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Boston Bubble Wrap: The Real Story for MA - Sep 2010

 
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admin
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PostPosted: Fri Oct 29, 2010 5:20 pm GMT    Post subject: Boston Bubble Wrap: The Real Story for MA - Sep 2010 Reply with quote

This is a brief report on what the data for the housing market in Massachusetts looks like in real terms. Market data is typically reported in nominal terms which can be misleading because it combines changes in housing values with changes in the value of the dollar. Correcting for inflation removes changes in the dollar as a factor and gives a more accurate picture of how housing values have changed. This report is based on the published data of the Massachusetts Association of Realtors, though it should be noted that the S&P/Case-Shiller Index is a superior data source.

The Massachusetts Association of Realtors released their data for September 2010 on Tuesday, October 26th. While the raw prices were provided in nominal terms, for this report they have been adjusted for inflation using the CPI Northeast Urban numbers available at http://www.bls.gov/cpi/ Adjusting for inflation produced the data represented by the graphs below. Prices for January 2003 and earlier have been estimated by applying the earliest reported median from The MAR, February 2003, against the S&P/Case-Shiller Index for the Boston area. Suggestions for improving this estimate are welcome.

Full Price History



Change in Median Price From One Year Earlier, February 2004 - September 2010

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



Some observations:

  • The real increase from September 2009 to September 2010 was 0.50%.
  • This was the tenth 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.
  • Real prices are still lower than the same month in every year in the time period covered by The MAR, with the exception of 2009.
  • Real prices are once again below their 2008 levels after having poked above them for the previous two months.
  • Prices are now 30.46% below the peak set in June 2005. This is the result of a 21.07% decline in nominal housing prices and a 11.89% decline in the purchasing power of the dollar.
  • The cumulative price decline from the beginning (Feb 2003) is 13.70%, which is an annualized decline of 1.92%.


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

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

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

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Teavo
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PostPosted: Wed Nov 03, 2010 4:01 pm GMT    Post subject: Reply with quote

Beginning with the summer of 2008, the price lines for 2008, 2009, and 2010 are almost perfectly in synch. So it appears that prices since that time have been essentially "flat" except for the expected seasonal variation.

Interesting.

Are we bumbling along at a market bottom?

I don't know, but I have a gut feeling that these price doldrums will be with us for a long time.

Thanks as always for this great info.
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PostPosted: Wed Nov 03, 2010 11:09 pm GMT    Post subject: Reply with quote

Teavo wrote:
Beginning with the summer of 2008, the price lines for 2008, 2009, and 2010 are almost perfectly in synch. So it appears that prices since that time have been essentially "flat" except for the expected seasonal variation.

Interesting.

Are we bumbling along at a market bottom?

I don't know, but I have a gut feeling that these price doldrums will be with us for a long time.

Thanks as always for this great info.


You're welcome. I think that the periods you identified as being in sync correspond very well to when the two most recent home buyer tax credits were in effect. So the best that the tax credits could do with the demand that they pulled forward in time was to create price doldrums. I don't expect the synchronization to last now that the hangover has started. It has started in volume now, possibly in price later - the S&P/Case-Shiller Index will be a better gauge of that come February.

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CL
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PostPosted: Thu Nov 04, 2010 12:18 pm GMT    Post subject: Reply with quote

It depends on which tiers of housing you are looking at - for low tier (less than 265K) it is very sensitive to tax credit and availability of foreclosed home inventory, so the data series will be volatile.

For high tier (not that high actually, anything more than 400K), Boston market is actually fairly stable. Peak to trough of -15%, Peak to current of -11%. And comparing to other cities, the Boston market is actually one of the most stable/defensive in the nation (only Denver high tier market is more resilient).

So the question is which tier do you look at? Are you investor looking to buy foreclosed home, or user buying 450K home to settle down? Depending on the circumstances, the market can be very different.
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PostPosted: Thu Nov 04, 2010 12:51 pm GMT    Post subject: Reply with quote

It is true that the low tier has been more volatile thus far, though not just because of the tax credit. The low tier was distorted a lot more during the bubble run up, and so it had a lot more to correct for. See the chart below.

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PostPosted: Thu Nov 04, 2010 5:20 pm GMT    Post subject: Reply with quote

Admin - one idea you can improve on your analysis is to add a rent/Owner equivalent rent component to get a total return perspective. Right now you are only looking at price return then adjusted for inflation, which is akin to looking a stock return looking at the change in price adjusted for inflation but ignore the dividend. One main component of return for housing, however, is rental income (for investment purpose) or rental saved (for consumption purpose). Any thought on this one?
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PostPosted: Thu Nov 04, 2010 5:43 pm GMT    Post subject: Reply with quote

Funny you should mention this now. I was just thinking of posting a price-to-rent ratio chart and may do so if I have some free time soon. A few concerns that come to mind are that past rent control may throw off a historical comparison and that this would still be an incomplete picture of return given that carrying costs are substantial. It would still be nice to have such a chart, though.

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PostPosted: Fri Nov 05, 2010 12:14 pm GMT    Post subject: Reply with quote

The reason rent is it does typically add 1% (more or less) annually, even with the carrying cost of a standard mortgage. With that added it will halfed your annual decline of 2% since 2003.

Also, one of the metrics investor look at is mortgage rent spread, mortgage being your carrying cost and rent being your cash flow. Given the very low rate, it's actually a good time to be a landlord if your time horizon is reasonably long and your have an inflation view.
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PostPosted: Sat Nov 06, 2010 7:27 pm GMT    Post subject: Reply with quote

CL wrote:
The reason rent is it does typically add 1% (more or less) annually, even with the carrying cost of a standard mortgage. With that added it will halfed your annual decline of 2% since 2003.


I was thinking of property tax and maintenance for the carrying cost, and there are of course other costs as well (like the mortgage, as you pointed out, and insurance). The annual property tax alone on the building I'm in is a little over 1% of the assessed value and Zillow's "Zestimate."

Just in case you missed it, I did end up making a price/rent graph for the Boston MSA:

http://www.bostonbubble.com/latest.php?id=price_to_rent

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PostPosted: Mon Nov 08, 2010 1:19 pm GMT    Post subject: Reply with quote

True - rental income will be taxed and there will be maintenance cost and property tax too. Just from a tax perspective though, investing in housing is probably the most advantageous since you got a lot of tax breaks, at least for now (mortgage interest deduction, prop. tax deduction, all the energy savings tax break for maintenance, etc), versus buying stocks and paying the cap gain tax. It can of course be changed in future.

Some people are already doing it (learning to be landlord and take advantage to the rent-mortgage spread), though I suspect the real driver is lack of appealing income investment alternative and a hedge to hyper-inflation.

Thanks for the price-rent post. Will read, think, and post comments.
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