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Boston Bubble Wrap: The Real Story for MA - Apr 2010

 
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PostPosted: Fri May 28, 2010 1:14 am GMT    Post subject: Boston Bubble Wrap: The Real Story for MA - Apr 2010 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 April 2010 on Tuesday, May 25th. 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 2010

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



Some observations:

  • The real increase from April 2009 to April 2010 was 4.62%.
  • This was the fifth real year over year increase since August 2005, with all such increases occurring consecutively and after the most recent renewal and expansion of the home buyer tax credit.
  • The year over year change fell back within one standard deviation above the moving average after having moved above the normal range last month.
  • Real prices are still lower than the same month in every year in the time period covered by The MAR, with the exception of 2008.
  • Prices are now 30.33% below the peak set in June 2005. This is the result of a 21.07% decline in nominal housing prices and a 11.74% decline in the purchasing power of the dollar.
  • The cumulative price decline from the beginning (Feb 2003) is 13.55%, which is an annualized decline of 2.01%.


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 2010 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=2816 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=2816

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 May 28, 2010 6:43 pm GMT    Post subject: inflation Reply with quote

I really appreciate both of your analysis posts. Much more thorough than what gets produced in other markets.

One thing I wonder is what happens if you use an older definition of inflation, rather than the modern emasculated one? I read recently that while the current report is ~2% inflation, if you calculate using the 1980s parameters, it is closer to 7%, mostly due to increased healthcare spending (which has been reduced to 6% of the cp index from 15%, iirc).

Finally, has anyone calculated a boston CS index normalized to wage inflation, using the change in MSA income?

Thanks for all the work!
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PostPosted: Fri May 28, 2010 8:59 pm GMT    Post subject: Reply with quote

Thanks.

The issue of what inflation metric to use is a tricky one. I too am a little distrustful of some of the changes to the CPI methodology, but there are plausible justifications for the changes. I haven't looked into it enough to know whether I would consider the older methodology is more "correct."

To side step that whole mess, I would suggest doing exactly what you propose, and adjusting by income too. There is an attempt to do that here, though it isn't perfect, and it is a little old now:

http://www.bostonbubble.com/latest.php?id=ma_price_to_income

I really need to update it.

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PostPosted: Fri May 28, 2010 10:11 pm GMT    Post subject: Reply with quote

Thanks for the link to the older posts. Very informative.

Look forward to the 2010 update.

I wonder if the income numbers this year will show an absolute decline?
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PostPosted: Fri May 28, 2010 10:19 pm GMT    Post subject: Reply with quote

Well, the 2010 income data probably won't be out until late 2011. The data for 2009 isn't even out yet, unless they changed the URL again. 2008 is out, and income there was up both in nominal and real terms. In fact, real income in 2008 for Massachusetts households was actually slightly more than one standard deviation above the historical average. I'm going to go out on a limb and guess that this didn't last in 2009.

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