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Housing crisis - why it may (continue to) become worse
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GenXer



Joined: 20 Feb 2009
Posts: 703

PostPosted: Mon Aug 24, 2009 11:28 am GMT    Post subject: Housing crisis - why it may (continue to) become worse Reply with quote

Depression or not, it appears as if the housing crisis will last for a long, long time. Here are several developments which can potentially make the situation worse.

1) The government in its infinite wisdom has now decided to increase the supply of 'affordable' apartments. About 20k people in MA are on waiting litst, and in the meanwhile they must live somewhere, so if this plan materializes, the home/apartment owners will be the ones hurt.

2) Rents are starting to come down. Not a ton, but there is a glut of rentals with very few takers (the inventory is roughtly 2x what it was last year).

3) If rents go down, people would prefer renting to buying possibly longer (not assuming most people are rational in their decisions, but with the unemployment going up more and more, people will have no choice)

4) House prices will have to come down more, but it could take several years to unwind. Unemployment (and the invisible unemployment of the new grads which never makes it anywhere) will eventually play a role.

5) We are in a government spending bubble - this is unsustainable (as Warren Buffet correctly noted), and somebody is going to have to pay the bills. For the most part, it will be us, the taxpayers. Even if there is no inflation and all the prices are crashing down, this will not help those who have no job, and it will also not help those with jobs who are taxed to the maximum

6) Interest rates will come up. If not now, then eventually. This may coincide with other factors, and it should be the last nail in the coffin. Once the government stops buying treasuries, the rates will jump all by themselves, but higher rates must necessarily mean lower prices.

7) And of course, all the underwater prime mortgages, as well as Alt-As will almost certainly implode within the next several years given that the unemployment is increasing.

So to anybody who's watching the situation, and wondering whether they should buy now at the exorbitant prices which are still being asked almost everywhere (except where nobody wants to live), the answer is to be patient some more. I'd give it another 2-3 years, but really, as long as unemployment keeps increasing, and then some, the prices will have to fall. The only reason why they will not is the banks owning everything and not selling. But just like the government intervention, this may work for a while, but when it doesn't, the prices can jump dramatically (just like the interest rates).

Bottom line: whatever happens, something can not come out of nothing. Even if prices do come up (which they can, since prices are volatile, so they can move both up and down), we may get another 'crisis' down the road. It will be the same crisis, since I do not think that the 'experts', including banks and government have figured it out yet. We may get a repeat of the housing crisis with commercial real estate. Once easy money dries out, banks will still take too much risk, and people will keep buying houses they can not afford simply because they think that prices are only going up from here.
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PostPosted: Wed Aug 26, 2009 6:16 pm GMT    Post subject: you all waited too long... Reply with quote

Not sure if you've have noticed the news lately? Check out the lead news artcile on cnnmoney. All of you that keep sitting and waiting and waiting and waiting to buy trying to time the market have waited too long. Prices are gowing up everywhere. Keep waiting and waiting and you will keep losing and losing. Other than unemployment, which has slowed tremendously and will eventually level out at normal levels in the near future (early 2010) housing will make a comeback. Not like it has in the nmost recent past (2004-2005 levels) but it will come back just like the stock market. All of you who sat on the sidelines have sat too long. Here is the article to read for yourself.

http://money.cnn.com/2009/08/26/real_estate/July_new_home_sales/index.htm?postversion=2009082612

Title of Article: New home sales blast past expectations
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PostPosted: Wed Aug 26, 2009 6:49 pm GMT    Post subject: Re: you all waited too long... Reply with quote

Anonymous wrote:
Not sure if you've have noticed the news lately? Check out the lead news artcile on cnnmoney. All of you that keep sitting and waiting and waiting and waiting to buy trying to time the market have waited too long. Prices are gowing up everywhere. Keep waiting and waiting and you will keep losing and losing. Other than unemployment, which has slowed tremendously and will eventually level out at normal levels in the near future (early 2010) housing will make a comeback. Not like it has in the nmost recent past (2004-2005 levels) but it will come back just like the stock market. All of you who sat on the sidelines have sat too long. Here is the article to read for yourself.


First and foremost, that article is about the national housing market. It is not a reflection of the Greater Boston market and you are incorrectly jumping to conclusions by treating it so. But yes, let's look at the article:

Quote:

"There are many economic conditions that led to the surge," said Bob Walters, chief economist for Quicken Loans. "But certainly low mortgage rates, huge price reductions on the high inventory of new builds, and the first-time homebuyer tax credit have been instrumental in getting consumers to take the plunge into the real estate pool of opportunity."


All but one of those factors that contributed to the "surge" are temporary. The homebuyer tax credit is going away very soon. Low mortgage rates are a result of direct intervention in the market by The Fed, something which they have not done until recently, do not plan to continue doing, and may not even be able to continue if they wanted to.

In fact, today's still high prices are entirely predicated on historically low interest rates. Take away the anomalously low interest rates and current price levels simply have no support in many neighborhoods. You're playing a risky game if you're relying on today's low rates to support your price (and you are). Any number of triggers for higher rates seem plausible, if not imminent: China et al slow purchases of US debt (or even begin selling), The Fed stops buying mortgage backed securities, inflation picks up, or the federal deficit continues to swell.

You're assumption that the bottom has been "missed" also doesn't fit with history. Check out the last downturn and you'll see that once the market actually did hit bottom, it puttered along at that level for several years before any substantial appreciation came about again: http://www.bostonbubble.com/latest.php?id=ma_price_to_income

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mpr



Joined: 06 Jun 2009
Posts: 344

PostPosted: Thu Aug 27, 2009 12:13 am GMT    Post subject: Re: you all waited too long... Reply with quote

[quote="admin"]
First and foremost, that article is about the national housing market. It is not a reflection of the Greater Boston market and you are incorrectly jumping to conclusions by treating it so. But yes, let's look at the article:
Quote:


Since the decline in Boston started earlier than nationally and Boston
was never plagued by foreclosures to the same extent as some other
parts of the country, I would have thought the case for a bottom here
would be stronger than nationally.

[quote=:admin"]
In fact, today's still high prices are entirely predicated on historically low interest rates. Take away the anomalously low interest rates and current price levels simply have no support in many neighborhoods. You're playing a risky game if you're relying on today's low rates to support your price (and you are). Any number of triggers for higher rates seem plausible, if not imminent: China et al slow purchases of US debt (or even begin selling), The Fed stops buying mortgage backed securities, inflation picks up, or the federal deficit continues to swell.


Even when the Fed discount rate was closer to 5%, long term mortgage
rates were still in the 6% range. I dont think going back to that
level is going to break the back of housing. Of course you could
postulate a much more dramatic rise in long rates and inflation.
But no one really knows how its going to play out, or what the
effect on housing is going to be. The subtlety is that a dramatic
rise in rates will likely constrain supply as well as demand, because
people sitting on their low fixed rates will be very reluctant to move.

admin wrote:

You're assumption that the bottom has been "missed" also doesn't fit with history. Check out the last downturn and you'll see that once the market actually did hit bottom, it puttered along at that level for several years before any substantial appreciation came about again: http://www.bostonbubble.com/latest.php?id=ma_price_to_income

- admin


I agree thats its unlikely we are going to have huge appreciation,
but I dont think the poster is saying that either. That doesn't mean
we haven't hit bottom though. Common sense suggests that
the best deals were to be had when people were most fearful.
This "end of the world" discount it probably no longer in prices,
and that's consistent with the significant uptick we've seen recently.

In general I have to agree with the sentiment that too many people
who post here are perma-bears on housing, who would continue complaining
at almost any price level. I mean if the economy is not in great shape
there will always be dangers on the downside, and if the economy
is great its likely that people here will think that housing is overvalued.
So they'll always find something to complain about.
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PostPosted: Thu Aug 27, 2009 12:52 am GMT    Post subject: Re: you all waited too long... Reply with quote

mpr wrote:

Even when the Fed discount rate was closer to 5%, long term mortgage
rates were still in the 6% range. I dont think going back to that
level is going to break the back of housing. Of course you could
postulate a much more dramatic rise in long rates and inflation.
But no one really knows how its going to play out, or what the
effect on housing is going to be. The subtlety is that a dramatic
rise in rates will likely constrain supply as well as demand, because
people sitting on their low fixed rates will be very reluctant to move.


Yes, I'm talking about a much bigger rise in mortgage rates than a simple return to 6%, not as a certainty, but as a very real possibility. Looking at it from the angle of a prospective buyer, I am not willing to bet that rates will stay near historic lows (and a rise to 6% would still be near historic lows) until I would need to sell again.

mpr wrote:

I agree thats its unlikely we are going to have huge appreciation,
but I dont think the poster is saying that either. That doesn't mean
we haven't hit bottom though. Common sense suggests that
the best deals were to be had when people were most fearful.
This "end of the world" discount it probably no longer in prices,


I don't think we ever saw any "end of the world" discounts around here - maybe in some neighborhoods, but definitely not broadly or uniformly. Specifically, the price to income ratio was still over a standard deviation above the historical average at last check. It is possible that we've hit bottom, but there were never "deals" if that is the case, certainly not "end of the world" deals. Conventional wisdom is still that houses are a great long term investment and people are still treating them as such. The fear that usually accompanies the bottom never really materialized.

mpr wrote:

and that's consistent with the significant uptick we've seen recently.


It's also consistent with an $8K tax credit whose timing matches the uptick.

mpr wrote:

In general I have to agree with the sentiment that too many people
who post here are perma-bears on housing, who would continue complaining
at almost any price level. I mean if the economy is not in great shape
there will always be dangers on the downside, and if the economy
is great its likely that people here will think that housing is overvalued.
So they'll always find something to complain about.


I consciously worry that I may be doing this myself at times, but then I look back at the price to income ratio and am reminded that prices really are still very high relative to normal, using an objective measurement. I also rerun my mental experiment where I ask whether I would buy in my target neighborhoods if I had all cash, and the answer is still no because of the huge interest rate risk and the lack of correction that those towns have experienced. I'm not bearish on all towns - if those which have experienced substantial corrections worked for me, I might not be waiting. (Yes, the interest rate risk would still be there, but the cost basis would be so much lower that I could live with the additional loss.)

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PostPosted: Thu Aug 27, 2009 1:39 am GMT    Post subject: Re: you all waited too long... Reply with quote

admin wrote:

I consciously worry that I may be doing this myself at times, but then I look back at the price to income ratio and am reminded that prices really are still very high relative to normal, using an objective measurement.


Oh - I left out an important point about the price to income metric. That can't be a perma-bear metric the way I'm using it because I am comparing the current ratio against the cumulative average. Eventually, the current ratio and the historical average will meet again if for no other reason than that a higher than average ratio will itself increase the average in subsequent time periods. Even if the ratio were to stay at this new permanently high plateau, the average would eventually rise to meet it, thereby ending the bear signal. It's the fact that the ratio wasn't even within a standard deviation (which is also growing) of the average at last check which makes me think that prices really are objectively higher than what can be sustained as opposed to just an arbitrary feeling that prices are too high.

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mpr



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PostPosted: Thu Aug 27, 2009 2:13 am GMT    Post subject: Re: you all waited too long... Reply with quote

admin wrote:

I consciously worry that I may be doing this myself at times,


Well you're certainly not the worst offender. Smile

admin wrote:

but then I look back at the price to income ratio and am reminded that prices really are still very high relative to normal, using an objective measurement. I also rerun my mental experiment where I ask whether I would buy in my target neighborhoods if I had all cash, and the answer is still no because of the huge interest rate risk and the lack of correction that those towns have experienced. I'm not bearish on all towns - if those which have experienced substantial corrections worked for me, I might not be waiting. (Yes, the interest rate risk would still be there, but the cost basis would be so much lower that I could live with the additional loss.)
- admin


One problem with this analysis is that this reversion to the mean
could happen without nominal prices falling.

What could cause a spike in long term rates ?
I don't think the "Chinese buyers strike" theory is actually
very plausible. The US treasury markets are too deep and liquid
for that (this doesn't preclude a rise in rates but a spike is unlikely)
and the relationship with China is in any case a co-dependent one.

What I find very plausible is that the economy starts to recover slowly,
inflation (perhaps in the guise of asset inflation) starts to pick up,
but that the Fed is too slow to pull back the extra money supply.
Then eventually you get a spike in rates to counter inflation.

The other thing which makes this plausible to me is that
it would be very convenient for the US to inflate away some of
the excessive debt.

Now in this scenario you get a spike in rates only in combination
with an increase in inflation. In that case real house prices may well
fall while nominal prices rise or stagnate. Since your mortgage is in
nominal dollars buying now when rates are lower would be better in
this scenario.

In general, I find a further large decline in prices unlikely if only
because the Fed has shown that it is prepared to be so aggressive
in fighting deflation and recession. It just seems unwise to bet
against the guys who have the printing presses.
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PostPosted: Thu Aug 27, 2009 2:35 am GMT    Post subject: Reply with quote

Quote:

One problem with this analysis is that this reversion to the mean could happen without nominal prices falling.

That's a feature, not a bug. The assumption is that a false positive for a "don't buy" signal is better than a false positive for a "buy" signal.

Quote:

What could cause a spike in long term rates ? I don't think the "Chinese buyers strike" theory is actually very plausible.

Oh, I wasn't hypothesizing a sudden spike, simply an increase. It could be a long, gradual increase. In that case, the "China starts weening itself off the dollar" scenario is already on the horizon, at least in talk.

Inflation as you outlined is another real threat...

Quote:

Now in this scenario you get a spike in rates only in combination
with an increase in inflation. In that case real house prices may well
fall while nominal prices rise or stagnate. Since your mortgage is in
nominal dollars buying now when rates are lower would be better in
this scenario.

I don't think nominal price would rise or even stagnate if mortgage rates were rising significantly. People are still bidding based on what banks will loan them. Higher mortgage rates will necessarily reduce this reach height and thus house prices.

Quote:

In general, I find a further large decline in prices unlikely if only
because the Fed has shown that it is prepared to be so aggressive
in fighting deflation and recession. It just seems unwise to bet
against the guys who have the printing presses.

They have been fighting general price deflation, not asset price deflation. I don't know that propping up the housing market was or is their goal, so this wouldn't be a bet against them. Also, much of the country has actually corrected already - I doubt they would leave the presses running just for Boston.

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balor123



Joined: 08 Mar 2008
Posts: 1204

PostPosted: Thu Aug 27, 2009 3:17 am GMT    Post subject: Re: you all waited too long... Reply with quote

mpr wrote:
In general I have to agree with the sentiment that too many people who post here are perma-bears on housing, who would continue complaining at almost any price level.


We're not housing perma-bears, we're just Boston housing perma-bears. I think we'd all most likely be pretty happy everywhere else except the high cost of living areas, which geographically cover very little of this country.

mpr wrote:
if the economy is great its likely that people here will think that housing is overvalued. So they'll always find something to complain about.


That's because Boston has always been overvalued.
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balor123



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PostPosted: Thu Aug 27, 2009 3:27 am GMT    Post subject: Re: you all waited too long... Reply with quote

mpr wrote:
In general, I find a further large decline in prices unlikely if only because the Fed has shown that it is prepared to be so aggressive
in fighting deflation and recession. It just seems unwise to bet
against the guys who have the printing presses.


I don't think anyone here doubts that. But that doesn't mean houses are a good investment in immune Boston towns right now.
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mpr



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PostPosted: Thu Aug 27, 2009 3:49 am GMT    Post subject: Reply with quote

admin wrote:

Quote:

Now in this scenario you get a spike in rates only in combination
with an increase in inflation. In that case real house prices may well
fall while nominal prices rise or stagnate. Since your mortgage is in
nominal dollars buying now when rates are lower would be better in
this scenario.

I don't think nominal price would rise or even stagnate if mortgage rates were rising significantly. People are still bidding based on what banks will loan them. Higher mortgage rates will necessarily reduce this reach height and thus house prices.


But you have to keep in mind that this would be happening in
an inflationary environment where people's nominal purchasing
power was increasing. This could easily more than offset the nominal
increase in interest rates. Not to mention the issue of constricted supply
I mentioned earlier.

I dont claim this is clear cut, because it depends on how the pool of
new money feeds through to the real economy. But one should in any case not imagine that it would be as if they started to increase rates right now.

admin wrote:

They have been fighting general price deflation, not asset price deflation. I don't know that propping up the housing market was or is their goal, so this wouldn't be a bet against them. Also, much of the country has actually corrected already - I doubt they would leave the presses running just for Boston.

- admin


I think your first point above is really a distinction without a difference.
The measures to fight both types of deflation are the same.
Anyway, buying up mortgage bonds is all about fighting asset price
deflation.

You're right in the sense that they would probably claim that they
would be quite happy with a growing economy with low inflation where
house prices happened to be falling. But that isn't a very likely
scenario.

Finally, Boston is down about 20% in nominal terms and seems less fragile
than many parts of the country - fewer foreclosures, and a reasonably
functional market.

Put another way, the fact that the Boston correction started earlier
and corrected less than other parts of the country would suggest
that the market is more resilient, less overleveraged and healthier.
If you believe it has further to fall, I think you have to explain
why this hasn't happened already given what's gone on in other parts
of the country.
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PostPosted: Thu Aug 27, 2009 4:38 am GMT    Post subject: Reply with quote

Quote:

But you have to keep in mind that this would be happening in
an inflationary environment where people's nominal purchasing
power was increasing. This could easily more than offset the nominal
increase in interest rates.


Maybe increasing incomes would offset increasing interest rates, but maybe they won't. We could very well fall into stagflation with falling real incomes. Like you said, it's not clear cut.

Quote:

I think your first point above is really a distinction without a difference.
The measures to fight both types of deflation are the same.


While the applicable tools that The Fed has traditionally been limited to may be the same, the decision of where to set the target rates would be different. If The Fed actually treated asset price stability as a priority as it does general price stability, it would have raised rates to lean against the dot-com bubble and the housing bubble.

Quote:

Anyway, buying up mortgage bonds is all about fighting asset price
deflation.


I thought it was about restoring solvency to banks.

Quote:

Finally, Boston is down about 20% in nominal terms and seems less fragile
than many parts of the country - fewer foreclosures, and a reasonably
functional market.

Put another way, the fact that the Boston correction started earlier
and corrected less than other parts of the country would suggest
that the market is more resilient, less overleveraged and healthier.
If you believe it has further to fall, I think you have to explain
why this hasn't happened already given what's gone on in other parts
of the country.


Boston was indeed less overleveraged than other parts of the country. My hypothesis is that the most inflated parts corrected fastest and hardest because they were the most vulnerable. The same is true for individual neighborhoods - you will notice that if you look at the tiered S&P/Case-Shiller indexes for Boston, there was a significantly more pronounced run up and decline in the low tier.

Why does the premise that existing trends will continue need more of an explanation, though? Boston prices are still much higher as a percentage of income than they have been in the past. That's reason enough for me to expect additional declines more than not. I think that what needs additional explanation is the assertion that the trend of declines in Greater Boston is complete. That CNN article had nominal Boston prices down 8.3% year over year, in fact.

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GenXer



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PostPosted: Thu Aug 27, 2009 11:38 am GMT    Post subject: Reply with quote

Incomes are falling. Unemployment is rising. Government projects 12 trillion deficit (which keeps growing). Several legislations which will bankrupt us are probably going to be passed regardless of the opposition. Commercial real estate is in the gutter. Speculators are back in business. More and more loans are underwater. The banks are bailed out (again). Prices are FALLING while sales are rising only temporarily (cash for clunkers anybody?). Rents are falling so much that I think I'll be able to rent a huge house/townhouse for the price of my current rental. Yet the government will make sure that we get inflation (and they will then tighten the interest rates, whenever that happens). Most people buying expensive houses can not afford it, and overestimate the security of their jobs (and underestimate the risks of getting stuck with too much house).

Don't be fooled by apparent cycles. We can nitpick and argue that things will remain good or better, but the more macroscopic factors we are to examine, the more it seems that the only way our house of cards is supported is with borrowed money and time. There is an appearance that the government is able to 'fix' the economy. In fact, we are probably repeating the 1937 crash all over again, maybe not on the same time scale.

All I can say is, wait and see. One can always fund data to support whatever conclusion one wishes to draw from the data. This is why economics is not a technical science but rather a free for all. But after there is no more money (and printing even more could spike inflation almost overnight), and the state governments which are still spending like crazy instead of saving run out of money, and nobody will want to pay higher taxes (the taxes will still go up), then we will see what will break first.

This recession will last for a long time, in one form or the other. Anybody who says otherwise is oblivious to reality.
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PostPosted: Thu Aug 27, 2009 2:10 pm GMT    Post subject: Reply with quote

admin wrote:

Quote:

Anyway, buying up mortgage bonds is all about fighting asset price
deflation.


I thought it was about restoring solvency to banks.


Again, I would argue there's less to this difference than meets the eye.
They had plenty of programs in place which directly helped the banks.
Buying bonds is about keeping interest rates low, which is about
helping housing which is about keeping the banks solvent.

You can change the narrative, but further house price declines
are bad for the economy and especially for bank solvency. The Fed
has made it clear they're going to print as much money as it takes
to stop this.

Quote:

Boston was indeed less overleveraged than other parts of the country. My hypothesis is that the most inflated parts corrected fastest and hardest because they were the most vulnerable. The same is true for individual neighborhoods - you will notice that if you look at the tiered S&P/Case-Shiller indexes for Boston, there was a significantly more pronounced run up and decline in the low tier.

Why does the premise that existing trends will continue need more of an explanation, though? Boston prices are still much higher as a percentage of income than they have been in the past. That's reason enough for me to expect additional declines more than not. I think that what needs additional explanation is the assertion that the trend of declines in Greater Boston is complete. That CNN article had nominal Boston prices down 8.3% year over year, in fact.
- admin


I meant 20% from peak.

The issue is what the existing trends are. Prices have ticked up,
unemployment looks like its peaked. So where is the extra pressure to
crush the comparatively resilient Boston market going to come from ?

We can argue over whether this uptick is the first part of the "W" in a
double dip. If it is interest rates will stay low longer. If it isn't
the economy will pick up and further falls are also unlikely.
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PostPosted: Thu Aug 27, 2009 2:21 pm GMT    Post subject: Reply with quote

mpr wrote:

Buying bonds is about keeping interest rates low, which is about
helping housing which is about keeping the banks solvent.


Buying the mortgage backed securities was about taking toxic assets off banks' books, not about keeping interest rates low. The narrative matters, in this case. It's the difference between a temporary measure and a permanent distortion.

mpr wrote:

You can change the narrative, but further house price declines
are bad for the economy and especially for bank solvency. The Fed
has made it clear they're going to print as much money as it takes
to stop this.


People said the same thing, that The Fed would prop up the market, before we had any price declines at all. This didn't exactly happen. Regardless, they aren't going to print money just to prop up prices in Newton when the rest of the country has stable prices on its own.

mpr wrote:

The issue is what the existing trends are. Prices have ticked up,
unemployment looks like its peaked. So where is the extra pressure to
crush the comparatively resilient Boston market going to come from ?


Hold on... prices are still falling in Greater Boston. Check out that CNN article: the most recent data point is an 8.3% nominal year over year decline. The latest MA unemployment numbers were also up over last time. What's the basis for assuming local unemployment has peaked?

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