bostonbubble.com

[wherzmyhome]

man, something does not seem right. single family homes built after 1995 in moderate school districts are selling for the high 500s......although everything i read for the future of housing is contrary to the current housing prices. The only way out would be a high inflation rate which would make home prices worth the listing price today. are potential buyers waiting on the sidelines or just buying with this long term situation in mind? Still, it hurts to even think of mortgage on a $550k+ house, and what is would do to my savings and quality of life No room for emergencies or situations where you have to make do with one income.

[Guest]

[admin]

I agree that waiting for the perfect time to enter the market may be futile. Just look at a chart of Japan's housing market for the last few decades. When was a good time to enter the market there? By waiting, you do run the risk of the correction dragging on for ages. I've said it on here before, I would buy if the amount I would expect to lose from an additional correction would be low enough to not care about.

That said, I don't think that looking at the last 18 months as a positive indicator is warranted (even if I considered higher prices a positive thing). There were two major distortions in the market over that time period, both of which were most likely temporary. First, the home buyer tax credit corresponded very conspicuously with all of the ostensible evidence of "stabilization" recently. Granted, that might not be as directly applicable to the sales you cited given their much larger than normal prices. But the second factor is very applicable: unprecedented mortgage rates. I think that completely explains the anecdotes you cited. I would definitely not bet on those rates lasting, and the effect on prices will be in the opposite direction if and when rates rise. Again, I would buy anyway if I could stomach the potential loss, but that certainly rules out $million+ for me for the foreseeable future.

- admin

[Boston ITer]

Between Greenwich and Darien CT, prices have slid some ~30% from the '05 peak. These are the NYC metro north equivalent of Wellesley, Weston, & Winchester. This coincidences with the panic crash of '08 and its wrecking ball effect on hedge fund wealthier regions of the tri-state area.

For metro Boston, for the past ten years, we've had less growth in our mainstay sectors like software-IT, mutual fund, biopharma, etc, but have seen defense budgets grow stealthy by 300%.

http://www.boston.com/business/articles/2010/12/07/value_of_mass_defense_contracts_triples_in_decade/

What that tells me is that eastern MA has been buttressed by a Guns & Butter economy, contrary to everyone's belief that we're a commerce driven region. Right now, defense contractors have facilities in various states which can offset spiraling costs by moving capacity from MA to either TX, VA, CO, etc. Without Ted Kennedy at the helm, it's highly unlikely that future Congressional infusions will be renewed for the region.

Thus for the time being, MA is in the eye of the hurricane but as you know, any region which is heavily vested in the govt (as oppose to tradeable goods/services), for support will resemble post-bubble Japan where each temporary uptick may be followed by another downturn. So if you buy, you really could be buying for the long run.

[balor123]

First, I don't think it's fair to accuse us of providing no evidence. You won't find more detailed and regularly updated data on the Boston housing market anywhere. There's a plethora of links to housing studies and data that we've pulled out ourselves. Second, not all of us are claiming that you should wait to buy. As admin said, for must of us it's a question of when the time is right for us to own and whether we're willing to stomach the losses. We're simply just not jumping into the market as soon as economically feasible as people have done for the last decade. Third, we're generally a conservative bunch. I think most Americans, even today, buy as soon as they can and for as much as they can. With home values so high in Boston, we're just the kind of bunch that worries about Black Swans when you have to bet your future life savings on it.

My personal expectation is similar to admin's. Housing growth here will be anemic going forward and inflation adjusted I expect to lose a little year over year. However, in 2 years, when my wife graduates and my daughter needs public school, if I'm still here I likely will buy anyway. I don't think there's a good chance of much upside but there is significant downside risk. We simply discard the advice to buy as much as you can afford because housing can only go up. Be prudent - buy as little as you need. I'll probably go for a low end SFH or duplex in towns like Lexington or Newton myself in the 3x - 3.5x income range.

All things being equal, given the expectation of slow growth for a while, I'd rather wait until all things aren't equal anymore. You speak of housing buying happiness but that just tells me that you rent a place that's crummy. Unless you have $1mil+ new housing stock near Boston simply doesn't exist. Apartments continue to be built, however, so those tend to be fairly affordable.

[GenXer]

Ok, so all those greater fools buying 700k+ houses, and paying for them how exactly? The number of houses that cost 700k plus definitely outnumber the number of people in MA actually can afford one. And those who make $150k or less can barely afford $750k+ houses. A median house price in MA is 300k+ while the median salary for a family is around 50k-60k. This makes the price to salary ratio pretty large. We also know that most people don't have much savings, and you get trouble. Just because people are buying $750k houses doesn't mean they can afford them. In Newton, the median price is $700k and the median salary is $100k. Pretty unaffordable, but again, there is no shortage of greater fools. The question is, how long will this last?

Do this for kicks. Look up all those happy buyers and see what types of loans they took out and what downpayments they made. These could all be very wealthy people, or they could all be out on a limb. In any case, I wouldn't follow either one of the above.

The question is, what can YOU afford? What if everybody was buying $1M houses? These people are the same ones getting foreclosed on all over the country. No need to plunge hoping that prices will go up - if they don't, you will go bankrupt in no time at all. The next question is, why bother buying a house when you don't need it? When I have 3 kids, we'll need a bigger place. At that time, we'll decide whether to rent or buy. No such need right now - that's probably true for everybody who's renting.

By the way, somebody making $100k can have a greater take-home pay than somebody making $150k. If you are a $150k earner who's stretched to make house payments on a $800k house, chances are your 401k contributions are 0, and your savings rate is also near 0, and your monthly payments are probably 2x what somebody pays for a rental.

[Boston ITer]

[balor123]

I think you incorrectly assume that because people in Newton make $100k and own $700k houses that they therefore have large loans. Their loans may be smaller than you think because many people in these towns got there by rolling over debt from previous purchases. For example, someone I used to work with graduated about 4 years before me and has about the same income. He bought a condo in Brookline and sold it for a good $100k appreciation. He then sold that and bought a 3br condo which appreciated another $100k or so. So while the two of us make roughly the same amount of money, he is able to live in a place that costs twice as much as what I can afford. He is able to do it because he made a lot of money along the way and we now know that was a Ponzi scheme. The person who bought his first condo is probably in trouble because that person can't afford the 3br condo and the 1br condo is stagnating or has fallen a little bit. That person is stuck ni the 1br.

[Boston ITer]

[GenXer]

For every one who made out, there is at least one who lost money. Some are very much underwater. I'm talking about recent purchases. Ok, so somebody has an extra $100k, and they put it into an overpriced house, so it's at best a wash. It is no consolation that somebody has 'lower' payments, when the end result could be a huge loss. I also know some who did the same thing, but many think that because they have 'equity', this allows them to buy $1M+ houses. Just look at the loans people are taking out. I see plenty of $250k down for a $1.25M house. This is even worse because they simply abuse leverage to buy more expensive houses than they could otherwise afford. Doesn't make it more affordable by any stretch.

[balor123]

I should add that I think lower priced houses are purchased with high leverage. Anything under $500k is likely to be purchased in the 4x - 7x range, often times with low downpayment loans. Many are FHA but there's still evidence of people putting below 20%. That's what's been supporting the market now but I think mostly realized losses haven't been realized as GenXer suggests due to drop in interest rates and subsidies. The losers in these cases are savers. The only realized losses are those in distress. It will take time for those losses to be realized. They have to be slow and will be spread out over many years. Hence the prediction that housing a slow losing proposition right now.

[mpr]

Rather than droning on with endless (and largely meaningless) anecdotal
evidence, why don't we look at the recent data.

The MAR index has stabilized in the last two months, and the CS futures
confirm this (note that they are slightly behind so part of the period
for which MAR has data is just a projection for CS).

Also interesting is that the trendlines predicted by CS futures have been
consistently improving - say for 2011, 2012. Thanks to admin for collecting
all this.

It seems pretty silly to take a view of housing prices without having a view
on the economy. If the economy continues to recover next Spring, as
seems likely to me (certainly predicted by the stock market) then I would
predict a modest increase in prices next year.

Finally a word about the "irresponsibility" of high leverage. I've always wished people wouldn't go on about this quite so much on this site - surely
it depends on personal circumstances. But whatever you might think, if
people are continuing to leverage this way in the current economy you have
to realize its here to stay. You may not like it, but thats the way it is.
You'll either have to do the same or buy something more modest.

[admin]

[GenXer]

Actually, I agree that lower rates are here to stay. But that doesn't mean by any stretch of the imagination that we are recovering. Unemployment is still sky-high and is actually not getting much better. It has to decrease rapidly for any meaningful recovery, and it is arguably getting worse. We'll see in a couple of months what the numbers are after all the temporary hiring subsides. In fact, recovery will be signaled by much higher rates. This will allow some more questionable buys to unwind, and this will keep many people who can't afford to buy from doing so, further weakening the market. But arguably, this can be a long way off. In the meanwhile, we are very vulnerable to any type of pressure, be it rising commodity prices and any other economic shocks that can take us for a double dip. It's anybody's guess what will actually happen. But if nobody was able to use futures to predict this crash, nobody will be able to use futures to predict ANYTHING of any importance. This is a simple chicken and egg story - futures merely RESPOND to what has already happened, and they are simply bets people make based on their reading of the CURRENT situation. They have no idea what shocks can change prices, so their best guess has to be an extrapolation. We know that the reality can easily be altered in a short period of time, creating a new 'normal', which will alter the market in unpredictable ways.

[mpr]