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Boston Bubble Report: What's Really Going on in MA- Feb 2006

 
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PostPosted: Fri Mar 24, 2006 9:07 pm GMT    Post subject: Boston Bubble Report: What's Really Going on in MA- Feb 2006 Reply with quote

An absolutely critical piece of information which is almost invariably overlooked when discussing real estate is inflation. Comparison of real estate prices from different times is very frequently made in nominal terms. This is invalid because a dollar today can buy fewer goods and services than it could a year ago. It is essential to adjust for inflation before comparing real estate prices from different time periods so that it can be determined whether an increase in the nominal price of a home is due to the home's value going up or due to the dollar's value going down.

The current position of the Massachusetts Association of Realtors is that the real estate market in Massachusetts has slowed down and returned to normal. Prices are still increasing, just a bit more slowly than in the past. Just ignore the 9.5% decline from the peak - sales are seasonal, the peak was set in a busy month and we are currently in a slow month, so prices will naturally be lower and you should look at year over year numbers instead so that the comparison is seasonally adjusted. Of course, you'll also need to ignore the year over year decline in February - that was just one month and doesn't signal a trend. (Also, please ignore the swelling inventory levels while you're at it.)

The problem is, the picture is not so normal once the Massachusetts Association of Realtors' numbers are corrected for inflation. I have taken the liberty of doing so since this is something that is invariably left out of analyses that I see. I adjusted the prices using the CPI Northeast Urban numbers available at http://www.bls.gov/cpi/ While the government also tracks the CPI specifically for Boston, it is currently only available bi-monthly and I decided to go with the CPI-NU for now since it is available monthly, like the data from the MAR. At some point I may re-run the analysis using the CPI for just Boston.

Here is a graph of the median sale prices for single family homes in Massachusetts, adjusted to the value of the dollar in February 2006:



One thing to note is that the price peak occurred earlier than most outlets are reporting. Real prices peaked in June 2005 whereas the MAR will tell you that they peaked in August because they do not account for inflation.

Also importantly, real prices are down 11.44% from their peak. This is in contrast with the 9.48% that the MAR is reporting.

What about seasonality? Surely some of the decline is due to winter and things will trend upward again come spring, right? To answer that, let's look at the inflation corrected year over year change for as far back as the Massachusetts Association of Realtors publishes median price data:



It turns out that Massachusetts real estate has seen year over year price declines every single month between September 2005 and February 2006 inclusive. While the Massachusetts Association of Realtors officially states that February 2006 was the first time in several years that there have been year over year declines, that is only true in nominal terms. Seasonally adjusted values have been declining for half a year now in real terms.

It looks like the bubble started to burst here in Boston much earlier than most peopled realized. Feel free to verify my analysis, which was built using data from these sources:

http://www.bls.gov/cpi/

http://www.marealtor.com/content/monthly_reports.asp

One odd thing that I noticed while compiling this report was that the Massachusetts Association of Realtors switched their reports from using the average sale price to using the median sale price during 2004. This very well could have masked early warning signs in the high end market which would have been captured by the average. While the median is a better choice of measurement, several of their reports in 2004 had both a median and average listed, and I am left wondering why they dropped the average later on. Perhaps that is something to investigate in a future report.

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PostPosted: Fri Apr 28, 2006 1:22 pm GMT    Post subject: March 2006 report available and a note on reproductions Reply with quote

On Tuesday, April 25th the Massachusetts Association of Realtors released their data for March 2006. For an updated analysis with accompanying graphs which include this new data, see http://www.bostonbubble.com/forums/viewtopic.php?t=65

Thanks to whoever added the year over year graph from the above report to the Wikipedia article on the United States housing bubble. I noticed that the "Licensing" section associated with the image says that it is copyrighted and unlicensed. I will explicitly spell out the reproduction guidelines now to hopefully allow the graph to be recategorized as licensed.

This text of the original post and the associated graphs are Copyright 2006 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-NoDerivs 2.5 License. You may additionally scale the graphs to fit your work. Attribution should be made via a hyperlink to http://www.bostonbubble.com/forums/viewtopic.php?t=52 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=52

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