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Boston Bubble Wrap: The Real Story for MA - Jan 2011
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balor123



Joined: 08 Mar 2008
Posts: 1204

PostPosted: Fri May 06, 2011 2:50 am GMT    Post subject: Reply with quote

Or for that matter, how many people are there who can afford a home that requires a $250k downpayment? Using the 2-3x ratio recommended by Consumer Reports from another thread, that's an income of 250*5/3=416k! The answer, I think, is some but not enough to fill the number of houses in that price range. More likely, they're being filled by people who made money on their previous homes, creating a housing pipeline. I wonder if this has anything to do with the huge drops in volume that CNBC was reporting in Cambridge and a few other towns earlier this week.
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CL
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PostPosted: Fri May 06, 2011 3:25 pm GMT    Post subject: Reply with quote

Re:Brookline - it's an interesting market coz it has single family which rarely dropped below $1mil (typical $1-3mil) and tons of condos (from 350K to 1mil+). I have kept a close eye on several towns and I do think Brookline is one of the most resilient town when compared to others. The good school + good location is appeal that don't depreciate, and you have the Longwood area which provide a lot of doctors and professors constantly looking into the area.

Btw, 416K gross salary is not unthinkable for Brookline, when there are so many doctors, professors type in that area. 200K (or more) each for a couple, which is fairly typical in those industries.
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admin
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Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston

PostPosted: Fri May 06, 2011 3:55 pm GMT    Post subject: Reply with quote

CL wrote:

Btw, 416K gross salary is not unthinkable for Brookline, when there are so many doctors, professors type in that area. 200K (or more) each for a couple, which is fairly typical in those industries.


It's not unthinkable, but it's not normal either, as it would need to be if it were the fundamental support for a $1M median. There is a histogram of the household income distribution for Brookline about a quarter of the way down this page:

http://www.city-data.com/city/Brookline-Massachusetts.html

From eyeballing the chart, it looks like about 80% of Brookline households make less than $200K. That's for the entire household. It stops segmenting incomes above $200K, so you can't tell from this chart who many households meet the $416K target, but it can't be more than ~20% and I would guess it's much less since the $200K threshold isn't even near it.

However, the histogram right next to it showing the distribution of housing values indicates that the median house value is a lot lower than $1M too. I assume they are throwing condos in there too given that elsewhere on the page they cite $629,817 as the "estimated median house or condo value in 2009".

- admin
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CL
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PostPosted: Fri May 06, 2011 5:30 pm GMT    Post subject: Reply with quote

Of course 400K household income is not the norm. But SF in Brookline is not the norm too (condo is), and you don't need a lot of doctor/professor type to support the small and already built-out market (Having that said, I do know people who made an absolute killing buying those properties in 2008/09 when Jumbo market froze, but it's also not for ordinary people). That, and the proximity of Longwood and in general Boston will support the market a lot better than say, Weston. Thus I think the market is more defensive in nature. In fact, it is probably one of the best performing towns (if not the best performing) in terms of home value after 2005.
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admin
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Joined: 14 Jul 2005
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PostPosted: Fri May 06, 2011 6:05 pm GMT    Post subject: Reply with quote

$629,817 isn't cheap either. How do you not need a lot of doctor/professor types when this is the median price, condos included? You would still need a $200K+ household income to support that using the criteria given previously, and only about 20% of Brookline households have that, not 50+%. I have a suspicion that the majority of the people buying in towns like this stretch to buy under the shared belief that all of their neighbors are rich and will support housing prices for them. I don't think that hypothesis has really been tested by the market yet, given the low volume cited by Beaumont V, and given the unknown longevity of the extraordinarily low interest rates.

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balor123



Joined: 08 Mar 2008
Posts: 1204

PostPosted: Sun May 08, 2011 3:19 am GMT    Post subject: Reply with quote

I know a few engineers who live in Brookline and in every case the pipeline got them there. The data admin provides corroborates my theory. Also, you don't just need doctors but specifically specialists who want to live in Brookline.
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GenXer



Joined: 20 Feb 2009
Posts: 703

PostPosted: Mon May 09, 2011 1:40 am GMT    Post subject: Reply with quote

Wanna know about the how the 'pipeline' really works? Here's what the reality is. A young couple (or a single person before getting together) buys an expensive condo. They get together, marry, have kids. The condo drops by a lot (if they didn't sell it at the top in 2007 or before). They then buy another condo or a house, renting out the first condo. That's the real pipeline. Unless sold before 2007, the rest are not selling because they are facing huge losses. Sometimes even 'breaking even' is taken as a 'loss' and prompts renting the condo out without even the most basic risk analysis (i.e. what if you can't rent it out for a couple of months ever year, and paying realtor's fees, etc).

As far as incomes, it is easy to see that incomes above 400k are so rare as not to really add to the bottom line. I see that the people with 200k incomes pretend as if they are millionaires buying 1M+ houses. Some may have had money from previous sales, but not that much (still taking out 1M mortgages). As I said before, 5:1 for 1M house is much riskier than 5:1 on a $100k house (the key of course is how close the house price is to the median salary).

Another thing to consider for the cheaper houses - they have an unknown cost associated with repairs/landscaping that has to be paid (unless you do all the work yourself, which is unrealistic for most people, given the time constraints and kids). Recently a couple told me that the house is 'for themselves' (not for 'sale'), and then when I mentioned that median holding time is 5-7 years they agreed, saying they want to move in 6 years. I really had nothing else to say to them. They are playing the housing roulette, and I have a feeling that it won't end in their favor.
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balor123



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PostPosted: Mon May 09, 2011 1:06 pm GMT    Post subject: Reply with quote

Brookline condos haven't done so bad but the prices stopped increasing, leaving a lot of people trapped in their condos. In any case, I didn't say it was sustainable but that's how most people got into their houses there I think. Volume was high in 2000 - 2007 and low from 2007 - 2011 so there's a lot more people who benefited from the pipeline than who are stuck now.
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Boston ITer



Joined: 11 Jan 2010
Posts: 269

PostPosted: Tue May 10, 2011 1:53 am GMT    Post subject: Reply with quote

GenXer wrote:
Recently a couple told me that the house is 'for themselves' (not for 'sale'), and then when I mentioned that median holding time is 5-7 years they agreed, saying they want to move in 6 years. I really had nothing else to say to them. They are playing the housing roulette, and I have a feeling that it won't end in their favor.


Since rents are still 1/2 a typical mortgage payment, that's practically expecting that that property will gain some $100K in value for the 6 year holding pattern to make it worth it. At least many of the folks I speak with today are planning for the 15-20 year horizon in mind. Most don't expect to re-coup anything within the next 7 years.
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CL
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PostPosted: Tue May 10, 2011 12:50 pm GMT    Post subject: Reply with quote

Boston ITer - are you sure Rent is 50% of typical mortgage payment?

According to Trulia rent to buy index, as of 4Q2010 the price to rent ratio in Boston is around 17. At 20% down payment and 4.75% mortgage rate for a 500K, the rent will be 2450 and the mortgage payment P&I 2373.

For Rent to be 1/2 of typical mortgage payment at today's rate, price to rent needs to be at around 40. You need to go to NYC for this kind of valuation.
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JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Tue May 10, 2011 3:50 pm GMT    Post subject: Reply with quote

Boston ITer wrote:
GenXer wrote:
Recently a couple told me that the house is 'for themselves' (not for 'sale'), and then when I mentioned that median holding time is 5-7 years they agreed, saying they want to move in 6 years. I really had nothing else to say to them. They are playing the housing roulette, and I have a feeling that it won't end in their favor.


Since rents are still 1/2 a typical mortgage payment, that's practically expecting that that property will gain some $100K in value for the 6 year holding pattern to make it worth it. At least many of the folks I speak with today are planning for the 15-20 year horizon in mind. Most don't expect to re-coup anything within the next 7 years.


I'm not seeing this either. Can you at least provide some examples of places you can rent for 1/2 the purchase price?
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GenXer



Joined: 20 Feb 2009
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PostPosted: Wed May 11, 2011 1:18 am GMT    Post subject: Reply with quote

Very interesting question. It does depend somewhat on when you bought and how much you put in, but in our case (owner bought in 1999), the rent = mortgage payment + condo fee + expenses and repairs (barely). That is, considering that a lot more renovations have to be done to justify the rent as it is. If you bought the condo in 2003, the mortgage/rent would be higher by about 1/3.

But, if we are talking ANY rental that is nice (apartment/condo) vs. any house that is inhabitable, then the ratio can definitely be 2:1 including expenses (that is total cost of ownership : total cost of rent). Also not included into that is the house as depreciating asset (its nice when prices go up for 10 years, but they can also go down for 10 or even 20 years, even if by not going up much), while rents are pretty steady (compared to house price increases).
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Boston ITer



Joined: 11 Jan 2010
Posts: 269

PostPosted: Wed May 11, 2011 4:42 am GMT    Post subject: Reply with quote

GenXer wrote:
But, if we are talking ANY rental that is nice (apartment/condo) vs. any house that is inhabitable


I think the main problem, many observe, is the lack of equivalence in the metro area. For the most part, apartments/townhouses are available for rent but not so many houses. Thus, houses are practically excluded from the rental picture.

So while the house below has nearly same amount of sq footage and baths as my apartment... to purchase the following (with 20% down), within striking distance of the city [circa Alewife T or Bus 77-79], it'll be ~$2.8K per month (not including any additional expenses like prop taxes, maint, heating, etc).

http://realestate.yahoo.com/Massachusetts/Arlington/15-village-ln:b047aa26303e327d6b1765d16b9f3b6;_ylt=AmGEp_wU5XU.CaUfv.zPicpn47Qs

In contrast, my rent which includes heat/hot water plus garage, is still about half that. More importantly, I have to ability to move in a month's notice when a better opportunity in another city comes by.

I've sort of stopped looking these days, locally, as I'm finding properties in northern VT now trending towards ~$250K vs the $300-$450K prices during the bubble years. That's equivalent to $1.1K/month mortgage, which a normal Vermonter, working for let's say Green Mt Coffee or the Burlington Medical Ctr can afford w/o too much of a downside risk as it matches the rents for the Burlington area.
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Beaumontv
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PostPosted: Wed May 11, 2011 6:19 pm GMT    Post subject: Reply with quote

I ran the sales volumes from 2004 to present for Brookline 02446. Volumes have been pretty steady...until this year. Normally April sales are up from the dec-feb sales. This year the number of sales is heading down...and it is starting from a rate of around 8 per month.

It is very possible that there was a lag time effect from the crash. Just because the mortgage market freezes and the economy crashes, things don't have to react right away. People cash in 401k's, rent out the home, banks stall the foreclosure process, etc.

Someone made the point that few have the $250k for a down payment. Good question. Starting Spetzler 30th, fan and Fred are going to drop the top conforming limit from $729k to something closer to $417k. For condos, private banks want 30% or more down. Condos that are habitable with 3+ bedrooms are over $1m in my area 02446.

I doubt many people who make $416k have an extra $300k in thhe bank. At their tax rate, their take home is around $300k. If they didn't save for retirement or college, it would still be tough to cover that nut. Most of the doctors, lawys, PhDs etc in my affluent schooldistrict do not have it .those that own homes are under water so forget rolling over the mortgage. You really need people who make more like $1m a year to buy these homes. This is a very, very small number and those people live in Newton Hills where they have parking, lawns, and room to keep a bicycle or park an extra car. Brookline is a pain in the ass, frankly. A million dollar condo might have one parking spot.

I propose that the prices were supported by the easy credit. This stopped in 2008. That the effect was not apparent immediately could be simply an indication that it takes time for the market to react.

If sales drop in June of this year, the market will be similar to the market for MBS is 2008 -- illiquid. In an illiquid market, past prices have no meaning. If no one will buy (or no one can come up with the cash) then the real market price is much lower than average.
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Beaumontv
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PostPosted: Wed May 11, 2011 6:25 pm GMT    Post subject: Reply with quote

More simply put, if there are 100 homes for sale and only 30 people who can afford the down payment on them, prices must decline...or the market has to go illiquid. The latter assumes that all sellers can afford to stay meaning no layoffs, no job changes, no need to move, etc.

My calculations suggest that the inventory. Is about 2x of the pool of potential buyers. When th conforming limits and other changes go into effect on sept 30, 2011, the pool of buyers will get smaller.

This is true everywhere that homes run well above the conforming limits. How many people can buy a $1m home? And how many homes are on the market for $1m. Simple economics, more sells than buyers means price decline. We only had more buyers than sellers in the first place because of the liberal credit markets.
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