bostonbubble.com Forum Index bostonbubble.com
Boston Bubble - Boston Real Estate Analysis
 
 FAQFAQ   SearchSearch   MemberlistMemberlist   UsergroupsUsergroups   RegisterRegister 
 ProfileProfile   Log in to check your private messagesLog in to check your private messages   Log inLog in 

 
Go to: Boston real estate bubble fact list with references
More Boston Bubble News...
DISCLAIMER: The information provided on this website and in the associated forums comes with ABSOLUTELY NO WARRANTY, expressed or implied. You assume all risk for your own use of the information provided as the accuracy of the information is in no way guaranteed. As always, cross check information that you would deem useful against multiple, reliable, independent resources. The opinions expressed belong to the individual authors and not necessarily to other parties.

Boston Bubble Wrap: The Real Story for MA - Apr 2011
Goto page 1, 2  Next
 
Post new topic   Reply to topic    bostonbubble.com Forum Index -> Greater Boston Real Estate & Beyond
View previous topic :: View next topic  
Author Message
admin
Site Admin


Joined: 14 Jul 2005
Posts: 1823
Location: Greater Boston

PostPosted: Fri May 27, 2011 12:51 am GMT    Post subject: Boston Bubble Wrap: The Real Story for MA - Apr 2011 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 April 2011 on Tuesday, May 24th. 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 - April 2011

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



Some observations:

  • The real decrease from April 2010 to April 2011 was 11.06%.
  • Prices have resumed their downward trend after a period of twelve consecutive year over year increases. Those were the only year over year increases since August 2005 and they all occurred consecutively and after the most recent renewal and expansion of the home buyer tax credit. The moving average turned negative this month for the first time since the end of the tax credit. Price declines are once again the norm after being briefly interrupted by the government playing Weekend at Bernie's with the housing market in what was actually one of its many backdoor bank bailouts.
  • Real prices are once again lower than the same month in every year in the time period covered by The MAR. Additionally, the real median has plummeted back below the estimates for prior years and is now the lowest it has been since the estimate for 2000.
  • Prices are now 35.94% below the peak set in June 2005. This is the result of a 25.35% decline in nominal housing prices and a 14.18% decline in the purchasing power of the dollar.
  • The cumulative price decline from the beginning (Feb 2003) is 20.50%, which is an annualized decline of 2.77%.


Of note in this month's release from The MAR, their historical data for past comparisons has been revised substantially. The nominal median for March 2011 was revised up from $273,475 to $275,000. The nominal median for April 2010 was also revised up from $295,000 to $305,000.

Also of much significance this month, the volume of sales has changed quite a bit from last year. Single family home sales plunged 20.0% year over year in April. This makes the median even less reliable than usual given that the mix of what is selling is almost certainly changing, and that necessarily distorts the median as a consequence of how it is calculated.

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 2011 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=3467 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=3467

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

- admin
Back to top
View user's profile Send private message Send e-mail Visit poster's website
Renting in Mass



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

PostPosted: Fri May 27, 2011 6:44 pm GMT    Post subject: Reply with quote

Quote:
Price declines are once again the norm after being briefly interrupted by the government playing Weekend at Bernie's with the housing market...


LOL, great line Laughing
Back to top
View user's profile Send private message
admin
Site Admin


Joined: 14 Jul 2005
Posts: 1823
Location: Greater Boston

PostPosted: Fri May 27, 2011 7:18 pm GMT    Post subject: Reply with quote

Renting in Mass wrote:
Quote:
Price declines are once again the norm after being briefly interrupted by the government playing Weekend at Bernie's with the housing market...


LOL, great line Laughing


Thanks. If I were motivated, I'd fire up my image editor and make a movie poster using this Bernie to emphasize the Ponzi nature of the market, or maybe make it "Weekend at Barney's" since Barney been such a big proponent of government involvement in the housing market in the past.

- admin
Back to top
View user's profile Send private message Send e-mail Visit poster's website
Renting in Mass



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

PostPosted: Fri May 27, 2011 8:09 pm GMT    Post subject: Reply with quote

That poster would be awesome on so many levels.

On a more serious note, what is your gut telling you about the housing market right now? When I look at just the local housing market, I feel like we're closer to the bottom than the top. But when I try to look at the macro picture (Fed policy, interest rates, etc.), I go in circles and feel like I have no sense of what the future holds.
Back to top
View user's profile Send private message
admin
Site Admin


Joined: 14 Jul 2005
Posts: 1823
Location: Greater Boston

PostPosted: Fri May 27, 2011 8:34 pm GMT    Post subject: Reply with quote

Renting in Mass wrote:

On a more serious note, what is your gut telling you about the housing market right now? When I look at just the local housing market, I feel like we're closer to the bottom than the top. But when I try to look at the macro picture (Fed policy, interest rates, etc.), I go in circles and feel like I have no sense of what the future holds.


My gut is telling me that because the ratio of monthly payment to income is back to normal now (though the ratio of price to income is still way above normal) the housing market will just follow the business cycle of the general economy until interest rates change. Once rates change, their influence will dominate, and massively so if they get anywhere close to even just the historical average. The problem is, I really don't know when rates will change. It could be months, it could be years, it could be decades. My current strategy is to decide what an acceptable loss would be and then work backward from that to establish an acceptable maximum purchase price in various rising interest rate (and resultant falling price) scenarios. I'm working on a Monte Carlo simulator for that.

- admin
Back to top
View user's profile Send private message Send e-mail Visit poster's website
Renting in Mass



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

PostPosted: Sat May 28, 2011 12:29 pm GMT    Post subject: Reply with quote

Quote:
the housing market will just follow the business cycle of the general economy until interest rates change. Once rates change, their influence will dominate, and massively so if they get anywhere close to even just the historical average. The problem is, I really don't know when rates will change. It could be months, it could be years, it could be decades.


Yeah, that's how I feel. And since I have no idea what's going to happen with interest rates in the short/medium term, I'm leaning towards buying. At least the falling knife is closer to the ground now...
Back to top
View user's profile Send private message
GenXer



Joined: 20 Feb 2009
Posts: 703

PostPosted: Sun May 29, 2011 5:27 pm GMT    Post subject: Reply with quote

Actually, right now the prices are 'stable'. When interests rates rise (only a matter of time now), prices will start falling sharply. Only the availability of cheap credit keeps prices from falling further.
Back to top
View user's profile Send private message
Renting in Mass



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

PostPosted: Tue May 31, 2011 1:33 pm GMT    Post subject: Reply with quote

Quote:
Actually, right now the prices are 'stable'.


Prices were down 8.5% YOY in April. That's stable?

Quote:
When interests rates rise (only a matter of time now), prices will start falling sharply. Only the availability of cheap credit keeps prices from falling further.


I agree, but I'm not convinced that interest rates are going to rise in the short term. The Fed knows as well as we do that rising rates would kill the housing market.
Back to top
View user's profile Send private message
Beaumontv
Guest





PostPosted: Tue May 31, 2011 3:50 pm GMT    Post subject: monte carlo Reply with quote

admin, if you are calculating the loss range probability, monte carlo is fine. I would suggest you assess the loss on a leverage basis. there is an inflation trap you have to watch as well. this will be sort of a long term american put option model.

Let's say you decide that rates will go up a lot (a la 1983). In this inflationary environment, you want to have as large a loan as possible so that you can pay it off with highly devalued dollars in the future. $100,000 owed today might be a small sum in ten years when the dollar is worth less. So a bigger loan is a good play.

However, if you look at the loan as a leveraged investment, it might not be such a good idea. Let's say you put $1,000 down on that $100,000 mortgage. If the home price increases by 2% (or $2k), you just made a 100% profit on your $1000 investment. hooray! but if it drops $10,000, you lost 900%. Not so good.

The point is that the more you borrow, the more you amplify your losses. This is the same as when a hedge fund borrows money to make investments. You wouldn't borrow from your credit card to buy gold, right?

But you also have to offset the gain/loss with the inflationary effect. if the scenario in your monte carlo simulator includes inflation, then you might have certain "gains" by having a fixed rate mortgage if rates increase. Then you have to offset this with the loss of the decline in housing prices.

Housing prices might stay flat during high inflation. Whatever the assumption, make sure you capture teverything or the model will have bad blind spots. Let us know if you find a balance point.

I keep thinking of Zimbabwe. you could have taken out a $1 trillion mortgage in 2005 and paid it off for the cost of a stick of chewing gum in 2010. At that point, leverage and everything else mattered little.
Back to top
balor123



Joined: 08 Mar 2008
Posts: 1204

PostPosted: Tue May 31, 2011 11:36 pm GMT    Post subject: Reply with quote

Americans are too accustomed to thinking of their economy as a closed system: rising rates => rising wages. The two are not strictly related. Prices and interest rates can rise without wages. In that scenario, leveraging up is a bad idea because you are trapped with a home that you have trouble paying off and which you can't sell to someone else. With a large trade gap, this scenario is a real possibility.
Back to top
View user's profile Send private message Send e-mail
GenXer



Joined: 20 Feb 2009
Posts: 703

PostPosted: Wed Jun 01, 2011 1:22 am GMT    Post subject: Reply with quote

That's right - worst case, rates rise, wages don't.

Don't kid yourself - Fed has very little actual control. They can lose it faster than we can say 'inflation'. And then all bets are off (or in that case I hope that I have enough cash to buy 30-year treasuries yielding 15%).

Compared to what prices can do in the future, I guess 8% is 'stable'. The error rate on that 8% is huge though, so these prices are far from stable at this point. I was thinking the 'immune' towns like Newton. People continue to believe that prices can never go down further.

Beaumontv: Monte Carlo with what statistics? House prices have very fat tails, and unless you use at least a semblance of a fat-tailed distribution, your results will be worse than useless. However, making it much more complex is that the actual distribution is multifractal (i.e. many different distributions alternating between different regimes). For stress-testing purposes you may be fine, but none of these results will mean much. Besides, probabilities are useless since we don't observe them. What you want are conditional expectations (probability of a loss greater than a certain amount).
Back to top
View user's profile Send private message
admin
Site Admin


Joined: 14 Jul 2005
Posts: 1823
Location: Greater Boston

PostPosted: Wed Jun 01, 2011 12:43 pm GMT    Post subject: Re: monte carlo Reply with quote

Beaumontv wrote:
admin, if you are calculating the loss range probability, monte carlo is fine. I would suggest you assess the loss on a leverage basis.


Yes, all of the inputs and outputs are ranges / probability distributions. Leverage will definitely be considered. Studying the inflation effects that you brought up was actually one of the main reasons I started on the simulator.

balor123 wrote:
Americans are too accustomed to thinking of their economy as a closed system: rising rates => rising wages. The two are not strictly related. Prices and interest rates can rise without wages. In that scenario, leveraging up is a bad idea because you are trapped with a home that you have trouble paying off and which you can't sell to someone else. With a large trade gap, this scenario is a real possibility.


Yes, that's a good point. Additionally, even if wages in general are rising with inflation, that does not mean your wages will too. Individual industries can very easily deviate from aggregate trends.

- admin
Back to top
View user's profile Send private message Send e-mail Visit poster's website
Beaumontv
Guest





PostPosted: Thu Jun 02, 2011 9:42 pm GMT    Post subject: Reply with quote

GenXer

for multiple regimes there are a few ways to tackle it (bayesian distributions for example) which I wont get into. My point wasn't to get into the leptokurtosis or polymodal or fractal nature of market simulations. Rather I wanted to point out the way one profits from having debt in inflation and the amplification of losses from leverage. You guys are wayyyyy more sophisticated than most folks in that you thought of this already. Usually I get a bunch of blank stares when I mention either one of these factors.
Back to top
GenXer



Joined: 20 Feb 2009
Posts: 703

PostPosted: Thu Jun 02, 2011 10:24 pm GMT    Post subject: Reply with quote

Yes, admin is very thorough. I won't let you off the hook too easily though. Bayesian won't work here. Predictions are futile.

There is no math as of this moment that can tackle a multifractal random process. Nothing even close. There is never enough data to accurately predict your slopes, and no math to figure out when regimes switch. I keep my hand on the pulse, and I have to disappoint you.

All we can do is predict the past (even that is near impossible). This is why I am always open to bets on the S&P Case Schiller index - my bet is that nobody can consistently predict the future outcome (thus, I bet that if anybody tries, they'll be wrong most of the time, and by orders of magnitude).
Back to top
View user's profile Send private message
BeaumontV
Guest





PostPosted: Mon Jun 06, 2011 7:57 pm GMT    Post subject: Reply with quote

GenX

No one can predict the future. I think we can agree. what I think the admin wants to do is get odds on the future, which we can do. Given current events, the probabilities for some outcomes get better or worse.

Just because one cannot predict does not mean that calculating probabilities is futile. I think the admin is just trying to see what is more or less likely. But I do not want to speak for admin.
Back to top
Display posts from previous:   
Post new topic   Reply to topic    bostonbubble.com Forum Index -> Greater Boston Real Estate & Beyond All times are GMT
Goto page 1, 2  Next
Page 1 of 2

 
Jump to:  
You can post new topics in this forum
You can reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum


Forum posts are owned by the original posters.
Forum boards are Copyright 2005 - present, bostonbubble.com.
Privacy policy in effect.
Powered by phpBB © 2001, 2005 phpBB Group