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Boston Bubble Wrap: The Real Story for MA - Dec 2011
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PostPosted: Thu Jan 26, 2012 6:18 pm GMT    Post subject: Boston Bubble Wrap: The Real Story for MA - Dec 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 December 2011 on Tuesday, January 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 - December 2011

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



Some observations:

  • The real decrease from December 2010 to December 2011 was 6.74%.
  • 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 1999.
  • 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 in April for the first time since the end of the tax credit. Price declines are once again the norm after being briefly interrupted by buyers being misled into mistaking one of many backdoor bank bailouts for a good buying opportunity.
  • Prices are now 38.01% below the peak set in June 2005. This is the result of a 27.25% decline in nominal housing prices and a 14.79% decline in the purchasing power of the dollar. Note that this ignores seasonality.
  • The cumulative price decline from the beginning of the MAR's data (Feb 2003) is 23.07%, which is an annualized decline of 2.93%, again ignoring seasonality.


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 2012 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=3932 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=3932

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

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PostPosted: Fri Jan 27, 2012 11:24 pm GMT    Post subject: Thanks for the update Reply with quote

Party like its 1999!!!!
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PostPosted: Sun Jan 29, 2012 2:16 pm GMT    Post subject: Cambridge? Reply with quote

Love the posts on this blog, & so much appreciate the light you shed on local real estate. Here's a question I'd love any opinions about: I live in Cambridge & for non-financial reasons want to stay here. We rent, partly because we couldn't afford to buy when we moved here some years ago, and partly because it seemed obvious real estate was in a bubble.
Now I don't know what to make of things. We should be able to buy, since our incomes have gone up--but in Cambridge, both rents and the costs of buying seem to rise/sustain despite the recession. Is it still a bubble/was it ever, in Cambridge? Are university towns just recession-proof (and if so, what to do about it if you want/need to live in one)? Will there ever be a moment again where incomes and real estate costs match in a place like this? Or do we just concede they never do, and take out a gigantic mortgage while interest rates are low so at least we lock in a decent monthly payment for the next 30 years? I just can't figure this stuff out.
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PostPosted: Mon Jan 30, 2012 4:13 pm GMT    Post subject: Reply with quote

With Harvard and MIT, all the tech companies, and proximity to Boston,
I think Cambridge will always be expensive. A lot of people have been sitting on the sidelines waiting for the recession to do its job and push prices down. But places like Cambridge, some of the Boston neighborhoods (BB, BH, SE, WF), and the desireable suburbs will always be expensive.
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PostPosted: Wed Feb 01, 2012 6:22 pm GMT    Post subject: Reply with quote

We're gonna need a bigger chart.
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PostPosted: Sat Feb 04, 2012 3:58 pm GMT    Post subject: Reply with quote

Guest wrote:
With Harvard and MIT, all the tech companies, and proximity to Boston,
I think Cambridge will always be expensive. A lot of people have been sitting on the sidelines waiting for the recession to do its job and push prices down. But places like Cambridge, some of the Boston neighborhoods (BB, BH, SE, WF), and the desireable suburbs will always be expensive.


That a given neighborhood has reasons for being more expensive than others does not mean that it is not also overpriced and subject to correction. There is a fatal gap in justification if you jump from accepting that Cambridge should have some price premium straight to assuming that any price premium is therefore valid. If the actual price premium always has been and always will be justified, then how could prices in those towns have risen faster than inflation and incomes during the housing bubble? Shouldn't they have already been priced at where they are now (adjusted for inflation) all along?

distracted wrote:
Is it still a bubble/was it ever, in Cambridge? Are university towns just recession-proof (and if so, what to do about it if you want/need to live in one)? Will there ever be a moment again where incomes and real estate costs match in a place like this? Or do we just concede they never do, and take out a gigantic mortgage while interest rates are low so at least we lock in a decent monthly payment for the next 30 years? I just can't figure this stuff out.


Take a look at a graph of mortgage rates over the period in question, and I think that will help explain why some towns have given off the illusion of being recession proof. Since the bubble started bursting, rates have just kept consistently declining, falling from low to super low. This has allowed people to use more and more leverage. It is my contention that historically low interest rates are a single point of failure for most high priced towns in the area. Just take a look at the income distribution histograms for a town and compare them to the home price distribution - this site has them: http://www.city-data.com/city/Newton-Massachusetts.html They almost never line up in a way that could be sustained if interest rates rose even to merely their historical average, even in most "immune" towns.

Taking out a gigantic mortgage is the last thing I would do, especially now, unless you know for sure that you will live there for the duration of the mortgage. Given that the average owning time in the US is 7 years, that's not something I would plan on. I have a hard enough time predicting what my job and family size requirements will be like one year in the future - forget about 30.

Furthermore, for a given monthly payment, higher interest rates are preferable to lower interest rates. There is the already implied reason that it is preferable because higher rates mean that the risk of price declines resulting from rising rates is lower. However, there is also the less obvious reason that you build equity faster when rates are higher: http://www.cepr.net/index.php/publications/reports/the-housing-affordability-index-a-case-of-economic-malpractice/

All that said, I am not waiting for rates to rise myself. While that would be ideal, it could take decades (see Japan). Instead, I am working backward - deciding how much I would be willing to lose over a 7 year period, using what percentage price decline would be suggested by history if rates returned to their average plus one standard deviation, and deriving a maximum purchase price from that. That rules out the oft cited "immune" towns (for now), but I haven't thought of a good argument for why this is too conservative of an approach yet.

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PostPosted: Sun Feb 05, 2012 2:58 pm GMT    Post subject: Japan vs USA Reply with quote

Is it possible that the pressure on interest rates in the USA will heat up faster than Japan. In Japan's case didn't they have lots of in-country purchasers of their Debt - meanwhile we here in the US finance our government through lots of foreign Treasury buyers. I'm wrong several times a day - but, many think we are at the bottom for bond rates - it will be interesting to see if even an incremental increase in bond rates impacts prices in the Boston area.
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PostPosted: Sun Feb 05, 2012 8:38 pm GMT    Post subject: Reply with quote

admin wrote:
Guest wrote:
With Harvard and MIT, all the tech companies, and proximity to Boston,
I think Cambridge will always be expensive. A lot of people have been sitting on the sidelines waiting for the recession to do its job and push prices down. But places like Cambridge, some of the Boston neighborhoods (BB, BH, SE, WF), and the desireable suburbs will always be expensive.


That a given neighborhood has reasons for being more expensive than others does not mean that it is not also overpriced and subject to correction. There is a fatal gap in justification if you jump from accepting that Cambridge should have some price premium straight to assuming that any price premium is therefore valid.


I don't know that this is exactly the argument. I think the point is that, for various reasons the industries which make Cambridge and nearby areas attractive have been relatively resilient to the effects of the recession.
The popping of the bubble still had an effect on prices in Cambridge etc,
but at least it wasn't further impacted by significant job losses.

More generally I think the argument that areas near high growth industries should command increasing (though not at bubble rates) premiums has merit. There is widening gap between the earning power of people in those industries and the rest of the population.

admin wrote:
However, there is also the less obvious reason that you build equity faster when rates are higher: http://www.cepr.net/index.php/publications/reports/the-housing-affordability-index-a-case-of-economic-malpractice/


This is wrong, or at the very least misleading. Obviously, all else being equal you build equity slower with a higher rate. With a fixed payment amount, the more you spend on interest, the less you can spend on principle. What I assume you're referring to is the table in the report which shows that equity rises faster in a certain higher inflation rate scenario.

But there are various assumptions built into that - first the level of interest rates at a given inflation rate (the table says 6% at 2% inflation, whereas rates are now at about 4%), and secondly that home prices will rise at the rate of inflation.
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PostPosted: Sun Feb 05, 2012 9:16 pm GMT    Post subject: Re: Japan vs USA Reply with quote

Anonymous wrote:
Is it possible that the pressure on interest rates in the USA will heat up faster than Japan. In Japan's case didn't they have lots of in-country purchasers of their Debt - meanwhile we here in the US finance our government through lots of foreign Treasury buyers. I'm wrong several times a day - but, many think we are at the bottom for bond rates - it will be interesting to see if even an incremental increase in bond rates impacts prices in the Boston area.


I have no idea how to predict the pressure on interest rates, so yes, I would not rule out that possibility.

mpr wrote:

More generally I think the argument that areas near high growth industries should command increasing (though not at bubble rates) premiums has merit. There is widening gap between the earning power of people in those industries and the rest of the population.


That does sound like a plausible hypothesis, but like I said earlier, the income distribution histograms for many of the towns in question don't usually show the same bulge in incomes as in housing prices (a few do).

mpr wrote:

This is wrong, or at the very least misleading. Obviously, all else being equal you build equity slower with a higher rate. With a fixed payment amount, the more you spend on interest, the less you can spend on principle.

You're implying that the only way to build equity is to pay principle. I suppose "build" might not be the best word for increasing equity through other means, so call it what you wish, though I don't think it's wrong or misleading. Yes, you gain equity by paying principle, but you also gain equity when the real value of the principle is reduced by inflation. (Appreciation of the property would also increase equity independent of you paying principle, though this is not a necessary condition.)

mpr wrote:

What I assume you're referring to is the table in the report which shows that equity rises faster in a certain higher inflation rate scenario.

But there are various assumptions built into that - first the level of interest rates at a given inflation rate (the table says 6% at 2% inflation, whereas rates are now at about 4%), and secondly that home prices will rise at the rate of inflation.

Yes, there are assumptions built into the table, and the assumptions are actually in favor of the low rate scenario to emphasize the point. I'd expect that in reality the real interest rate should be closer between the two scenarios. Assuming home prices generally rise with inflation seems like it a very reasonable assumption given Shiller's 100+ year study, although the bubble has obviously disrupted that.

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PostPosted: Mon Feb 06, 2012 4:47 pm GMT    Post subject: Reply with quote

A unit in the building next door to me in Boston just sold last month
for $1.7 M. The previous owners paid $1.25 M in 2003.
What accounts for this resilience in this market in the "immune neighborhoods" and the "immune towns"? (Cambridge being one of them, I suspect)
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PostPosted: Mon Feb 06, 2012 5:29 pm GMT    Post subject: Reply with quote

Guest wrote:
A unit in the building next door to me in Boston just sold last month
for $1.7 M. The previous owners paid $1.25 M in 2003.
What accounts for this resilience in this market in the "immune neighborhoods" and the "immune towns"? (Cambridge being one of them, I suspect)


I wouldn't extrapolate from just one property, but maybe it could be a starting point. Can you look up the sales at masslandrecords.com? See what the financing was like both times - I'm going to guess that the mortgage rate was significantly lower the second time around, so at least part of that "resilience" is simply more leverage. Also, Google the name of the latest buyer to see if you can figure out what industry they work in. A few industries are doing quite well, for now (not necessarily due to their own merits - e.g., bailout recipients in finance).

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PostPosted: Mon Feb 06, 2012 5:35 pm GMT    Post subject: Reply with quote

I'm not. This one example seems a bit extreme, but I track the
property values fairly thoroughly and there are almost no forclosures
or short sales in the BB, SE, BH. Property values are fairly stable.
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PostPosted: Tue Feb 07, 2012 12:55 pm GMT    Post subject: Reply with quote

Without any solid proof, I imagine the same will be true in Boston. From Economist Lexington Blog -

http://www.economist.com/node/21546010

If you look at "SuperZip" area like Brookline, Lexington, etc, where its population is highly educated (70-75%+ bachelor degree or above)

"A great cultural gap separates the elite from other Americans. They seldom watch “Oprah” or “Judge Judy” all the way through. In fact they do not watch much television at all. They eat in restaurants, but not often at Applebee’s, Denny’s or Waffle House, chains that cater to the common taste. They may take The Economist, with the New York Times, Wall Street Journal, and perhaps the New Yorker or Rolling Stone. They drink wine and boutique beers (and can discuss them expertly) but only in moderation, and they hardly ever smoke cigarettes."

These top 5% elite class is highly educated, with safe and often quite high earnings. I don't see how these neighborhoods' house price will suddenly collapse.
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PostPosted: Tue Feb 07, 2012 1:53 pm GMT    Post subject: Reply with quote

CL wrote:
These top 5% elite class is highly educated, with safe and often quite high earnings. I don't see how these neighborhoods' house price will suddenly collapse.


Sudden collapse versus resilience is a false dichotomy with ample room in the middle. I am contending that the perceived resilience would not survive a rise in interest rates, not that this would necessarily manifest itself as a sudden collapse - my (wild) guess would be that it would be more of a slow, drawn out erosion. Highly educated people take out mortgages too. And there are other risks which could put downward pressure on prices over the long term too, which probably won't matter if you only want to avoid a sudden collapse but may matter if you use the ostensible resilience as a justification for stretching your own budget. (I also don't think that the earnings at the top actually are safe for a lot of individuals, but I suppose it's the aggregate that matters if you're looking at the neighborhood.)

My own conclusion from this is that I would personally approach buying with the expectation of losing money, especially in real terms, no town excluded. I would treat it as an expense rather than an investment. That should be the default anyway, given the amount of leverage involved makes buying the antithesis of diversification, and diversification is essential in actual investment.

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PostPosted: Wed Feb 08, 2012 2:22 am GMT    Post subject: Elite Towns - impact of family wealth Reply with quote

I think people aren't considering family wealth for a significant minority of people that buy into "immune towns". Lets face it there are a lot of super educated in Massachusetts from Lexington - or Weston - and they have lots of cash that they do often give to their children. Imagine a couple in there late fifties, who are well educated, husband and wife both earning $100,000 (and probably more) 0r a family income of $200,000 and higher. This same couples housing costs are nil because they probably bought their home in the early 1980s when interest rates were high and R/E values low. Money has been piling up in their savings accounts. Their children are newly married and handing the kids $200,000 or $300,000 is not a big deal for a significant number of these well heeled families. These families value education and they will do what they can to ensure their Grand children get the best public schools available in Massachusetts. Remember, the 'mmune" towns are real fairly small number of towns with lower populations, As a result money flows from a smaller number of wealthy families may have a real impact - no data to support my educated guess - its just a theory.
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