bostonbubble.com

[admin]

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 February 2010 on Wednesday, March 31st. 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 - February 2010

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



Some observations:

• The real increase from February 2009 to February 2010 was 5.09%.
  
• This was the third real year over year increase since August 2005, with all such increases occurring consecutively and after the most recent renewal and expansion of the home buyer tax credit.
  
• For the first time since March 2009, the year over year change is within one standard deviation of the moving average. The rate of change has stopped increasing with the average still in negative territory.
  
• Real prices are still lower than the same month in every year in the time period covered by The MAR, with the exception of 2008.
  
• Prices are now 35.44% below the peak set in June 2005. This is the result of a 27.24% decline in nominal housing prices and a 11.27% decline in the purchasing power of the dollar.
  
• The cumulative price decline from the beginning (Feb 2003) is 19.88%, which is an annualized decline of 3.12%. This metric is particularly noteworthy this month as the time of year is identical and is thus not skewed by seasonal variation.
  

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:

• http://www.bls.gov/cpi/
  
• http://www.marealtor.com/content/housing_data.htm
  
• http://www.standardandpoors.com/ ...truncated...
  

The text of this post and the associated graphs are Copyright 2010 by bostonbubble.com with all rights reserved, except as stated here. You may reproduce each graph individually or the text of the entire post as a whole (including graphs) under the Creative Commons Attribution-No Derivative Works 3.0 Unported License. You may additionally scale the graphs to fit your work. Alternatively, if you remove the bostonbubble.com signature from the bottom left hand corner of the images within this post, those modified images (and only those modified images) can then be distributed under the Creative Commons Attribution 3.0 Unported License. In all cases, attribution should be made via a hyperlink to http://www.bostonbubble.com/forums/viewtopic.php?t=2683 or http://www.bostonbubble.com/ Quoting excerpts of the text is also allowed provided that the quotes would normally fall under fair use. To request other terms for reproduction, please post your request in the original thread at http://www.bostonbubble.com/forums/viewtopic.php?t=2683

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

- admin

[GenXer]

I remember we've had these long discussions about 'waiting for the bottom' or 'finding bottom'. I wonder if all those people who said they could time the real estate market were actually able to buy at the so-called bottom. The funny thing is that the S&P Case Schiller 'bottom' is no bottom at all. If anything, because the index is not your typical Gaussian random walk, the 'bottom' came and went pretty quickly. But even if you could find this bottom by pure luck, I don't believe that local inventory actually relfected the index price (i.e. each of the 500 stocks making up S&P500 index could be priced anywhere, and just because there is an average price bottom doesn't mean you could buy an individual stock at a discount (you may for some stocks, but not for others). Just wanted to bring this home for those who still think they can time the real estate market (good luck).

[admin]

[GenXer]

[Renting in Mass]

I didn't search through the archives, so maybe there were lots of people claiming that they were going to time the bottom, but that isn't my recollection of the conversations here.

Speaking for myself, I'd like to see some evidence of a bottom before I buy, but that doesn't mean I'm trying to time it. I agree that it's unlikely that many people bought at exact bottom (so far), but who is really trying to do that? You're knocking down a straw man.

[GenXer]

I think the point was whether you can time the market at all. Some people have a belief that it is possible. My argument was that it is never possible unless you get lucky. That's about it. A pretty important argument actually, as some people believe in their timing abilities.

[Renting in Mass]

I'm tempted to argue, but let's get a common definition to work with first. How do you define market timing in terms of buying a house? Can we use "trying to buy low and sell high," or do you have a more specific definition in mind?

[john p]

I always thought "timing the market" meant waiting for all the stars to be aligned where you'd end up getting the best overall value for their given situation.

It's like buying a car. For some who have little available for a down payment and don't expect to put a lot of miles on the car, many like to lease. Others find value in older cars that might need a part changed here and there but have low ownership costs because the purchase price was cheap. Timing, kind of means that macro, meso, or micro events happen where a situation becomes very favorable. People define their "strike zone" like Admin did by waiting for certain affordability metrics to reach certain levels.

Another way to look at it is like travel. Say airline tickets to Paris are X amount of dollars, and then all of a sudden they have a number of empty flights and they offer a sale, that would be a good time to jump on an opportunity. "Market Timers" tend to always have their antennae up and have a historical sense of what things costs so if something jumps out, they know it.

Another way to look at market timing is that period where something happens to affect the overall affordability before things adjust upward. Take for instance a price structure of homes. If a price structure for a market is set in say early March for a Spring Selling Season, and then all of a sudden the mortgage rates increase, that typical monthly payment will go up so the whole market will be above the historical average of affordability. Now consider if the mortgage rates go down, the whole market structure is more affordable. It is harder for people to add to their prices. In times like these i.e. around 2002, when rates were dropping, the affordability clicked in lower and lower so houses were selling fast.

Another way to look at it is market inertia. Say the mortgage rates drop lower and lower, all of a sudden people are refinancing which pumps more money into the economy which creates a wealth effect and the economy increases and you see more activity in the market so things go upward. If you get in early you can catch the wave. If you understand that it is a wave you have to understand the TIME to surf OUT before it crashes down on you.

Now think of the array of wealth as one gear, and the other gear is the available houses on the market. So, the most expensive houses are purchased by the most wealthy. Now let's say we're at an auction and the first painting on the block has three really wealthy people bidding, the most wealthy gets the first painting, the second most wealthy gets the second painting and then the third goes to the third...... NOW, what happens when the three wealthy buyers have left the auction, but there is another painting available that is just as good as the other three sold prior, but THERE ARE NO MORE WEALTHY BUYERS LEFT. The middle class guy can get into that painting simply because the wealthy have left the auction (provided the seller is still willing). That is good timing.

Now, think about timing as investing in something before it gets found out. Don't you think that Littleton was a value town PRIOR to it becoming a top 10 town for school systems? Now, you're going to see more and more people bidding there because it is found out. I met a guy who bought a beautiful house in Hopkinton and he wasn't very rich at all and he said "I got in early here". The same goes for the Back Bay or the South End. Buying in those areas during the Bubble was crazy, but getting into them in the early 90's was the TIME to get in.

I want to throw these things out there because if you get to a period where you have fewer buyers and more motivated sellers you can actually get a better deal than when the "stars are aligned with the masses" because things all click into the gears (buyer into a seller, next buyer into next seller, click, and the buyers align with the price structure and you get a velocity of click, click, of the gears.

Now, according to some, like my cousin who bought a house worth over a million a few years ago, just got a house for $480k, the quality of the house he was able to get relative to his salary was much better today than a few years ago. I know another guy who at a very young age became a Vice President, moved to Florida to buy a house for $900k. This house now is now worth in the low $400's, so basically the guy who works for the guy that reports to him can afford his house.

The alternative to the market timing is market avoidance. Let's say you look at your assets and say, if I invest my money in this vehicle or that, it will grow at a certain rate, so if I make my money work for me, I can rent cheaper and let my investments grow so I can get a head by being in an investment fast track and wait until the time is right where your investment portfolio is favorable to the house purchase. Basically, this is kind of what happened when people were cashing out of the stock market and getting into the real estate market, real estate was a better, safer investment than the equities market which was tanking.

Understanding the market also gives you a sense as to how long it takes for the market to adust. Some sit back and see the "day of reckoning", but feel like fools like waiting for the tides to rise because of global warming. Others know that it takes a little while for a price structure to adjust to say a change in mortgage rates. A savvy seller might adjust more quicky than the market and LOWER their price because they know that prices will lower more quickly once people realize that homes are just going to sit.

The last aspect I can think of right now regarding market timing is that of the long view. Say you're outside the Red Sox game; sure the scalper is going to sell the tickets at a premium before the game, and then by the end of the first inning, they just want to unload them. The problem is, that if you wait until you're like 50 to buy a place and you finally get a deal, it's like getting into the Red Sox game in the 5th inning. Now let's say there is a rain cloud overhead and the game is most likely going to be called, that ticket might still be worth something because you can redeem it at another game. This is sort of how retirees might cash out of Massachusetts and head to the Carolinas and sell their house to the guy who will show up at the rescheduled game.

This regionality game is also played by people who come to Massachusetts for a season, collect experience or wealth and save, and then move back to a cheaper cost of living area. Timing the market for them might mean, live in Massachusetts for ten years, save X amount and then move back to Kentucky and buy a house cash.

The capstone to all of this is understanding the number of buyers and sellers, their disposition and understanding the predispositons to any behavior in the market so when you see a force acting upon a system, you have a decent idea of the reaction...

[Renting in Mass]

Definition from Wikipedia: Market timing is the strategy of making buy or sell decisions of financial assets by attempting to predict future market price movements.

Differing views on the viability of market timing

This piece of the above link seems to capture GenXers argument:

"Some may consider market timing to be a form of gambling based on pure chance because they do not believe in undervalued or overvalued markets. The efficient-market hypothesis claims that financial prices always exhibit random walk behavior and thus can not be predicted with consistency."

I don't think I buy into that line of reasoning because I don't believe the efficient-market hypothesis and I do believe that markets can be overvalued. I'll admit that I have zero ability to recognize whether a pattern exhibits random walk behavior or not.

If I did accept the argument, what would I do with that information? In 2005, it would have compelled me to buy, since there's no way to predict future price movement. It would seem to lead to giving up trying to understand the market.

[Renting in Mass]

So I guess I'm a market timer in the sense that I'm basing my purchase decision on the belief that I can predict future price movements. When I say "predict," I mean that I believe I can look at the situation and glean some information about the likelihood of prices going up or down over the next several years. I don't think I can do so with any specificity in regards to amounts or time periods. And I certainly don't have any illusions that I could identify the bottom as it happens.

[Renting in Mass]

The funny thing is, I don't do any market timing in my investing. The problem is, when it comes to buying a house, there aren't any other options. I wish I could apply portfolio theory to home buying, but I'm stuck with market timing or throwing up my hands and accepting that there's nothing I can do to reduce the downside risk of the biggest purchase of my life.

[john p]

There were a few lines that realtors used to parrot and they did it enough that it became conventional wisdom....

One of them was "You don't want to "time the market"". They would use this line when a buyer would start to show signs of cold feet. They'd say "We all get that cold feet but there really is no way we can time the market, you'll just drive yourself crazy." They want you to take a leap of faith and feel comfortable that many before you have done so as well and it all worked out for them....

Unless you're acting completely blindly of course you're trying to "time the market".

Other lines they say are "There not building any more land".... Developers used to say "There are more trees here today than when Columbus was here....". I mean how fucking stupid is this one, like they had a tree counter on board the Mayflower. (stupidity my emphasis)

[GenXer]

While I don't believe in efficient market hypothesis (its a hypothesis for crying out loud), I believe in the reality of price movements. I should qualify, that I believe in the research that has been done over the past 100 years on price movements in different markets. The reason there is no value is because the price overshoots and undershoots based on many factors, which are not important. What is important is the result. And the result is that the price can not be timed. The longer you do it, the less likely you are to come out ahead. Anybody who believes they have skill to time the market (any market, including real estate) is deluding themselves at best, but I won't be standing in your way. I did call the bluff of those who said they were going to time the bottom, which apparently has just passed according to what the Case Schiller index is saying. Not that the price can't go for the second dip and go even lower - that would still be part of my argument. Market timing is gambling because not only do you have no tools to forecast prices (if you could do so accurately even 60% of the time, you may be able to make good money on it), nobody can do so consistently AND make the right bets to make money. If anybody thinks they can time the market accurately, you have a big cushy job waiting for you at the investment bank of your choice...but good luck, because too many people thought that they were above average market timers, and ended up in foreclosures.

[GenXer]

Financial industry is largely deluded, actually, when it comes to market timing. But a word of cautionary advice. They get bailed out - and you do not. This is the reason they can gamble instead of actually provide advice that requires skill (i.e. understanding math and current research). Most people in finance do not have the education to figure out that what they are doing amounts to gambling. Those who do are doing so quietly, and do not command the media's attention, because they are simply BORING. This is why Vanguard is now #1 mutual funds company. Surprised? Hardly. Most of their business is passive buy and hold investing. Their timing funds actually didn't do too well, but even they have to offer these because of pressure to compete with others who do the same. Show me a single study that proves that market timing is not only viable but profitable, and I'll show you a bunch of cooked statistics. When 90% of investors believe that they have above average timing skills, I laught all the way to the bank because this is exaclty what allows the slow and the boring to buy low and sell high.

[balor123]