bostonbubble.com

[CJ]

Hello,
I really like this site. Thanks for the hard work! I just wanted to point out that Admin said few time regarding looking at house price in inflation adjusted terms. As the following quote, even Boston 5% drop in Boston prices, considering the inflation, it is much cheaper. It makes sense, but for most people, their worlds don't work like that. The problem is there's been no corresponding increase in most people's wages.

It's very hard to find a reasonable property (said about 1500 sq. single family house) within 20-25 miles to Boston under 400k. Today's inflation is so high. Everything is getting so expensive. Without increasing wages, 400K is still 400k. It does not mean houses are getting cheaper, it actually only means living standard is much higher. Most people still have hard time in today's market.

Without increasing wages. the inflation does not make house prices cheaper, it makes life even harder.

Just my 2 cents.

Cheers,

CJ

PS: BTW, English is not my first language.

[admin]

I think you actually just identified one of the reasons why using inflation adjusted prices is useful. It let you identify declining real wages as a core problem. The problem isn't that housing prices aren't falling, it is that your real income is also falling. Glancing over the Census Bureau's historical income tables, my hunch is that income is volatile relative to inflation and can deviate from it for several years but eventually regresses to it. Viewing housing prices in inflation adjusted terms gives a better sense of when housing is no longer uniquely overpriced. Declining income is obviously a serious concern, and it obviously limits the benefit of the housing decline, but it is a separate issue and adjusting for inflation helps to make that distinction.

- admin

[john p]

Like everything, I look at this like a structure; a building and specifically the structural frame.

When I hear people talking about macro stuff, I think about a geodesic lightweight frame where the truss members are two force members either in tension or compression and each member typically has a uniform amount of stress or strain (which is why they are usually the same size and length). The geodesic arrangement in my mind would be like a housing development with the same types of homes and neighborhoods (commodities).

What can take down a structure like this is a macro force like a big wind (they are usually dome shaped like igloos resist the wind better). What also could hurt it is a growing larger uniform load which is greater than what the structure was intended to hold (in my mind, this is like a recession).

I think the Boston housing market isn't one of those uniform geodesic structures, it is like a mixed use structure that has been added on to and renovated and has a mixture of styles and structural systems. The structural behavior is localized but is also subject to macro forces. The additions built with steel and bricks are better suited to withstand the big bad wolf's huffing and puffing. We do see some larger speculative forward thinking developments in the edges of industrialized areas (near Lechmere Station and near 93 in South Boston) as well as on the waterfronts historically used for industrial.

The behavior of these new speculative projects is subject to three things in my mind: macro, meso and micro forces. A macro force is like a recession or a stimulus package. A meso force in my mind relates to the surrounding context and localized job market. For instance if Putnam tanks, the Andover’s might have a softer market or EMC, the Franklin/Hopkinton markets go soft and if they go through the roof, so do the markets like they did in the late 90's. Micro forces are like the much localized issues like the HVAC system expense in those concrete housing towers near Rowes Wharf.

I feel like I'm boring you folks to death. Here is a decent take away. In a structure that has a variety of construction types fused to each other over time (like the analogy for the Boston housing market), you have expansion/contraction issues, fire separations, and load bearing conditions that affect meso and micro levels of behavior. For instance, if a wood frame catches fire, they typically have a "fire cut" beam so if it falls away from a load bearing wall, it doesn't pull the wall down. Also, if a building doesn't have proper expansion joints, it will transfer loads to the adjacent structure, and if you put too much load on top of a weak structure below, it obviously will collapse.

To avoid all of these conditions above, we have Building Codes which require us to create fire separations, we have "Construction Types" that align the use and size of building with the appropriate fire resistance and protected structure types. Codes have developed over time based on honestly, failures in the past. I did a project in Chicago and they had the most fire related zoning regulations I had ever seen. Typically zoning is usually a building related issue and not a zoning issue (unless it is storage of flammables...) this is because of the great Chicago Fire which spread from building to building. Chicago's history has literally tempered their approach towards addressing fire and zoning. They have taken a leadership position in this regard kind of like California has with the environment. I mean the Kyoto Protocol for the environment was based in Japan because people were dying because of the pollution in the bay. People's history changes their constitution and as a result, the behavior to the destructive forces they have faced in the past. Anyway getting to the point.... We have to understand the behavior and properties of a structure during a fire or catastrophe. Just as we think about how that building is going to go up, we have to understand the properties of how it is going to go down. We look at base shear for earthquake design (which is like pulling the tablecloth under a flower vase); we think about what elements will fail in the first five minutes, half hour, hour, etc. We then make sure that the egress systems provide protection for a safe emergency exit. The point is with the housing market, what is the behavior of the collapse in a structure like the Boston Housing Market? Have people forgotten lessons of the past? It happens.

Lastly, think about certain areas of the structure experiencing meso forces. Think about the flood in Taunton. Think about the ocean flooding in Revere and Scituate. Think about a fire in Lynn. These localized issues don't hit every member in the structure. They take out a section or two, but are localized.

I look at economic forces and wonder about how they will affect the overall structure. Think about if the price of a Wedding D.J. doubles in the course of four years. Does this affect the people that are already married? No, they don't care. If the force doesn't hit you, you don't care. The problem is that Governments and the capitalistic elite understand that they can target and hurt certain members like taking out certain beams and columns of a structure and know that it won't all collapse, and they just eat away at the herd little by little and pacify the rest of the structure and muffle the cries for help by those that are hurt. That interconnectedness of the herd, the herd mentality, the tribal old school mentality that was so important for immigrants is weakening. The fiber content of our constitution is breaking down. Weston doesn't care if Waltham tanks; Route 128 (which separates them) is their firewall.

One reason why the bridge in Minnesota collapsed was due to fatigue. You can run the numbers for a structural system with a given material and section modulus and the appropriate loading and dynamic system, but if the connections rust out, they are useless and you get eccentric (unplanned) loading and behavior. I think lots of housing stock in Boston has fatigue and if people don't have that extra $50k for repairs, it could add to the price drops. I think that if newer structures are being built, it will add to the price drops of the older structures that haven't kept up with the maintenance.

I think looking at the numbers for macro is crucial, but driving around and understanding the meso and micro levels to the location aspects is important to assessing the structural capacity of each area.

Most importantly keep this in mind. The hurricane might have a consistent 110 mph wind. That 110 mph wind might hurt certain structures and coastlines different than others. If, however, we get a 100 year storm, areas that never got flooding might have to think about their positions...

[john p]

And when I'm talking about fatigue, I'm also concerned about the internal constitution of the people in the area. People who quit, and give up are the type that get soft and are easy prey for predators. This is why I am following the casinos because they are a good temperature reading to the constitution of our people. Do we have the strong interconnectedness structural property or will we let a predator pick away at the herd and hurt one community at a time. Do we say when the going get's tough, work harder, be creative and pioneering, or gamble? When our leaders tell our people that the easy way out is the only way out, those weak values are the same that people use when they decide to take drugs and find an escape from reality and not face it with fire.

[Guest]

Inflation actually reduces affordability so houses don't become cheaper if there is high inflation. It's income that drives affordability. If inflation is 20% a year and your income is same soon you will be on the streets because you wouldn't even be able to rent let alone buy. So saying that a home has declined in value 20% inflation adjusted is nonsense and has no meaning. You have to use an income inflation adjustment. If your income increases by 20% and headline inflation is 5% then yes, the house will be relatively cheaper by 15% due to inflation.

[admin]

[john p]

http://www.oftwominds.com/blogapr06/inflation.html

Read this guy's last paragraph. Higher inflation means higher interest rates. The higher the interest rate, the lower the house prices will go.

[admin]

Here is a graph of median income in Massachusetts adjusted for inflation:



Income is actually pretty close to the historical average right now. I think the graph also supports the hypothesis that real income is close to constant over the long term. While it can fluctuate above and below the average for periods of years, over the long term it looks roughly constant (though the data here admittedly doesn't go back very far). I don't see any reason to think that inflation is exploding everywhere but wages.

I think that this graph demonstrates another reason that adjusting housing prices for inflation is useful. Fluctuations in real income appear cyclical, drawn out, and adjusted in spurts. Inflation serves as a more accurate measure of general price increases as it is more fluid and gradual. It can thus help to distinguish when house prices are in line with other prices but incomes are still lagging.

Sources:

• Income: http://www.census.gov/hhes/www/income/histinc/h08.html
  
• Inflation: http://www.bls.gov/cpi/
  

- admin

[JCK]

[john p]

I agree with you, any diagnostic tool like CPI is useful provided you understand the variables. What I liked was he pointed out the fact that although close to 90 of people buy certain things that make up the Index, a smaller percentage rent so that skews the readings if you're not aware of it. I think that some of these composites and indicies have veiled flaws that go unnoticed because certain variables never drifted far apart in the past and this new behavior due to interest rates, global products being hit with the weak dollar etc, we have to evaluate the output of what these indicies yield as information. Again, if you put a mix of mercury in a thermometer it won't read the same way as mercury.

As far as inflation is concerned, I think about those who bought their house before the big inflation of the 80's. Well it was tough for a stretch, but eventually wages caught up and the whole water level rose making mortgage payments for house prices prior to inflation seem less and less.

My thinking, which I'm not sure of, is this: We all have fundamental rules like say Harvard puts walkways through their campus. If those walkways are fundamentally in the wrong place, people will walk across the grass and create trails. What Harvard has done is put the walkways over the lines of where people actually walk, so the don't fight the trail lines, they pave over them and make them proper walkways. Now there are people that are walking on the old paths that are playing by the rules and have actually quit Harvard because of this paving program (just kidding).

Anyway, mass behavior can deform fundamentals. My thinking now is about looking at potential based on context and what we can reasonably predict in the future (like babyboomers retiring). When you have a strong juxtaposition of temerature (hot and cold markets). The insulation properties of the barrier might prove to make a difference. And as birds of a feather flock together, you have to look at the abilities of different birds and their ability to survive and adapt to the current conditions. During deformation, typically properites change state. Ice melts, water evaporates, steel bends and almost liquifies under the stress and strain. I mean think about a bubble. Water is boiling and it is deforming and changing state so the change from liquid to gas and the mixture is a bubble (gas within liquid).

I think the biggest wildcard is actually the election. On the one hand you have someone who wants to continue the War and the other people that want to shock our economy with more entitlements that we can't afford. Voting districts over the years have been gerrymandered to give advantage to certain political parties and due to their concentration we end up with very polarizing members in Congress and a very polarizing choice for the Executive. The losing side of this equation was most likely the Republicans who have seemed to choose a more centered member as opposed to one on the wing. When you think about it, after Bush 41 Clinton was a centered Democrat and won with a moderate appeal. So as the Republicans went to the center, the Democrats fought to get their base. The second part of 2008 will tell us how moderate our Government will be. How this aligns with the real estate Spring Season we need to think about.

As far as the US Dollar versus the Euro, The Euro was introduced in the past decade so it really was a bit of speculation as to where the value truly was initially.

My current thinking relates to some of this stuff:

http://www.chemistryland.com/CHM107/AirWeBreathe/AirMisconceptions.html

http://www.islandnet.com/~see/weather/elements/seabrz.htm

http://www.worsleyschool.net/science/files/saltandfreezing/ofwater.html

http://www.chemistry.wustl.edu/~courses/genchem/LabTutorials/Thermochem/Fridge.html

http://www.boston.com/sports/basketball/celtics/extras/green_room/Gino200.jpg