bostonbubble.com

[Richthofen]

I bought a condo in 2006 at 26 years old for $190k in Malden. Sold it short in 2011 for $95k. I did basically everything wrong: I bought while unmarried, didn't know the neighborhood, etc. Neighbors all foreclosed, had nightmare rental neighbors, was miserable as hell, gladly short sold.

Now I'm 34 and married with a wonderful infant son born two months ago. Wife and I are renting a SFH in Harvard Lawn area of Belmont. It's a great house and we just got rent-shocked as last year our lease was $2200/month and now the landlords, who own five SFH that they rent and live in a 1.5 million home in cambridge, are increasing the rent to $2400. 9% increase. Tried negotiating, failed.

We want to set more permanent roots. We're trying to stay Arlington/Belmont/Cambridge/West Somerville/Watertown/West Medford/East Waltham, but finding there are barely any properties listed. Most a pie-in-the-sky priced. Ones that are reasonably priced, like this one, have 11 offers and are snapped up.

http://www.trulia.com/property/3150512384-48-Fayette-St-Watertown-MA-02472

Are we crazy for trying to buy? I mean, it feels like 2006 all over again. I work in Central Sq. and we have one car, and my wife is home full time with the baby for at least 5 years. Feels like we'll never be able to buy, and that the inventory just doesn't make it to market. I wish we had more space, and more permanence, and protection from landlord rent-raising. But it doesn't look like that's going to happen. I grew up around here, had parents who fled Somerville and Waltham. Now I can't even think of affording the houses close to work that they left.

[Richthofen]

That a lot of the big life decisions in our family have been put on hold. I know that 2006 and (perhaps) 2014 might be peak bubble prices. But at some point you can't just wait 5 years for prices to normalize. You eventually want to live your life, provide the things to your family, etc.

I spent a long time waiting and it just seems like when I was ready to move into my own place in 2006, money-wise and timing wise, happened to be in the middle of a huge housing bubble. Now I'm finally married and have a family, and it coincides with another huge run up in the housing market. Reminds me of this article, which seems to ring so true about Gen X and timing, and how just 5 years of birth difference can mean a whole lot re: milesones.

http://www.oftwominds.com/blogmay13/genX5-13.html

[admin]

Check out this graph of inventory for the Boston area. 2013 was much worse for inventory than any other year on record (though that record admittedly isn't very extensive). All of the "pie-in-the-sky" pricing, all of the bidding wars, all of the deadlines and urgency that Realtors have been manufacturing for the last year+, all of the insanity in competing against buyers rolling the dice on waiving financing and inspection contingencies have been a function of the low inventory and historically low mortgage rates. The mortgage rates are actually much higher now that last year, in relative terms, so that part has at least improved. Now the inventory is the remaining problem.

I have my fingers crossed that the inventory will improve soon, given the sharp rise in interest rates - it was improving last fall but then stopped (perhaps thanks to the awful winter that's hopefully over now). I'm not going to pretend to know when the inventory will improve, but looking at the historical inventory very strongly suggests that 2013 was highly abnormal and that you shouldn't conclude from the recent market that you will never be able to buy. It sounds like you have a 5 year window before your kid is in school, which gives you some substantial breathing room to wait for the inventory to improve. It might improve on its own in short order, after the market burns off all the remaining people infected with the craziness from last year. Or it might improve when another recession hits - we're about due for another one, just purely thinking about how far they have been spaced historically (not because of any specific threat offhand), especially if your window is the next 5 years.

- admin

[Former Arlingtonian]

Richthofen

""That a lot of the big life decisions in our family have been put on hold. I know that 2006 and (perhaps) 2014 might be peak bubble prices. But at some point you can't just wait 5 years for prices to normalize. You eventually want to live your life, provide the things to your family, etc""

It is incredibly frustrating to feel like you are waiting for the right time to buy.

But, you and your family can have a perfectly great life while you wait and you won't be putting your financial future at risk. Too often Americans focus on the physical building as the center piece of the family and that is an illusion made tangible by Madison Avenue.

View this graph of what is happening to demand as rates rise:
http://www.merkinvestments.com/images/2014/2014-04-01-new-home-sales.jpg

I think that what has been going on is very similar to the 1980s. First Interest rates/Mortgage rates fell from their heights, and housing took off. Then has mortgage rates climbed people continued to buy and real estate fever enveloped the United States. Then one day there was a shift and real estate entered a bear market. Dr Shiller has analyzed several boom markets and he describes how slow prices are to fall until prices start to fall.
Read his observations here:http://www.bostonfed.org/economic/neer/neer1994/neer294d.pdf
The original research here: http://cowles.econ.yale.edu/P/cp/p12a/p1209.pdf

Most of all stop listening to your peers and your family. Enjoy your family and be glad you aren't buried in debt. You will have your chance to buy a home......and buy some Gold in your brokerage account GLD, PHYS, to protect your nest egg.

[Richthofen]

I've long ago learned that my family's financial outlook is squarely framed by the environment they lived in. They bought in the 1980s and watched as their $30k SFH in Woburn sold for $110k, and their $180k SFH in Tewksbury sold for $400k. A decreasing interest rate environment, plus the baby boom of buyers (as all the boomers reached first time home buying age around the same time, while building has basically not existed compared to birth rate in MA), makes for a strong cocktail. They'll never be convinced that what they saw is anything out of the ordinary. (Even though my mom bought a $200k vacation condo in South Carolina which is now worth less than $100k, and the association won't even sell on a mortgage at this point).

It's not my extended family driving the housing desire. It's my personal desire to:
Lay down roots for my family
Have a place where I can work on projects, make improvements, etc (right now my dining room is filled with projects because I don't have a 'shop' space in our rental)
Avoid rental increase shock
Start saving for other goals (vacations, child's education, etc)

It's just a really raw deal to not be able to give your kid the same life you had. I realize a lot of my problem is that I want to live close to where I work (Cambridge), and after 30 years of people making 1 hr each way commutes, everyone else recognizes that too. (Most of my generation is not nearly as car-obsessed as our parents were). But I just can't see myself moving to Tewksbury or Billerica or anyplace like that. Endless suburbs with no public transportation, no sidewalks, no culture. Everyone's insulated from each other. No thanks.

[Former Arlingtonian]

Richthofen,

A. You understand interest rates and how it affects asset values - then you understand there are some tremendous money making opportunities right in front of us.

I'm sure you realize that the stock market is equally overheated as housing.

Nostalgia makes us want to give our children the childhood we had.....is that really what they need? Its taken a long time for me to realize my child will never be living in the 1970s or 1980s. My child needs the tools and wisdom to live in the future. Embrace that the world is always changing, share your wisdom with your children, teach them about money and interest rates. This education will be worth a lot more than some idealized dream we all hold on to (I have the same sense of loss).

"A decreasing interest rate environment, plus the baby boom of buyers (as all the boomers reached first time home buying age around the same time, while building has basically not existed compared to birth rate in MA), makes for a strong cocktail. They'll never be convinced that what they saw is anything out of the ordinary."

Your ability to see this means you are ahead of 99% of the population. I recommend adding itulip.com or Fred Hickey of the High Tech Strategist or Marc Faber - if you understand how interest rates have driven this whole mess you need to educate your self on making money from rising interest rates and rising gold prices.

Fred Hickey interview by Barron's http://live.wsj.com/video/fred-hickey-why-it-time-to-buy-gold-miners/DD6559F6-2C21-4F77-A712-B2A7D7A9046D.html

http://www.itulip.com/

Mark Hanson - on housing bubble 2.0
http://mhanson.com/archives/1594

[Former Arlingtonian]

Look at what happened at 54 Fayette - the new owners were willing to borrow $417K for a home that was priced at $540,000

Look at earlier sales transactions for 54 Fayette: 06/03/11
Sold: Foreclosure Auction
$509,500

Assuming their mortgage is 4% the have a monthly mortgage of $2553 plus $600-$700 for the Tax man, $3200 per month.

[Richthofen]

I read a lot of finance/housing blogs, have been doing so since 2008. I read Zero Hedge, iTulip, Dr. housing bubble, etc. Haven't really made any money on it though. Been mostly in recovery mode when it became apparent that I was going to have to short-sell. No debt, though, between my wife and I. Paid for car, no student loans, no credit cards.

However, I'm seriously frozen with fear over the market in general. I am 90% cash. I have a small amount in PHYS, plus short the yen, etc. I really don't trust the stock market as its largely rigged [HFT, etc]. I also am reluctant to invest savings for a house in a short term bet. Given that I had a short sale I will need a large DP (20%). I am trying to save $1k a month but at that rate it will take you 6-7 years to save enough for an $80k DP on a $400k house. And believe it or not, I'm on the lucky side. none of my friends and their families have $1k extra in their budget for anything.

I know this is a bit of whining, and its not constructive. I'm a saver, I always have been. I make decent money ($115k), but its just my income right now as my wife is a full time mom for now. We're doing the best we can. Definitely a lot harder competing with the DINK couples who are buying, both with 6 figure incomes. I know there's going to be a time in the future where this isn't even on my radar.

Appreciate the advice, though. Patience is a big virtue, definitely need to work on it.

[Former Arlingtonian]

Richthofen
1. A couple of thoughts we have been living throw a period of 'lack of inflation' or perception of lack of inflation.

2. Keeping too much Saving in just cash is a speculation as you know the Fed is creating $85-$55 Billion per month. Increasing your risk with Gold or Canadian currency (you can open a Canadian bank account if you want to take a weekend drive there

Spend $150 year on Fred Hickey's High Tech Strategist - Mr Hickey doesn't advertise because he doesn't need the business or money (I have no affiliation with Mr Hickey and I am not a financial advisor.

Read this research paper where they describe real estate frenzies that happen when there is a lack of inflation. Remember, when there is a lack of inflation the Central bank tries to deflate interest rates to stimulate demand.

Results: 1, Money builds in banking system - this money can result in tomorrows inflation.

2. People buy real estate as they view the depressed mortgage rates as the buying chance of a lifetime.

http://emlab.berkeley.edu/~webfac/malmendier/e218_sp06/Brunnermeier.pdf

Also, you are aware you can research mortgages people take to buy properties at http://www.masslandrecords.com/

[Richthofen]

I agree we are in a time of low price inflation. Right now the monetary mechanism to get all the liquidity from the Fed's balance sheet into the real economy is broken. It's broken because most all the big banks are functionally insolvent. But because of of the suspension of mark-to-market, and the revolving door between Washington and Wall St, banks will not be wound down. It's Japan syndrome, 100%.

The problem is that the push-pull of demand destruction and misallocation of capital can negate each other for a long time (25+ years in Japan) before the economy resets. I am not willing to put off buying a house, or seeing how the storm rides out, for 25 years. The other interesting dynamic that may push this over the edge is the baby boomer retirements and student loan debt behemoth. All forces moving in opposite directions and a clear trend is not apparent to me.

Housing is too unaffordable, investors bought with cash driving up prices
Inventory is low because people are still underwater and there's no more move up buyers
Buyers *should* be scarce because of poor job prospects for young people and the student loan bubble.
But building in MA is non-existent (how many new SFH are they making in Middlesex county? Less than 100 a year I'd say) and the population is growing.
Interest rates are on the rise, which *should* lower prices, but there's no shortage of buyers and inventory is scarce, which is negating this effect.
Boomers *should* be selling to finance retirement, but it seems most retirees would rather eat dog food and live in their pre-war cape than sell.

I just don't see a clear trend. I feel like the Fed can eff the economy a lot longer than most people believe, especially now that 'failure' is not an option for banks.

I wouldn't invest in the Canadian dollar. They have lots of resources but also have a housing bubble that would make the USA blush.

[Former Arlingtonian]

A big factor for Massachusetts is peak University student population which I think is driven by epic low in interest rates.

What happens to number of college/university students if interest rates are 1-1.5% higher?

I'd like to believe I have to answer, but I don't as I struggle with the same anxieties as you.

I find it helpful to look at specific of companies.

The market seems to be turning just take a detailed look at Massachusetts high fliers. WorkDay - trading WDAY in March it hit $115 per share, now down to $81/ share, this is up from $50 in 2012 when WDAY lost $79 Million, end of 2013 WDAY lost $119 Million
How about ConstantContact - trading at $15 in 2009, their revenue has been declining for the last 3 years: 2011 it was $23 Mil, then $12 Mil, and only $7 Mil for 2013.

EMC is trading near a high of $28 in 2009 - look at how EMC is generating Cash - through selling Shares as the business isn't throwing off cash, cash generated by EMC has been declining for three years straight....see http://finance.yahoo.com/q/cf?s=EMC+Cash+Flow&annual
Don't buy that dream colonial in Hopkinton

[Former Arlingtonian]

I mis typed EMC has borrrowed $5.5 Billion - and bought back stock, cheap interest rates have allowed companies to borrow as wildly as home buyers.

[mpr]

Richthofen: Two things. First I'm slightly fearful for your when I read @FA's advice. If you are saving for a down payment, and might want to use it in the next couple of years, keeping your money in cash, as you are doing, is the right thing to do.

Now more seriously, my advice is to remember that your options are not to either jump in right now, or decide to wait another five years. If you are not comfortable right now, don't buy. Just wait, and keep an eye on the market, and keep your options open.

Your rent went up $200. This is not a reason to buy. You can obviously afford it, and you like the house you're in. It never made much sense to me that people would switch from renting to buying when that meant they had to move to a less attractive house/neighborhood.

Again, keep your options open, keep studying the market, and opportunities will come. For example, admin is right, another recession will crush prices. But even if that doesn't happen, if you don't feel comfortable dont buy. It either means you don't know the market well enough, you can't really afford it, or something else is wrong.

[Former Arlingtonian]

MPR,

First my recommendation of Gold is not to own 100% Gold - but, some minor percentage of your savings ( never have your emergency money 6mos -1 year of cash).

MPR the buying power is steadily losing power.

Gasoline, milk, bagels, taxes ,fees, cheerios are all up. Yes, the gold market has had a big bull back as people have piled into things that go up with borrowed money.

Every investment that does well in the long term has major pull backs. Just look at the major pull back in Apple in 2008 when it went from $185down to $85 The advantage Gold has is its been an investment for 1000's of years, the US Treasury owns it, the IMF owns it, in fact there is only one major central bank that doesn't own a huge supply of investment grade gold.

How do you think the Fed will respond to a recession or if tapering doesn't work? The Central Bank will either continue to create more money or other methods to jump start the economy.

Mpr I'm fearful that you might not understand the impact that the Federal Reserve Bond buying will have on your savings.

https://www.imf.org/external/np/exr/facts/gold.htm

USA's Gold holdings:http://www.fms.treas.gov/gold/current.html

Data from the WorldBank on central bank gold holdings:
http://data.worldbank.org/indicator/FI.RES.TOTL.CD

In 2006 my friend Bernie was fearful when he called me about a Money Market he was going to put $60,000 in called the Reserve Fund and I tolld him money markets are risky buy some gold. Gold was trading at $500-$600. In 2008 the Reserve Fund broke a buck (it was illiguid) and Bernie almost lost all of his money. Eventually afer waiting 6-8 months he got access to his $60,000. Imagine how much bettter Bernie would be today if that $60,000 or even half or 1/4 had been in gold.

Gold is always liquid and the London Gold Exchange sets the price every second of every day:http://www.lme.com/en-gb/metals/precious-metals/gold/

best of luck.

[mpr]

@FA, man you sound like one of those late night tv ads or infomercials !

@OP, I should have added that in my view there is minimal chance of large price increases in the future. What you are seeing in the last couple of years is the rebound from the crisis helped by low rates. Its likely this is over. The 'best case' for prices is that we have slowly growing prices with slowly rising interest rates in a moderately recovering economy.

In this scenario you can expect inventory to continue to be tight (because locked in low interest rates mitigate against people moving), which means you have to continue to be patient.

But this is best case. There could be external shocks which tip as back into recession.