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Boston Bubble Brief: The Real Story for MA - Jul 2007

 
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PostPosted: Fri Aug 24, 2007 1:06 pm GMT    Post subject: Boston Bubble Brief: The Real Story for MA - Jul 2007 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 July 2007 on Tuesday, August 21st, six days ahead of schedule. 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:

Full Price History




Change in Median Price From One Year Earlier, February 2004 - July 2007

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



Some observations:

  • While The Massachusetts Association of Realtors reported a small price increase of 1.3%, prices actually declined when inflation is accounted for.
  • The real decline from July 2006 to July 2007 was 0.78%.
  • Prices are now 9.08% below the peak set in June 2005.
  • The year over year decline in July was less severe than normal, falling outside the normal range, along with two other months so far this year.
  • The moving average is now a little less than two standard deviations below zero, whereas it has been over two standard deviations below zero for awhile. This indicates that declines have been moderating. However, it is premature to assume that this trend will continue given recent and upcoming events which haven't had time to propagate to the end of the sales pipeline yet, such as the recent evaporation of jumbo loans and the cresting wave of ARM resets.

As as been the case for at least several months now, The Warren Group reported greater declines than The Massachusetts Association of Realtors. The discrepancy this month was particularly pronounced as The MAR reported a nominal increase of 1.3% while the The Warren Group reported a substantial decline of 4.6% on equivalent data, with nominal prices falling from $338,400 in July 2006 to $323,000 in July 2007. Given that The MAR reported the July 2007 median as the much higher $365,775, the continued monthly discrepancies between the two groups have apparently been accumulating and The MAR's latest number is now a glaring 15.39% above The Warren Group's. There was already some discussion as to whether this could be the result of reduced activity in the lower end of the price spectrum due to the recent subprime implosion, although it is worth noting that both groups reported an increase in the number of sales.

The MAR also changed their own data. The median price for July 2006 is listed as $361,250 in their latest report, whereas it was listed as $361,750 last year. Without this change, the real year over year decline would have been 0.91% but is now 0.78%. This may be related to a change in their reporting method for the South Shore and Southeast regions of the state.

The S&P/Case-Shiller Index for Boston is likely superior to the data from both The Massachusetts Association of Realtors and The Warren Group as it corrects for many flaws that are inherent when only using 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. 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 charts 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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PostPosted: Fri Aug 24, 2007 3:06 pm GMT    Post subject: Thanks Reply with quote

Once again, thanks for doing this. You have no idea how helpful your page has been to me over the last year - preventing me from making several stupid decisions. Keep it up.
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PostPosted: Mon Aug 27, 2007 7:12 pm GMT    Post subject: Re: Thanks Reply with quote

verjeep wrote:
Once again, thanks for doing this. You have no idea how helpful your page has been to me over the last year - preventing me from making several stupid decisions. Keep it up.


You're welcome. I'm glad you've found it useful.

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PostPosted: Tue Aug 28, 2007 3:22 am GMT    Post subject: CPI-NU adjustment question Reply with quote

I like the concept of the housing market graph that you produce, which shows MAR prices adjusted by the CPI-NU. However, I keep wondering what it represents if the CPI-NU has house prices as a major component. Is that circular logic or what am I misunderstanding here? Do you know if house prices are a major component of the CPI-NU? Would it make sense instead to adjust for household income or something not itself tied to rising house prices?
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PostPosted: Wed Aug 29, 2007 5:41 pm GMT    Post subject: Reply with quote

anonymous_ wrote:
I like the concept of the housing market graph that you produce, which shows MAR prices adjusted by the CPI-NU. However, I keep wondering what it represents if the CPI-NU has house prices as a major component. Is that circular logic or what am I misunderstanding here? Do you know if house prices are a major component of the CPI-NU? Would it make sense instead to adjust for household income or something not itself tied to rising house prices?


Housing prices are not a component of the CPI*. Instead, the cost of shelter within the CPI* is based on rents. That is directly applicable to properties which actually are rental properties. For primary residences which are owned, The Bureau of Labor Statistics estimates what the rental value of homes are by asking sampled owner households:

Quote:


If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?



There is an overview of the methodology here: http://www.bls.gov/cpi/cpifact6.htm

This approach may seem like it wouldn't necessarily be very accurate since owners' subjectivity could seep in, but The BLS argues that the other methods are even worse. There is a detailed paper justifying their approach at http://www.bls.gov/bls/fesacp1120905.pdf (PDF). The various potential approaches that they cover are:

Quote:


(1) Acquisitions approaches;
(2) Payments or cash flow approaches (the pre-1983 "asset-price" approach of the BLS is a member of this set);
(3) User cost approaches; and
(4) Rental equivalence approaches (post-1983 BLS practice is a member of this set).



The cost of shelter does indeed make up a large part of the CPI*. As of December 2006, rent of a primary residence made up 5.93% of the CPI and owners' equivalent rent of a primary residence made up 23.83%. I would guess that the percentages for the CPI-NU are relatively close to that.

If purchase prices were used instead of rents, I think you would be right that this would cause a distortion when adjusting The MAR data. I believe that would cause housing price changes to be understated. However, I don't think this applies when only rents are used. My guess (I haven't run the numbers for this) is that rents in Boston have been rising roughly in line with prices for other good and services and wouldn't therefore suggest that an examination for distortion would be necessary.

As for your suggestion of comparing prices to incomes, that is an excellent suggestion, and has actually been done already:

http://www.bostonbubble.com/forums/viewtopic.php?t=141

Unfortunately, there is a pretty big lag in the income data that was used for that report and it is also annual instead of monthly, so it wouldn't be directly usable for adjusting The MAR data. I suppose some sort of estimation could be used to convert the annual data into monthly data, but I would prefer a source which is inherently monthly (I don't know of one at this time, though I haven't looked very hard for one).

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