or bad deal by historical standards by buying now, though.

- admin
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JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Fri Apr 24, 2009 2:17 pm GMT    Post subject: Re: Signs pointing to price declines. Reply with quote

admin wrote:
JCK wrote:

Boston Globe today has an article about the luxury condo sales tanking.


Thanks for pointing out the article and for the rest of your insights. Here is the Globe article for those who haven't seen it yet:

http://www.boston.com/business/personalfinance/articles/2009/04/24/real_estate_slump_hits_luxury_condos/

JCK wrote:
In the long run, those ratios may hold, but I think they're useless for making near-term predictions, which all that anyone is interested in anyway.


I'd like to clarify that I am indeed interested in the long run, and so the ratios are relevant. I am concerned about the resale value of a potential purchase and therefore what it might be worth in 5, 10, 20 years, etc. In that context, the price to income ratio is more prescriptive than predictive. That is, if it is significantly higher than normal (as it is), it is a flag to be cautious about buying because the resale value may suffer. It's obviously not a good predictor of price movement when the time period you're looking at is near term. It can help tell you if you are likely to get a good or bad deal by historical standards by buying now, though.

- admin


I probably phrased that bit too strongly. I do think most of the posts here are interested in the short-to-medium term price movements, with respect to the rent vs. buy decision (i.e., monthly costs and foregone earnings on a down payment). I don't deny that long-term considerations are important, and certainly your point is a good one.

Thanks for the comments.
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WestCoastXPlant
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PostPosted: Fri Apr 24, 2009 2:53 pm GMT    Post subject: Reply with quote

I have a few comments:

1. Crashing sales -- are they crashing or not? There is another thread here that assertains that inventory is actually falling...I guess you're comparing the number of sales but I believe months of inventory is likely a more correct comparison.
-- Stickiness -- price declines can be pretty slow to follow declines in sales/income. They keep revising the foreclosure rules, but there was a realtor who made a post claiming you're better off as an owner in a layoff as you can live in your home rent-free for almost 9 months between the last mortgage payment and having to vacate. On the other coast, sales were absolutely DEAD last spring -- prices didn't seriously cave in till just after November.

2. Luxury sales crashing -- I agree, it also works both ways. We're actually considering a lower priced area than we originally targeted because we can own a very nice home for 2.5x income as opposed to 4x. The "special town" premium gets more "costly" if the lower end moves...

3. NYC -- I see relevance here though I don't know much about Boston economy -- if NYC's crash is related to finance and Boston is more diversified, it might hold up a little better. The other thing to consider is "locals" vs "transplants" -- I've been amazed at the number of people that I meet who are MA residents from generations back. My guess is that in places like NYC more folks will move back where they hailed from when jobs are gone...esp if they come from places like the south or parts of the MidWest where cost of living is low and jobs are disappearing slower.

4. Long term implications -- I agree about the price/income impact, as well as the influx of retiring boomers over the next decade (I actually think the latter has more adverse potential)...but I'm also worried about inflation in the 5+ yrs scheme of things.(yes, I know we've discussed IBonds and other hedging techniques -- I guess that's really the only hope for a 401K these days)
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BelmontRenter



Joined: 29 Dec 2008
Posts: 52

PostPosted: Fri Apr 24, 2009 3:22 pm GMT    Post subject: Reply with quote

Although I have no data to back it up, I too am concerned that the sales numbers are down in some of the "immune towns" because the listing volume is down. What isn't listed doesn't sell . . . and my anecdotal evidence is that listings are down, presumably as homeowners are waiting it out and hoping that prices rebound or stop falling.
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JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Fri Apr 24, 2009 3:29 pm GMT    Post subject: Reply with quote

WestCoastXPlant wrote:
I have a few comments:

1. Crashing sales -- are they crashing or not? There is another thread here that assertains that inventory is actually falling...I guess you're comparing the number of sales but I believe months of inventory is likely a more correct comparison.
-- Stickiness -- price declines can be pretty slow to follow declines in sales/income. They keep revising the foreclosure rules, but there was a realtor who made a post claiming you're better off as an owner in a layoff as you can live in your home rent-free for almost 9 months between the last mortgage payment and having to vacate. On the other coast, sales were absolutely DEAD last spring -- prices didn't seriously cave in till just after November.


Numbers of sales are crashing now, whereas prices are not. We may have to wait until November to see price declines. Total inventory is down over a year ago, but, not 50% down (as are sales). That should increase months/inventory, I'm guessing. If more is coming to market than is selling, prices should drop. This dynamic will need to be watched closely over the next few months. If sales pick up, then all bets are off on prices falling. If nice places start languishing on the market, then I think we'll see price movement.

Quote:
2. Luxury sales crashing -- I agree, it also works both ways. We're actually considering a lower priced area than we originally targeted because we can own a very nice home for 2.5x income as opposed to 4x. The "special town" premium gets more "costly" if the lower end moves...


I think the luxury market has effectively stretched out the value proposition for housing around here. In Cambridge and Brookline, going from $350k to $450k really gets you very little more, other than a slightly bigger condo. Even $450k to $550k isn't that much of a difference. You have to stretch up beyond $600k (probably in the $700-800k range) to get something qualitatively better/different. I attribute this to the luxury market ($700k and above) pulling up prices of non-luxury units (as people get priced out of Back Bay, South End, etc.). If the high end comes down, I think we'll see compression in the $550k market, which may decrease the premiums to get to that next level. This may have a lesser effect on the Sub $400k market.

I see the lower end in the nice areas (e.g., towns like Melrose, cheaper condos in Cambridge) as being less susceptible to crashing, as I think the value propositions vs. renting aren't quite so bad (which probably include the cheaper towns that you're looking at right now). But that doesn't mean they won't also come down as well.

This is somewhat speculation on my part, but it seems sensible to me.

Quote:
3. NYC -- I see relevance here though I don't know much about Boston economy -- if NYC's crash is related to finance and Boston is more diversified, it might hold up a little better. The other thing to consider is "locals" vs "transplants" -- I've been amazed at the number of people that I meet who are MA residents from generations back. My guess is that in places like NYC more folks will move back where they hailed from when jobs are gone...esp if they come from places like the south or parts of the MidWest where cost of living is low and jobs are disappearing slower.


There are vast, vast difference between the two markets. I agree. And I think the financial services effect here is somewhat attenuated as compared to NYC. But frankly, NYC has a greater cachet and wealth than Boston, and historically has been priced accordingly. I don't see this changing. So my conclusion is that while Boston probably won't see the percentage declines that NYC is seeing (indeed NYC went crazy from 2005-2008, whereas Boston did not), NYC is going to be priced above Boston regardless. So there should be some indirect effect here from what's going on there.

Quote:
4. Long term implications -- I agree about the price/income impact, as well as the influx of retiring boomers over the next decade (I actually think the latter has more adverse potential)...but I'm also worried about inflation in the 5+ yrs scheme of things.(yes, I know we've discussed IBonds and other hedging techniques -- I guess that's really the only hope for a 401K these days)


Deflation, inflation, retiring baby boomers? I don't know what to say. I think all of these things are important, but I don't have the tools to accurate assess their impact.
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balor123



Joined: 08 Mar 2008
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PostPosted: Fri Apr 24, 2009 3:32 pm GMT    Post subject: Reply with quote

There are some people (like my cousin) who moved from NYC to Boston a few years ago because the cost of housing was so much cheaper here. If they start becoming comparable, then there are some people who will choose to move back.
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JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Fri Apr 24, 2009 3:32 pm GMT    Post subject: Reply with quote

BelmontRenter wrote:
Although I have no data to back it up, I too am concerned that the sales numbers are down in some of the "immune towns" because the listing volume is down. What isn't listed doesn't sell . . . and my anecdotal evidence is that listings are down, presumably as homeowners are waiting it out and hoping that prices rebound or stop falling.


As above, I think inventory is down, but sales are down even further.

I suspect the luxury downtown sales will track the immune towns, as the properties are in the same price range and drawing from similar pools of buyers, to at least some extent. While I understand those considering a South End townhouse aren't necessarily the same people considering a Weston estate, the economic situation of both buyers is probably similar enough.
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PostPosted: Fri Apr 24, 2009 4:45 pm GMT    Post subject: Reply with quote

a few of the questions i still have is the historic fluidity of the market: ie How many people move in out of the region, how often do people move in and out of homes to upgrade or downsize, etc. My thoughts are just due to a 5-10% drop in prices will equate to a lot less traditional movement and in turn the people moving in and out will be the ones driving the market... perhaps those numbers will increase as babyboomer retire but?

also historically home prices have been impacted by recession and job loss more that anything esle... it is usually a trailing indicator.. I can only assume that since this dropped before the recession/job loss actually started it will continue for a while after the recession/jobloss ends.
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PostPosted: Fri Apr 24, 2009 4:58 pm GMT    Post subject: Reply with quote

Also, how long can they really keep low interest rates? They are shooting themselves in the foot. It is NOT working.
Interest rates must go up and then home prices will go down.
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Fri Apr 24, 2009 5:17 pm GMT    Post subject: Reply with quote

What I think new buyers need to take measure of is this:

People will sell their place for a $200k loss if they can save $200k on the house that they will be moving to.

Remember in the prior two years we had sort of a mixed market? Because the price movements were different in the different price strata people often didn't want to sell something if they didn't have to.

This past 12 months has been filled with people who had to sell (smaller number) and homes being bought by those that felt that the prices had come close to bottoming (smaller number).

Now, I see that the velocity of sales might pick up because there is some consensus of price drops across the board in price points and whereas in prior months people that sold, had to sell; now people are selling for two BIG reasons, number one, whatever loss they get on their home sale will be relative to the loss of the property they move to, and second, mortgage rates are LOW! Now, people can refinance when they make a transaction.

Here's an example: Take someone who lives in a condo that they bought for $400k and now is worth about $330k. On the one hand they need to bring money into closing, but on the other hand, the house that they had their eye on has dropped in price from $550k to $450k. On top of that, they can refinance their 5.75% cost of capital to 4.75% mortgage rate. Those are powerful incentives THAT WEREN'T PRESENT LAST YEAR!!!

I'm not saying that we will get an uptick, but I think that job security is the most important issue of the real estate market. When people feel more secure about their jobs again, I think the market will bottom despite current P/E ratios. I think that for an area like Boston, the P/E ratio is very good, if you account for the low cost of capital. Unless you have a substantial down payment that will grow with inflation, the the future price drops that will happen as a result of inflation driving up mortgage rates will in my mind balance into a mortgage payment reach height. Sometimes that mortgage payment has a higher percentage of principal and other times it has more interest. Unless you're in a position to grow a larger chunk of principal down payment, you need to take measure of future mortgate rate premiums due to inflation because Obama has just dilluted the value of the dollar. If you do have a sizeable down payment, waiting might serve you well because you'll only be financing a smaller amount of the house price.

Basically, the sales velocity is primed to increase due to uniformity across price strata, but what is gumming up the works is fear of job security. I'd watch jobs report numbers very carefully.
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BelmontRenter



Joined: 29 Dec 2008
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PostPosted: Fri Apr 24, 2009 5:21 pm GMT    Post subject: Reply with quote

Anonymous wrote:
a few of the questions i still have is the historic fluidity of the market: ie How many people move in out of the region, how often do people move in and out of homes to upgrade or downsize, etc. My thoughts are just due to a 5-10% drop in prices will equate to a lot less traditional movement and in turn the people moving in and out will be the ones driving the market... perhaps those numbers will increase as babyboomer retire but?

also historically home prices have been impacted by recession and job loss more that anything esle... it is usually a trailing indicator.. I can only assume that since this dropped before the recession/job loss actually started it will continue for a while after the recession/jobloss ends.


I think that your last paragraph answers the question you posed in your first paragraph. Movement into the region is largely due to job creation here, IMHO. Face it -- it's not the great climate, low taxes, or wonderful business climate that's bringing people to the Boston area Wink It's GOOD-PAYING JOBS, which were/are on the steep decline here. The rest of the housing market I think is first-time home buyers, and those who wish to trade up to something bigger/better/more prestigious/in a better school district. Price drops will help those who want to move from renter to owner, but won't help those trading up (much) and won't create jobs.
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Boston ITer
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PostPosted: Fri Apr 24, 2009 5:49 pm GMT    Post subject: Reply with quote

Quote:
Face it -- it's not the great climate, low taxes, or wonderful business climate that's bringing people to the Boston area. It's GOOD-PAYING JOBS, which were/are on the steep decline here.


I'd say it's the pipeline (now, perhaps a pipe dream Wink ) of attending a Boston area school, let's say masters at Tufts, followed by a good job in the region. Unfortunately, that's what's beginning to fade away as the jobs are either too specialized, see Whitehead/MIT-based biopharma or DoD work at a couple of robot firms, or ordinary like more medic/nursing/hospital attendants as oppose to let's say a new Polaroid, Gillette, Camb Tech Partners, or Reebok which can generate a wider array of jobs for a general pool of educated personnel and in the thousands, not a few dozen.

I presume that the ones, who have some home equity, & can hold on to their places, will stay put and pay the exorbitant mortgage/taxes/fees until they can't find work in the state anymore and then join the diaspora. I guess the govt and healthcare can provide some buffering here but it seems like a waste, sustaining a type of white collar rust belt, just for the price of real estate. All and all, it points to a new Buffalo By The Sea.
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StallionMang



Joined: 29 Apr 2008
Posts: 54

PostPosted: Sun Apr 26, 2009 1:12 pm GMT    Post subject: Reply with quote

This WSJ article agrees with you.:

The latest data from the National Association of Realtors, which rattled nerves on Wall Street this week, showed national home sales are still weak. But they also showed how home sellers nationwide have split into two camps.

Call them "the haves" and the "don't haves." As in: Those who have to sell, and those who don't have to.

The haves are the distressed sales. These include those in foreclosure, and those in pre-foreclosure "short sales." Such sales are now booming - at bargain prices.

On the other hand, those who don't have to sell are often hanging on to 2006 prices. And they are hanging on to their homes.

Prices aren't dropping. And homes aren't selling.[/url]
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