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Boston MSA Price/Income Approximation: 1975 - 2009 (- 2014)
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PostPosted: Mon Oct 18, 2010 5:32 pm GMT    Post subject: Reply with quote

CL wrote:
Just my 2 cents - if the blue line (price/income ratio) spent so little time near/below the yellow line (historical average), then I don't see why the 2 lines will suddenly converge in the near future.

Which means if you use it to gauge the market risk, then be prepared for a very long wait.


Actually, it think the blue line has spent close to half of the time below the latest point on the yellow line, which is what I would consider to be the most important point. That the blue line has not been below the yellow much for the same point in time is merely a consequence of the secular trend in the price to income ratio having been upward. I note that starting in the early 1980s and lasting until at least now (i.e., for most of the graph), there has been a long and steady decline in interest rates and inflation, allowing people to gradually leverage more and more (not that this is necessarily in their best interest, per Baker's paper). As long as this trend continues, I completely agree that waiting for a convergence could result in a very long wait. That's why I added the standard deviation - it actually is within striking distance of the average now. However, I don't personally want to bet on falling inflation and falling rates continuing because it is already very close to deflation at this point and Bernanke has made statements recently indicating that The Fed is going to try to ratchet up inflation expectations.

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john p



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PostPosted: Mon Oct 18, 2010 6:51 pm GMT    Post subject: Reply with quote

This is a picture taken in Boston in 1976 (the beginning of the chart).

http://en.wikipedia.org/wiki/File:Soiling_of_Old_Glory.jpg

Boston is a totally, totally different place than back then. Everyday people in Southie were throwing rocks at bus loads of black children back then, now we have a black Governor. The Ritz Carlton Condos in Boston sit on what used to be the "Combat Zone".

In order to filter the data into a controlled quantifiable format, I think one distills a lot of reality out of the picture.

I think this exercise is enormously important, but I almost think that the Price to Income ratio would make more sense now if we compared surrounding cities because you're less likely to compete with a buyer who travelled in time from 35 years ago versus someone who transfers from New York City or Portland Maine.
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PostPosted: Mon Oct 18, 2010 9:21 pm GMT    Post subject: Reply with quote

Sure, plenty of things are much different now than 35 years ago in Boston and everywhere. You could say the same thing about every generational time period. But what has changed that would deform the need for housing prices to be supported by incomes to a similar extent as in the past? Interest rates and inflation have - how permanent is that change and what was more important: the rates themselves or their derivative being negative? (I mean derivative in the mathematical sense, not the financial sense.)

One thing that is so striking about Shiller's famous graph of national prices is how flat real housing prices were for over a century. Boston, The US, and the world have all been through many, massive sea changes over the covered time period. I'm sure we will be able to say the same thing 35 years from now.

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john p



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PostPosted: Mon Oct 18, 2010 10:04 pm GMT    Post subject: Reply with quote

The number of earners in a "household" in the "household income" is a big one for me.

Also, like Albany, NY where you can get a huge house for dirt cheap, if Albany becomes a white collar center and transforms from a blue collar center that will be a game changer.

I mean look at areas like Hopkinton or Lynnfield which used to be little farm towns that turned into white collar bedroom communities. You won't see that type of transformation again.

The suburbs right around 128 pretty much were built in the early to mid 70's so that was also a once in a history type of thing.

I knew people that knew people who were buying apartment buildings in tough areas of the city for $1 in the late 70's; I don' t think that will happen or hopefully won't happen in the near future.

I know someone who bought three condo's near Northeastern on Mission Hill. He bought them 11 years ago for $135k a piece and now rents them to college kids for $3,000 or so a month. I don't think you'll see this again either.
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mpr



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PostPosted: Mon Oct 18, 2010 11:43 pm GMT    Post subject: Reply with quote

CL wrote:
Just my 2 cents - if the blue line (price/income ratio) spent so little time near/below the yellow line (historical average), then I don't see why the 2 lines will suddenly converge in the near future.

Which means if you use it to gauge the market risk, then be prepared for a very long wait.


I never even thought about this before, but how can the yellow line be
the average of the blue line ? Its almost always been below the blue line.
What is your definition of average ?
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PostPosted: Mon Oct 18, 2010 11:57 pm GMT    Post subject: Reply with quote

mpr wrote:

I never even thought about this before, but how can the yellow line be
the average of the blue line ? Its almost always been below the blue line.
What is your definition of average ?


Pick a point in time. The value of the yellow line at that point in time is the arithmetic average of the blue line from the start up to that point in time. This will hopefully make more sense if you just focus on a single point on the yellow line and compare it with the blue line up until that point. For instance, look at the 2009 point - roughly half of the blue line is above and half below. In other words, the price to earnings ratio has been frequently above its own historical average because it has been increasing.

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PostPosted: Mon Oct 18, 2010 11:59 pm GMT    Post subject: Reply with quote

john p wrote:
The number of earners in a "household" in the "household income" is a big one for me.


How depressing is that, if that's the main cause? Families are working twice as much but the extra income is going disproportionately to bid up the price of something which is so high mainly because they are working twice as much.

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PostPosted: Tue Oct 19, 2010 12:16 am GMT    Post subject: Reply with quote

Here, this might help clarify things. Consider the increasing series of numbers on the left, and the average of all previous values of that series inclusive on the right:


  • 0, 0
  • 1, 0.5
  • 2, 1
  • 3, 1.5
  • 4, 2
  • 5, 2.5
  • 6, 3
  • 7, 3.5
  • 8, 4
  • 9, 4.5
  • 10, 5

The average is always below the most recent value in the series, in the same way that the yellow line has generally been below the blue.

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john p



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PostPosted: Tue Oct 19, 2010 1:12 am GMT    Post subject: Reply with quote

This may be useful in trying to understand what's going on behind the curtain in the quantitative easing meetings:

http://en.wikipedia.org/wiki/IS/LM_model

As far as the "households", you're right, it is depressing that it takes two earners today to buy what one earner could get decades ago.

I think that I've chimed in because I am leery about certain types of historical reference. I think it is essential to study it because it is insightful as to understanding behavioral patterns, but I'd rather people understand the market like understanding the Periodic Table and being able to balance chemical equations so that if they understand the current composition and then introduce the new elements they can understand the reactions...

The numbers from the 70's scare me because things have changed so much. When a town goes through early growth, land is cheap. Building material costs track inflation pretty much and labor goes up and down with the economy (so dollar per square foot of construction is more constant), but land costs are based on abundance/scarcity. Land was much more abundant in the 70's. As the growth rings went to an beyond 495, the inner markets hit maturity from a spatial stand point and the scarcity of land helped drive up house prices. In my town in the South Shore, my house builder's acre lot which abuts a golf course cost $60,000 back in 1997. Today, the lot would most likely go for $300k. My father who is in his mid 70's grew up in Revere told me that there were farms in Revere when he was a kid.

I see household income in the same light with respect to capacity. The first wife to go off to work gave her family a little surcharge in buying power so their family had a little extras here and there. It was a luxury. Then as more and more and more women entered the workforce the excess capacity became the norm and prices elevated to what the market would now bear. When you also double the talent pool and then think that the more successful men might marry the more successful women then man, that power couple is going to earn more and drive up the top 1% of household incomes. I mean Barack Obama didn't marry some knucklehead; Michelle Obama was bringing in like $300k or so before she became First Lady.

My point is that capacity runs out. Eventually, those $60k house lots on the golf course get bought up and the next town further from Boston becomes the value town. Eventually the commute gets ridiculous and people start bidding up the existing housing stock. This is how a housing market matures, space runs out. In household income, eventually when both husband and wife are required to work to earn a living, what's next then, do the kids work? The excess capacity runs out. You're seeing grandparents moving in with kids in a larger home with an "in-law" which is one way to increase capacity through consolidation.

My father knows a guy who bought a ton of land on the access road to Stowe Mountain Vermont back in the mid 60's. He was a dumb witted kid back then but he got in early and he's loaded now. I'd bet that there are mountains in the Rockies and even up in New England where a whole new ski mountain resort could be built. The idea is to get in early to get the deal.

With the internet, people's minds are opened to all kinds of opportunities. The houses in Wellesley are based on the next generation of yuppies believing that their $800k little Cape on a 1/3rd is a great deal. Eventually, that new generation yuppie will look at what $800k can get them somewhere else and that will be the game changer.

Great statistic in the WSJ today. Although the manufacturing sector has added 114,000 workers this year (weaker dollar helping exports), it now employs just 11.6 million, a third fewer than it did a decade ago. It kind of reminded me of some of the statistics in the movie "Food Inc." where there was a total consolidation in the meat industry in the past decade. You have to wonder if technology has created a maturity in the manufacturing. The WSJ article talks about how there has been a transfer from the labor-intensive industries to the capital-intensive industries. Think about it, we're buying gadgets that can be mass produced versus hand made chairs.

You have to wonder if maybe we need to actually REDUCE capacity? They did this in Europe when their built environment got saturated with development, but eventually even with super long vacation times and reduced hours they still produced so little that they had to put people in government jobs until they just couldn't carry the dead weight.

As times get tougher watch how people choose scapegoats. The Unions are anti foreign influence. They want buy american clauses in stimulus spending as well as more protectionism in trade. What's going on in Germany is kind of scary, they let in all kinds of immigrants when times were good, to do menial labor, but now they are trying to get rid of them because they say they are dead weight to entitlement spending. In reality, the Germans have a very low birth rate and the immigrants are becoming stronger as a voting block....

Here is another simpler way to explain my point about history and similar to your explanation to MPR about "average":

Lets say the average time to win the Boston Marathon was 2 hours over a 100 year history. Even though they're doing it in just over 1.5 hours or whatever, would you expect it to ever "revert back to the norm" and we'd have to start seeing the times go back to the 2 hour mark just because that is what history said? Unless they stopped allowing the Kenyans to run, that wouldn't happen.
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PostPosted: Tue Oct 19, 2010 1:31 am GMT    Post subject: Reply with quote

john p wrote:

Lets say the average time to win the Boston Marathon was 2 hours over a 100 year history. Even though they're doing it in just over 1.5 hours or whatever, would you expect it to ever "revert back to the norm" and we'd have to start seeing the times go back to the 2 hour mark just because that is what history said? Unless they stopped allowing the Kenyans to run, that wouldn't happen.


I bet the average time for all participants each year dances around the historic average. That would be more analogous to the price to income ratio than looking at only the winner. (And not that it matters, but the course record is still over 2 hours.)

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PostPosted: Tue Oct 19, 2010 1:49 am GMT    Post subject: Reply with quote

On the one hand, the Boston Marathon like Boston has evolved from a local city race to an elite World Class race. You could say that although we have a surcharge elite runners coming from all over, the amount of the general population that runs has expanded deeper into the general population (as home ownership has expanded). Before, although most of the runners were locals, those that actually ran marathons were total animals, they weren't average athletes they were mad dogs who were addicted to running.

So the question is, if the Kenyans can get a bigger better deal running in other marathons where the purse is a little better, Boston might not be the World Class elite race. Will Boston maintain its world class status as a city, and if so why? I'd keep at least one eye looking through the windshield when moving forward. I know a lot of successful realists, but I don't know many successful pessimists. Although times look tough, those that are successful will come from the set of those that can see opportunity. The only real way to feel positive today is to look towards the future and look for opportunities.
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PostPosted: Tue Oct 19, 2010 2:08 am GMT    Post subject: Reply with quote

http://www.boston.com/sports/marathon/blog/2010/10/boston_marathon_sells_out_in_a.html

kind of funny, I guess the Boston Marathon filled up in one day versus 2 months last year...
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PostPosted: Wed Oct 20, 2010 3:10 pm GMT    Post subject: Reply with quote

I'd say that the Boston Marathon, as well as other American sports, is experiencing a type of tourism vis-a-vis global cachet effect.

Remember the NBA & ABA, from the Russell-Chamberlain rivalry and up until the Bird/Magic revival, was mainly a theater of sorts for b-ball enthusiasts in the USA. The fact that the Globetrotters were a traveling circus sort of highlights that effect.

Afterward, Larry Bird became a household name in many nation-states outside of America. Travel a bit and you'll see; Larry Legend isn't for Bostonians anymore. Many persons around the world don't know that Russell's the reason for many of Boston's prior titles. The Boston Celtics really became a type of Massachusetts legend in terms of professional sports. As a result, many more foreigners tried for the NBA so we saw new international talents like Hakeem Olajuwon, Dikembe Mutumbo, Peja Stojakovic, & Dirk Nowitzki being recruited to play in the league. This continued on, as Stern tried to overpromote Yao Ming as a way of opening the sport into bigger global markets in east Asia. And despite all the injuries, Ming is actually more recognizable than his Hall of Fame Houston predecessor, Hakeem. Thus, the NBA is a complete global b-ball destination; the FIBA doesn't compare, in terms of competitivity and respect.

Looking ahead, Stern is doing everything he can to maintain the global cachet of his league. The key here is branding. And really, the US has a sort of lead in this for entertainment and media.

On the other hand, for many communities, not situated around the LA/Miami/NYC media machines, they need something more than hype, to retain companies and bring work to the region. Right now, the game changer for white collar work is high speed internet. The reality of the situation is that entire offices, with American English speakers, could be in Billings Montana and they can service all the support for tiny sales offices along the east coast. That's a huge savings where in effect, high level meetings are held at Copley or Midtown Manhattan, for the look and feel of international prestige, but the real backoffice is somewhere between Des Moines & Billings. The need for huge coastal build outs, is less and less over time. How does this bode for many of our office workers looking ahead?
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PostPosted: Wed Oct 20, 2010 3:40 pm GMT    Post subject: Reply with quote

Boston ITer wrote:

On the other hand, for many communities, not situated around the LA/Miami/NYC media machines, they need something more than hype, to retain companies and bring work to the region. Right now, the game changer for white collar work is high speed internet. The reality of the situation is that entire offices, with American English speakers, could be in Billings Montana and they can service all the support for tiny sales offices along the east coast. That's a huge savings where in effect, high level meetings are held at Copley or Midtown Manhattan, for the look and feel of international prestige, but the real backoffice is somewhere between Des Moines & Billings. The need for huge coastal build outs, is less and less over time. How does this bode for many of our office workers looking ahead?


Funny you should bring this up. I came across this article just a few days ago:

Is Your Future in IT a Job in the Boonies?
http://www.pcworld.com/businesscenter/article/207446/is_your_future_in_it_a_job_in_the_boonies.html

This is one of the potential issues that I see with the premise that outward expansion of white collar housing permanently ratchets up the price to income ratio. Suburbs are a relatively new phenomenon (on a generational time scale) and it's perfectly plausible that this entire paradigm could be surpassed by some other population trend, thanks to things such as the high speed internet that you pointed out.

Reduced need for centralization isn't the only reason (or even the main reason) that I don't see suburb expansion as permanently ratcheting up the underlying price to income ratio, though. Building out the suburbs certainly elevated home prices, and justifiably so. However, it should have elevated incomes too, so it's not clear that the P/I ratio would have changed.

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PostPosted: Wed Oct 20, 2010 6:32 pm GMT    Post subject: Reply with quote

Quote:
it's perfectly plausible that this entire paradigm could be surpassed by some other population trend, thanks to things such as the high speed internet that you pointed out.


The way I perceive it, bandwidth is a global game changer. Even a few years ago, it was quite challenging to have full video conferencing between let's say Boston, Beijing, and Singapore. Today, it's happening all the time and with the ubiquity of instant messaging, one can live in MA but have a team scattered from here through Denver, China, & India. That's why there's no real close-of-business day for a lot of folks in technology. The idea is that the work shifts time zones. This has been a part of my own career for the past few years and is increasing. And believe it or not, it works. There's very little delay in relaying information when all locations & personnel are accessible on the IM.

If I were to let's say extrapolate on the above ... at some pt in time, many execs will look at the cost of high end person in Boston and see if they can find a stateside person, who's willing to live/work in Buffalo for 30% less and near to an airport, if a client expects an on-site visit on short notice. And with that cost containment structure, a bonus pooling method could be used to retain the top talent. Thus, name cities (see Boston, New York, SF, etc) will be more geared towards sales, marketing, and boutique type of operations than mainstay business.
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