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Boston Bubble Wrap: The Real Story for MA - Apr 2012

 
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PostPosted: Sat May 26, 2012 6:34 pm GMT    Post subject: Boston Bubble Wrap: The Real Story for MA - Apr 2012 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 for Boston is a superior data source.

The Massachusetts Association of Realtors released their data for April 2012 on Tuesday, May 22nd. 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 2012

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



Some observations:

  • The real increase from April 2011 to April 2012 was 0.38%.
  • The was the first real year over year increase since August 2005 which might have occurred naturally. There was a one year period in the interim where most months saw year over year increases, but those increases were the result of buyers being misled into mistaking one of many backdoor bank bailouts (the latest homebuyer tax credit) for a good buying opportunity. However, it should be noted that the expired tax credit may still be responsible for this and near term increases / smaller decreases via secondary effects. The year over years numbers now are comparing prices now with 2011, and 2011 sales were likely depressed by the tax credit pulling sales which would have otherwise occurred in 2011 earlier into 2010.
  • The moving average for the year over year change is still solidly negative, so price declines are still the norm for now. This is not to say that price declines will continue, merely that short term price increases are not a reliable expectation yet.
  • Prices are now 36.62% below the peak set in June 2005. This is the result of a 24.43% decline in nominal housing prices and a 16.13% 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 21.34%, which is an annualized decline of 2.59%, 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=4117 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=4117

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

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PostPosted: Sun May 27, 2012 10:03 pm GMT    Post subject: Impact of Interest rates Reply with quote

Do your calculation include the impact of interest rates?

Sadly, the average Citizen does not understand the Linkage between Interest Rates and Real Estate. Compare the Interest Rate from two years ago to the interest rate today - what will happen if Interest rates are forced to normalize!!!! Why does everyone think that Now if THE time to buy a Home......haven't we seen this film before.

Weekending 5/7/2010 Mortgage Rates were:
30 year FRM 5.0
15 year FRM 4.36
1 year ARM 4.07

Weekending 5/4/2012
30 year Fixed 3.84
15 year FRM 3.07
1 year ARM 2.70
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PostPosted: Sun May 27, 2012 10:33 pm GMT    Post subject: Reply with quote

Quote:
Do your calculation include the impact of interest rates?

...

Why does everyone think that Now if THE time to buy a Home......


Oh, I completely agree that historically low interest rates are a single point of failure for housing prices in just about all towns. However, it is also possible that rates will remain exceedingly low for decades, a la Japan. I would guess that we are at or near a nominal (and possibly real) bottom until 1) the local economy worsens or 2) mortgage rates rise. This does not translate into now being THE time to buy. I would say buy conservatively or don't buy because the mortgage rate risk is substantial, even though it is not inevitable.

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PostPosted: Sun May 27, 2012 11:42 pm GMT    Post subject: Interest Rates - Home values Reply with quote

Regarding Japan VS USA -

Didn't Japan have the advantage of lots of saving and lots of buying of Japan Treasuries internal to Japan (very few Foreign buyers).

The USA being in need of lots of outside the USA Treasury buyers - you would expect that interest rates may rise is a few years and a decade of low interest rates is next to impossible.

Would you agree - or am I over simplifying the problem......

All I know is the feeding frenzy I see around me is very scary. Students and Home Buyers are binging on Credit like its 19999.....and no one seems to think a surprise economic event is possible.

Its very possible that I'm a worry wart and all my worry is for naught!
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PostPosted: Mon May 28, 2012 1:23 pm GMT    Post subject: Reply with quote

Quote:

The USA being in need of lots of outside the USA Treasury buyers - you would expect that interest rates may rise is a few years and a decade of low interest rates is next to impossible.

Would you agree - or am I over simplifying the problem......


We've already had more than a decade of low interest rates, so I would consider another decade both possible and precedented. Yes, the US does need a lot of foreign Treasury buyers. For the time being, we have exactly that because the US dollar is the sole reserve currency for the rest of the world. I could see that continuing until a viable alternative is available, which could take quite awhile. That isn't to say that the US is guaranteed continued low rates for the near to medium term, just that it is one possibility. Higher rates are possible too, even with the US remaining the sole reserve currency. For instance, those countries buying Treasuries could curtail their demand because of declines in their own economies or in an effort to redirect their savings toward building their own infrastructure.

One thing I wonder is if higher rates will even be necessary for rates to effect change. I've noticed that over the last several decades, inflation and interest rates have been continually falling. I believe that has set the foundation for a lot of economic trends and conventional wisdom forged during that time. Maybe rates will remain ultra low for an extended period of time, but what happens when they simply stop falling? Nobody seems to be talking about the second derivative (Shiller did in his book, but only to say that people are very bad at judging changes in rates of change).

Quote:

All I know is the feeding frenzy I see around me is very scary. Students and Home Buyers are binging on Credit like its 19999.....and no one seems to think a surprise economic event is possible.

Its very possible that I'm a worry wart and all my worry is for naught!

I think you are very right to be thinking longer term and considering the larger economic picture like this. Buying a home is the single biggest purchase most people will ever make and the typical cost would take nearly half a lifetime to pay off. I would guess that it also dominates most people's net worth (the antithesis of diversification). For such a consequential decision, I think it would be reckless to suggest that somebody just turn their brain off because they are worrying about the impact.

The scary thing is, it wouldn't even take a "surprise" economic event to send the economy back into decline. What about the dissolution of The Euro? Surely that could not be considered a surprise, were it to happen. (Of course, that won't keep people from feigning surprise afterward - like Frank, et al, claimed that nobody could have seen the housing bust coming beforehand, even though many people did.)

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PostPosted: Tue May 29, 2012 12:55 pm GMT    Post subject: Falling Interest Rates - for my entire adult life Reply with quote

I think you are on to something - what if interest just remain flat?

quote:
"One thing I wonder is if higher rates will even be necessary for rates to effect change. I've noticed that over the last several decades, inflation and interest rates have been continually falling. I believe that has set the foundation for a lot of economic trends and conventional wisdom forged during that time. Maybe rates will remain ultra low for an extended period of time, but what happens when they simply stop falling? Nobody seems to be talking about the second derivative (Shiller did in his book, but only to say that people are very bad at judging changes in rates of change)."
**end quote**

In my circle of friends I know lots of well educated people and no one seems to notice that as House prices have been rising since the early 1980s, the prime Interest rates have been falling. Every one seems to understand that Real Estate was the way to Wealth creation, but no one seems to see that long term US Treasuries have been a boom to investors and Wall Street (and Mutual Fund Managers, and Insurance companies, and Defined Pension plans).

A United States in which interest rates stay flat will make the home prices look like they are falling, create income problems from Insurance companies, force Mutual Fund Companies to become more reliant on Funds that pick stocks, and lots of collateral damage to a weak economy.

The a portion intrinsic value of many over price homes is falling interest rates!
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