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Dorchester grandma
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 Posted: Fri Nov 09, 2007 6:23 am GMT Post subject: Fortune Mag predicts 5% drop in Boston prices (so what?) |
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Please say it isn't so. A 5% decrease is nothing, absolutely nothing!! So homes will NEVER be within the reach of many less wealthy but hardworking deserving, people.  |
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admin
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| Posted: Fri Nov 09, 2007 1:56 pm GMT Post subject: |
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It isn't necessarily so. First of all, a 5% decline over 5 years isn't all that bad in terms of price when you factor in inflation (it is pretty annoying in terms of waiting time, though). If inflation runs at 4% per year, that's a a 22.5% decrease in real terms, which is pretty close to Fortune's 22.4% decline of the P/E ratio. You can think of it this way - the way that inflation would work in your favor if this prediction is accurate is that you could expect 5 years of income growth, earned interest on your down payment, and no mortgage interest, with the end result being that you have both extra money and lower prices.
Secondly, there are reasons to believe that the article understates the decline. There is some discussion of this here:
http://www.bostonbubble.com/forums/viewtopic.php?t=535
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JCK
Joined: 15 Feb 2007
Posts: 559
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| Posted: Fri Nov 09, 2007 4:38 pm GMT Post subject: |
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Your estimate seems reasonable to me, but I don't see that dropping $20k on $400k home really changes the affordibility picture all that much.
In addition, most "bubbleheads" have been predicting much larger nominal (not inflation adjusted) drops. Numbers I recall seeing bandied about 20-30% drops in price, w/o the inflation adjustment. As I've said before, I wouldn't want to take advice from these individuals any more than I'd want to list to the NAR/MAR with their "housing never goes down" mantra.
If this report is correct, I'd question whether waiting 5 years to buy is good strategy, unless you're saving very aggressively for a down payment and are paying reasonable rent on a place you're happy staying in.
As john p has pointed out, extending your payoff period on your 30 year mortgage into (or further into) retirement may not worth the wait. If you're only expecting a 5% nominal drop over 5 years, and plan on keeping your home for longer than that, I think putting out some low-ball offers in this "down" market is not a bad bet at all. |
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admin
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Location: Greater Boston
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| Posted: Fri Nov 09, 2007 6:25 pm GMT Post subject: |
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| JCK wrote: |
In addition, most "bubbleheads" have been predicting much larger nominal (not inflation adjusted) drops. Numbers I recall seeing bandied about 20-30% drops in price, w/o the inflation adjustment. As I've said before, I wouldn't want to take advice from these individuals any more than I'd want to list to the NAR/MAR with their "housing never goes down" mantra.
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I don't know about that. My impression has been that most "bubbleheads" look at it in inflation adjusted terms. Sure, some have quoted nominal amounts, but I've seen Shiller's chart of real housing prices 1890 - present bandied about by the majority, and that implicitly frames the discussion in real terms. I try to avoid making predictions of my own and stick to relaying other's, and if I were to make a prediction, it definitely wouldn't be in nominal terms.
| JCK wrote: |
If this report is correct, I'd question whether waiting 5 years to buy is good strategy, unless you're saving very aggressively for a down payment and are paying reasonable rent on a place you're happy staying in.
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I think the report has at least one serious flaw, in that the time period used to calculate the "normal" price to rent ratio for the area is inadequately short. I think it is consequently underestimating the decline, and I went into a little more detail on this in the other thread. This is also consistent with the somewhat larger decline priced into the futures market, which is probably the best predictor available, not because it's particularly good (yet), but because all the other predictors are lousy.
Now that I think about it, it has another flaw too. It uses price data from the NAR, and as such it doesn't account for a change in the quality of what is being sold. They should have used the S&P/Case-Shiller Index, though I suppose that wouldn't have covered as many cities.
| JCK wrote: |
If you're only expecting a 5% nominal drop over 5 years, and plan on keeping your home for longer than that, I think putting out some low-ball offers in this "down" market is not a bad bet at all.
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I think that's a fine idea if you can find a buyer's agent who isn't hostile to this and have patience. I'd base the low-ball offer on the futures market, though, rather than the Forbes article. Although, I'd like to point out that in addition to a lower price and inflation working in your favor, waiting would also provide the benefit that sellers and brokers will probably be much more receptive in the future.
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JCK
Joined: 15 Feb 2007
Posts: 559
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| Posted: Fri Nov 09, 2007 7:01 pm GMT Post subject: |
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| admin wrote: |
I don't know about that. My impression has been that most "bubbleheads" look at it in inflation adjusted terms. Sure, some have quoted nominal amounts, but I've seen Shiller's chart of real housing prices 1890 - present bandied about by the majority, and that implicitly frames the discussion in real terms. I try to avoid making predictions of my own and stick to relaying other's, and if I were to make a prediction, it definitely wouldn't be in nominal terms. |
Well, reviewing some of the past postings on here, I see a lot "down 20% in 2006" predictions and the like. Plenty of discussion of the bubble "bursting," which I can only take to mean a double digit drop in a relatively short time frame. People saying prices have been too high since 2002, etc.
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I think the report has at least one serious flaw, in that the time period used to calculate the "normal" price to rent ratio for the area is inadequately short. [\quote]
Keep in mind that Boston had rent control until 1994 and Cambridge until 1997. I'm not sure how far back you'd want to go, or what you'd want to use as a baseline. So going back further doesn't necessarily solve this problem.
| Quote: | I think it is consequently underestimating the decline, and I went into a little more detail on this in the other thread. This is also consistent with the somewhat larger decline priced into the futures market, which is probably the best predictor available, not because it's particularly good (yet), but because all the other predictors are lousy.
Now that I think about it, it has another flaw too. It uses price data from the NAR, and as such it doesn't account for a change in the quality of what is being sold. They should have used the S&P/Case-Shiller Index, though I suppose that wouldn't have covered as many cities. |
But the S&P/C-S excludes condos, looks only at particular markets, etc. I tend to think of these different indexes as being complementary, rather than "better" or "worse."
I really appreciate your following up on the S&P/C-S as a future predictor, but I wouldn't really want to rely on it either. How well have oil futures predicted the current run-up in prices over the last several years?
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I think that's a fine idea if you can find a buyer's agent who isn't hostile to this and have patience. I'd base the low-ball offer on the futures market, though, rather than the Forbes article. Although, I'd like to point out that in addition to a lower price and inflation working in your favor, waiting would also provide the benefit that sellers and brokers will probably be much more receptive in the future.
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Or do your own legwork. It's not necessary to have a buyer's agent at all. The paperwork necessary to put in an offer is pretty straightforward. Once you're closer to closing, a decent real estate lawyer is probably better than a realtor anyway. |
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JCK
Joined: 15 Feb 2007
Posts: 559
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| Posted: Fri Nov 09, 2007 7:19 pm GMT Post subject: |
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admin,
I don't mean to implicate you as making predictions about the bubble "bursting" and housing prices "crashing", because you've been pretty consistent about the slow timeframe of housing market turnarounds.
But if we're only going to see 5-10% down over the next few years, that has to change the equation for some people. A lot of people seem to have convinced themselves that waiting a couple years will result in huge savings. Indeed, some have been saying the same thing since 2003.
In any case, I think the important thing is to find a living arrangement you're happy with for the medium term, whether it be renting or buying. I just think that people living in an unpleasant rental unit who tell themselves that the $400k dumps will be only $250k if they just wait 18 months are going to continue to be sorely disappointed, even if they are technically "right" about the house should be worth. |
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Fri Nov 09, 2007 8:04 pm GMT Post subject: |
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| JCK wrote: |
Well, reviewing some of the past postings on here, I see a lot "down 20% in 2006" predictions and the like. Plenty of discussion of the bubble "bursting," which I can only take to mean a double digit drop in a relatively short time frame. People saying prices have been too high since 2002, etc.
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Alright, I see the 20% drop in 2006 "Xmas wish" post you're referring to, but I frankly don't see many predictions at all in the old posts (and even that one was labeled a "wish"). Yes, "burst" was probably not the best choice of words given the excruciatingly slow pace of the correction. However, we actually did have a double digit drop in a relatively short time frame, when you factor in inflation, and we are already back below 2003 prices (the MAR data doesn't cover 2002):
| JCK wrote: |
Keep in mind that Boston had rent control until 1994 and Cambridge until 1997. I'm not sure how far back you'd want to go, or what you'd want to use as a baseline. So going back further doesn't necessarily solve this problem.
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Good point.
| JCK wrote: |
But the S&P/C-S excludes condos, looks only at particular markets, etc. I tend to think of these different indexes as being complementary, rather than "better" or "worse."
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OK, true enough. I think that the methodology is better, but the current implementation has some drawbacks (like not including condos). With reference to the Forbes article, just bear in mind that the median price might decline 5% over 5 years, but that could buy you something much different in terms of location and size.
| JCK wrote: |
I really appreciate your following up on the S&P/C-S as a future predictor, but I wouldn't really want to rely on it either. How well have oil futures predicted the current run-up in prices over the last several years?
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Good question - I don't know. However, I have a feeling that they are useful even if you can't rely on them for predictions. My vague strategy which I need to flesh out more is to use the futures as a predictor for where prices will be, shop for housing based on that, and use the futures market itself to hedge against the predictions being wrong. I would ask myself preemptively, if these predictions turn out to be inaccurate, what would screw me over the most? I would then buy or sell some contracts to hedge against that.
| JCK wrote: |
Or do your own legwork. It's not necessary to have a buyer's agent at all. The paperwork necessary to put in an offer is pretty straightforward. Once you're closer to closing, a decent real estate lawyer is probably better than a realtor anyway. |
My concern would be that the seller's agent might "forget" to give my offer to the seller - I really have no idea how common that is or if that concern is justified. I also wouldn't want to leave the 3% buyer's agent commission on the table, when some agents will refund their commission to you (and charge separately based on what services they provide).
| JCK wrote: |
I don't mean to implicate you as making predictions about the bubble "bursting" and housing prices "crashing", because you've been pretty consistent about the slow timeframe of housing market turnarounds.
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OK, thanks. I didn't think you were referring to me in particular, but it's good to know.
| JCK wrote: |
But if we're only going to see 5-10% down over the next few years, that has to change the equation for some people. A lot of people seem to have convinced themselves that waiting a couple years will result in huge savings. Indeed, some have been saying the same thing since 2003.
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Well, we actually are slightly below 2003 prices now (inflation adjusted), and I think that one huge advantage to buying now as opposed to then is that there is no longer a pervasive mania. Previously, there were frantic bidding wars, leading to intense time pressure on buyers and the disregarding of traditional contingencies. Now there is no rush whatsoever and tales of incentives being thrown in are common. Waiting from 2003 until now would have gotten you roughly the same price but a much better buying environment. You are right that waiting since they has not yielded substantial price savings as of yet, but the outcome may have been good nonetheless.
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JCK
Joined: 15 Feb 2007
Posts: 559
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| Posted: Fri Nov 09, 2007 8:36 pm GMT Post subject: |
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Admin,
But if you had bought in 2003, you'd have some pretty good appreciation today. Given that most people are pretty leveraged when they buy, the inflation-adjusted price is somewhat less important after the purchase is complete.
For example, if I bought a $200k house in 2003, and now it's worth $240k. Let's say, for the sake of argument, the inflation-adjusted 2007 price is the same as the 2003. If I put $40k down and didn't pay off a dime beyond that, my original $40k has become $80k. So, in this example, your inflation-adjust price is unchanged, but you've doubled your money over four years.
And, unless you've jumped on the interest-only ARM bandwagon, or are using your home equity like an ATM, you've probably paid off a few grand in that time on your mortgage, and you're 4 years closer to being done with the mortgage.
Now, I realize there are a lot more variables (equivalent rent, transaction costs, how much the renter has actually put his savings away vs. spending it on a new car) to consider, and any particular case is going be very dependent on the factual circumstances. And I also realize the leverage advantage works in reverse if home prices is falling. So there are some variables, and certainly some risk.
But having said that, one you've purchased, looking at the inflation-adjusted price is much less meaningful than it is prior to purchasing. So comparing the guy who bought 4 years ago the guy who is buying today, is more complicated than just looking at inflation adjusted prices. |
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admin
Site Admin
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Posts: 1826
Location: Greater Boston
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| Posted: Fri Nov 09, 2007 9:26 pm GMT Post subject: |
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| JCK wrote: |
But if you had bought in 2003, you'd have some pretty good appreciation today. Given that most people are pretty leveraged when they buy, the inflation-adjusted price is somewhat less important after the purchase is complete.
...
But having said that, one you've purchased, looking at the inflation-adjusted price is much less meaningful than it is prior to purchasing. So comparing the guy who bought 4 years ago the guy who is buying today, is more complicated than just looking at inflation adjusted prices. |
The way I look at it, financing is a separate issue and the purchase should be considered as if the house were being bought outright. I realize this makes me weird, but I don't think it's an invalid thing to do. In the example you gave, you paid for that nominal appreciation with the mortgage interest, the opportunity cost of the down payment, and the opportunity cost of the mortgage payments beyond interest, and I don't think you would come out ahead as a result. I mean that strictly in a financial sense - you may come out ahead psychologically by being 4 years closer to being done with your mortgage.
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JCK
Joined: 15 Feb 2007
Posts: 559
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| Posted: Fri Nov 09, 2007 9:57 pm GMT Post subject: |
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| admin wrote: | | JCK wrote: |
But if you had bought in 2003, you'd have some pretty good appreciation today. Given that most people are pretty leveraged when they buy, the inflation-adjusted price is somewhat less important after the purchase is complete.
...
But having said that, one you've purchased, looking at the inflation-adjusted price is much less meaningful than it is prior to purchasing. So comparing the guy who bought 4 years ago the guy who is buying today, is more complicated than just looking at inflation adjusted prices. |
The way I look at it, financing is a separate issue and the purchase should be considered as if the house were being bought outright. I realize this makes me weird, but I don't think it's an invalid thing to do. In the example you gave, you paid for that nominal appreciation with the mortgage interest, the opportunity cost of the down payment, and the opportunity cost of the mortgage payments beyond interest, and I don't think you would come out ahead as a result. I mean that strictly in a financial sense - you may come out ahead psychologically by being 4 years closer to being done with your mortgage.
- admin |
For the 2003 buyer then, your analysis then suggests that putting nothing down is the better option. Higher rate of return, lower opportunity cost, etc. But that involves more risk, and I don't think you or I would recommend putting nothing down. So there's really no way around the conundrum. You have to live somewhere. To make a "rational" decision, You have to guess what inflation, home price appreciation, and stock market performance are going to be over the next X years, where X is the number of years you will spend in your new home. All I can suggest is don't buy more home than you can afford, and if you're saving money by renting, actually save the money. Don't blow it hookers.
I don't separate the financing issue, because it's so tied up in the home purchase decision for all of the reasons you've identified.
Also, I don't like eliminating psychological factors, because they are important. With regard to the savings angle, I think most people simply are not disciplined enough to put away the extra $500/mo or whatever they save by renting. Obviously this isn't true for everyone, but I think most people just end up spending the money. And if you're not saving the money, you are worse off by renting.
In any case, I think a home purchase is about both psychology and finance. That doesn't mean you should behave irrationally, but if renting and buying are truly interchangeable, why do so many worry about home prices at all? If it truly makes no sense to purchase a home, then just don't do it! I wouldn't buy a Toyota Corolla if they suddenly jacked the price to $30k, I'd go get myself a Honda Civic and stop worrying about it. But the rent vs. buy issue is somewhat different from the Toyota vs. Honda. So psychology has to factor into the equation somewhere, doesn't it? |
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john p
Joined: 10 Mar 2006
Posts: 1820
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| Posted: Fri Nov 09, 2007 10:13 pm GMT Post subject: |
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You guys honestly sound like a couple of experts that are totally up to speed on things.
If you want to sound like these two, spend a few hours reading the old posts and the articles listed on the front page. |
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admin
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| Posted: Fri Nov 09, 2007 10:22 pm GMT Post subject: |
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| JCK wrote: |
For the 2003 buyer then, your analysis then suggests that putting nothing down is the better option. Higher rate of return, lower opportunity cost, etc. But that involves more risk, and I don't think you or I would recommend putting nothing down.
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No, that's probably the least optimal because of the mortgage interest. That's the big factor, I just mentioned the opportunity costs for completeness. If you put nothing down, you are paying for the nominal appreciation with the mortgage interest, and so if your mortgage rate was higher than the nominal appreciation (inflation in this example), you don't come out head (financially).
| JCK wrote: |
So there's really no way around the conundrum. You have to live somewhere. To make a "rational" decision, You have to guess what inflation, home price appreciation, and stock market performance are going to be over the next X years, where X is the number of years you will spend in your new home. All I can suggest is don't buy more home than you can afford, and if you're saving money by renting, actually save the money. Don't blow it hookers.
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Absolutely. A lot of people lost track of that during the boom.
| JCK wrote: |
In any case, I think a home purchase is about both psychology and finance. That doesn't mean you should behave irrationally, but if renting and buying are truly interchangeable, why do so many worry about home prices at all? If it truly makes no sense to purchase a home, then just don't do it! I wouldn't buy a Toyota Corolla if they suddenly jacked the price to $30k, I'd go get myself a Honda Civic and stop worrying about it. But the rent vs. buy issue is somewhat different from the Toyota vs. Honda. So psychology has to factor into the equation somewhere, doesn't it? |
Renting and buying aren't perfect substitutes - they each have their own advantages, price aside. Everybody needs to decide what premium they are willing to pay for one or the other based on their own preferences. Then the question isn't if it makes sense to buy, but when does it make sense to buy? I think people worry about it so much because it is the largest financial decision of most people's lives and it has long lasting and far reaching repercussions.
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john p
Joined: 10 Mar 2006
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| Posted: Sat Nov 10, 2007 4:22 pm GMT Post subject: Calculated Risk |
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If I had to put a theme on this discussion I'd call it "Calculated Risk".
If you stay within 3.5 times your gross salary on a house cost and you honestly feel that you're on the middle to low end salary range in your industry and your industry is relatively stable and you can weather a 8-12 month economic storm, and you feel that to stay in one location for the next 5 years is going to work for you, then yes, to low ball is not going to hurt, unless..... We get a macro correction and the economy finds a way to correct itself that is a direct hit to home prices or we get a huge recession which creates huge job losses. I think that if we got this macro correction 7 years from now when I think we will have a diaspora of baby-boomer retirees relocating, then we would see a plunge in home prices.
In the back of my mind I think of a couple of things. First, when the baby boomers retire (if they retire on normal schedule) there will be fewer workers paying for more and more retirees. Doesn't that mean that the younger folks need to make more to pump enough to cover all of the retirees? Will there be salary growth as the baby boom retires? Secondly, don't you think that jobs and job titles were created out of the function that there was a bulge in the workforce and the baby boomers feathered their beds and created pockets in upper management that aren't really needed? If this is true, won't there be lots of opportunities for younger folks that have had to live in their shadows for a long time i.e. job openings for high titles? Now think about all those retirees with 401k's investing in companies. The younger workers that are left running these companies need to be superstars because if they perform well there will be tons of money out there to buy their stock.
Will a younger generation that has been screwed up to now ever see the light of the sun? |
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john p
Joined: 10 Mar 2006
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| Posted: Sat Nov 10, 2007 4:54 pm GMT Post subject: |
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| I say this because along with the lower interest rates that created the price bubble, there was also a salary bubble... |
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john p
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