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Boston Bubble Wrap: The Real Story for MA - Oct 2010
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PostPosted: Wed Dec 01, 2010 1:47 am GMT    Post subject: Boston Bubble Wrap: The Real Story for MA - Oct 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 October 2010 on Tuesday, November 23rd. 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 - October 2010

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



Some observations:

  • The real increase from October 2009 to October 2010 was 1.68%.
  • This was the eleventh 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.
  • Prices are now 30.88% below the peak set in June 2005. This is the result of a 21.34% decline in nominal housing prices and a 12.13% decline in the purchasing power of the dollar.
  • The cumulative price decline from the beginning (Feb 2003) is 14.23%, which is an annualized decline of 1.98%.


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:

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=3174 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=3174

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

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Renting in Mass



Joined: 26 Jun 2008
Posts: 381
Location: In a house I bought in December 2011

PostPosted: Wed Dec 01, 2010 6:34 pm GMT    Post subject: Reply with quote

You got this one up fast Smile
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PostPosted: Wed Dec 01, 2010 8:44 pm GMT    Post subject: Reply with quote

Quote:
Prices are now 30.88% below the peak set in June 2005. This is the result of a 21.34% decline in nominal housing prices


21.34% decline is not much. Greater Boston is still way over-priced. We need at least another 10-15% to get back to a healthy level. If there was no 2 tax reductions, we should have already reached that.
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Renting in Mass



Joined: 26 Jun 2008
Posts: 381
Location: In a house I bought in December 2011

PostPosted: Wed Dec 01, 2010 9:13 pm GMT    Post subject: Reply with quote

Quote:
21.34% decline is not much


And Case-Shiller has it at only 14.3%, which is the smallest decrease in the 10 city index.

Quote:
We need at least another 10-15% to get back to a healthy level. If there was no 2 tax reductions, we should have already reached that.


Agreed. They just kicked the can down the road. With over 11 months of supply in inventory, I think we'll see that additional 10% before long.

Oh well, at least I'll be able to enjoy having the landlord clean the driveway for another winter.
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GenXer



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PostPosted: Thu Dec 02, 2010 1:46 pm GMT    Post subject: Reply with quote

60k people just lost the unemployment benefits. This means that they've been getting benefits for 99 weeks, and either couldn't or wouldn't work. I'll give it another year.
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balor123



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PostPosted: Thu Dec 02, 2010 8:23 pm GMT    Post subject: Reply with quote

Another 10-15% to get back to prices during good economic conditions. What should prices be compared to similar conditions in the past? I think a comparison to the early 90s would be better. That would imply a much further drop, and that's ignoring the extra risk from below average interest rates and stagflation in non-housing prices (health care, food, gas, etc). The housing story is far from over in Boston.

If I buy here it will be when my wife finishes her postdoc in 2 years and if she can't find a job she likes in our other target cities. Hopefully the correction will have completed by then but somehow I think it will drag on well past that point unless there is a catalyst. Until then, looks like I'll just have to cram the next kid into this apartment.

The rental and daycare market here is also messed up but unlike housing it's always been this way. The cost of renting a nice 3br here runs about $2.5k - $3k. The cost of cheap daycare runs about $1.5k. Total cost, then, is about $6k/mo or $72k/yr, mostly after tax money. Insane.
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balor123



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PostPosted: Thu Dec 02, 2010 8:31 pm GMT    Post subject: Reply with quote

GenXer wrote:
60k people just lost the unemployment benefits. This means that they've been getting benefits for 99 weeks, and either couldn't or wouldn't work. I'll give it another year.


I wonder how unemployment would change if:
(a) there was a requirement that to continue getting benefits you had to not only demonstrated that you looked for a job but that you considered jobs all over the US and
(b) there was a requirement that you try hard to look for a job

Both could be solved by using recruiters in the same way that appraisers are used for housing. When you become unemployed, a recruiter is assigned to you who looks for jobs for you using the above criteria. After a nominal time period, to continue receiving benefits you would be required to accept any job offer that the recruiter finds for you and deems to not be underemployment with an appeals process. Such a process would greatly increase the mobility of American workers and business needs while providing for income for the country.
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PostPosted: Thu Dec 02, 2010 11:10 pm GMT    Post subject: Reply with quote

balor123 wrote:
Another 10-15% to get back to prices during good economic conditions. What should prices be compared to similar conditions in the past? I think a comparison to the early 90s would be better. That would imply a much further drop, and that's ignoring the extra risk from below average interest rates and stagflation in non-housing prices (health care, food, gas, etc). The housing story is far from over in Boston.


A comparison to the early 90s may be too idealistic. That could be 20-30% drop or more, but I don't think it would happen. Fed will do whatever it could to keep interest rate low and re-inflate the bubble (or at least try to keep at current level). I don't think they will succeed, but housing cost probably will not go back to normal. The US is following Japan in the early 90's! The prolongation could be more than a decade.

I used to love this country very much, but now.... everything is so fxxxing wrong, for example extremely low interest rate, weak dollars, huge and fast growing national debts, unbalanced deficit, health care and education costs, homeland security....etc. You name it!
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GenXer



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PostPosted: Fri Dec 03, 2010 5:34 pm GMT    Post subject: Reply with quote

balor123 wrote:
Another 10-15% to get back to prices during good economic conditions. What should prices be compared to similar conditions in the past? I think a comparison to the early 90s would be better. That would imply a much further drop, and that's ignoring the extra risk from below average interest rates and stagflation in non-housing prices (health care, food, gas, etc). The housing story is far from over in Boston.

If I buy here it will be when my wife finishes her postdoc in 2 years and if she can't find a job she likes in our other target cities. Hopefully the correction will have completed by then but somehow I think it will drag on well past that point unless there is a catalyst. Until then, looks like I'll just have to cram the next kid into this apartment.

The rental and daycare market here is also messed up but unlike housing it's always been this way. The cost of renting a nice 3br here runs about $2.5k - $3k. The cost of cheap daycare runs about $1.5k. Total cost, then, is about $6k/mo or $72k/yr, mostly after tax money. Insane.


2.5k+1.5k=4k ($48k) but still, that does not include food and anything else. Your spouse has to make $80k just to break even. An alternative would be to rent a 2b for $1.7k and to have the 2nd parent start a home business. With 1 kid it may not be as cost effective (though pretty close actually, depending on the type of business), but considering the expenses, there are multiple ways of bringing costs down if the 2nd parent is at home. With 2 or 3 kids, it becomes almost silly to have an office job for the 2nd parent - costs for daycare multiply. Somebody running a home business in the meanwhile can maintain a low enough level of activity so that they don't lose their qualification, and when kids grow up can setup it up or get a day job if they wanted.

Let me put it this way. If prices don't come down in the next year or two, what we'll see is a 5+ year stagnation where prices don't grow much at all. That is possible as well. However, we have not seen the last of the budget deficits about to be unleashed (that were pushed off to the future, which is now very close).
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PostPosted: Fri Dec 03, 2010 7:32 pm GMT    Post subject: Reply with quote

Quote:
When you become unemployed, a recruiter is assigned to you who looks for jobs for you using the above criteria. After a nominal time period, to continue receiving benefits you would be required to accept any job offer that the recruiter finds for you and deems to not be underemployment with an appeals process.


If unemployment rates continue on, would recruiting then become a profession to itself, with licensing and certification processes?

Ultimately, when a person is deemed as "not accepting at par employment", that verdict would need some sort of appraisal report which could later be contested by the job seeker.
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balor123



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PostPosted: Fri Dec 03, 2010 9:52 pm GMT    Post subject: Reply with quote

Boston ITer wrote:

If unemployment rates continue on, would recruiting then become a profession to itself, with licensing and certification processes?

Ultimately, when a person is deemed as "not accepting at par employment", that verdict would need some sort of appraisal report which could later be contested by the job seeker.


Yup that's the proposal, except unlike other similar professions it shouldn't be controlled by recruiters in the same way that the military is controlled by a civilian.
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balor123



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PostPosted: Fri Dec 03, 2010 10:00 pm GMT    Post subject: Reply with quote

GenXer wrote:

2.5k+1.5k=4k ($48k)


I included the cost of the "next kid", which roughly doubles the cost of daycare so $2.5k + (1.5k * 2) =~ $6k/mo. Clearly, my spouse has to make a large amount of money to break even. The irony, however, is that Boston is a 2-income city. So if she doesn't work we can afford daycare but then we can't afford a home. I suppose a third option, not having kids, is the only workable solution that doesn't require a large sacrifice. In the technical fields (her Phd is in CS), sadly if she walks away even for a few years to raise the kids she won't be employable. Perhaps this explains why people in Boston wait until they're 40 to have kids or why many just don't have them at all.
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PostPosted: Sat Dec 04, 2010 2:57 am GMT    Post subject: Reply with quote

balor123 wrote:
GenXer wrote:

2.5k+1.5k=4k ($48k)


I included the cost of the "next kid", which roughly doubles the cost of daycare so $2.5k + (1.5k * 2) =~ $6k/mo. Clearly, my spouse has to make a large amount of money to break even. The irony, however, is that Boston is a 2-income city. So if she doesn't work we can afford daycare but then we can't afford a home. I suppose a third option, not having kids, is the only workable solution that doesn't require a large sacrifice. In the technical fields (her Phd is in CS), sadly if she walks away even for a few years to raise the kids she won't be employable. Perhaps this explains why people in Boston wait until they're 40 to have kids or why many just don't have them at all.


I think you got that right. This is why we pulled my wife out of her day job - she's so much happier now. Honestly, doing consulting work is a lot more profitable - maybe your wife should consider that. I know people get brainwashed to hold day jobs, and I know its not easy, but it is possible to do this. Then you never depend on somebody to give you a job - you make one for yourself. This is a lot of work, but if she starts now, I bet she could build a network and get offers on linkedin. Open your website, build your brand, communicate to people and you can have several kids with no problems, and homeschool them at the same time.

Ok, so no kids until you are 40. I won't even get into genetic disorders, difficult births and all that. By then most people haven't even gotten rid of their student loans. They buy a house. What then? Forget savings - everything will go downhill very fast with daycare/college costs/expensive houses in immune towns. Even people making $200k plus are in this mess. In Boston, you have to make $300k+ to be able to do all that. If you do the math (I think I already discussed it before), it may be possible for somebody making $200k has the same take-home pay as somebody making $120k if you allow for expenses and savings. You are right about 2 kids - this is why many people have just 1 - it is too expensive to maintain their lifestyle AND to have 2 kids. This is why you need to decide how many kids you want, and then pick the lifestyle you can afford, which is really a no-brainer with 2+ kids.
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balor123



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PostPosted: Sat Dec 04, 2010 4:25 am GMT    Post subject: Reply with quote

I agree about consulting but it's not straight forward and I know people who tried it without success. Mostly, however, it's not for everyone and I don't think it's for my wife. She wouldn't be happy as a housewife either. I think it's easily possible to get by on $100k - $150k here but our notions of risk need to go out the door. Buy the maximum house the bank will let you buy. Don't bother with insurance until you are older and minimize that which is required. Don't plan on saving much (retirement, college, reserves, etc). Take a stable job at a large company and don't move. Buy everything big on credit and stretch out the loans.

Statistics show that most people around here fall within that range. Statistics also show that, for example, most people don't buy life insurance (55% according to CNN today). Some not even health insurance. They also show Americans don't save much, negative only recently and still only a few percent today. Anecdotally, we also know that people often buy with 4x - 5x leverage here. We're uncomfortable here because we're not like those people but we have to compete with them.

I know one coworker who lives in Lexington and is living paycheck to paycheck right now since his son is going to college (and public school for that matter). He's tapped out on home equity. I know two others who live in Brookline and haven't saved anything for their children's education. One waited until he was in his 40s to have his kids and had to use IVF. All 3 are 2 income families. Another one just built a $850k house in Wellesley on a single income of maybe $130k with about $300k of equity from previous house. Two others live 1+ hours away. Of those 30+, 2 have no kids. Our secretary admitted she spends 50% of her income on her mortgage payment, despite owning the place for 30 years. Some are comfortable but bought before 2000. The rest are young (early 30s), rent, and have no plans to buy. These are all engineers with graduate degrees from top schools. It's insane how much different their lives are despite all having roughly the same income but merely being born at different times.
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GenXer



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PostPosted: Sat Dec 04, 2010 5:22 pm GMT    Post subject: Reply with quote

And I have a lot more of stories like that...mostly of engineers sending their kids to college while paying $200k a pop and then the kids move back into their parents' houses with no job prospects in the near future.

But as far as making it work, there are tons of people who make this work. 'Housewife' is a bad term actually. Many people have home-based businesses, and are NOT housewifes or househusbands. And occasionally some people use babysitters if they have work to be done at home. Yes, they may not save as much, but you know what? Given a choice to not see your kids and live beyond your means without saving vs. living within your means on a median salary with no saving while being with your kids, I'd pick the latter. There is always a way to upgrade after the kids grow up.
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