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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 January 2008 on Tuesday, February 26th. 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 - January 2008

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



Some observations:

• Current prices are once again lower than the same month in any other year in the time period covered by The MAR, by the largest margin yet.
  
• The inflation adjusted median is again at the lowest point on record - the present price represents a loss relative to any time since the record began.
  
• The cumulative price decline from the beginning (Feb 2003) is 2.03%, which is an annualized decline of 0.42%.
  
• The most explosive price growth occurred in years prior to those reported by The MAR, which is hinted at in the gap between the 2001 and 2002 estimates and the reported prices for 2003. This should serve as a caution against the conclusion that price declines are nearly over now that the real price is below all previously reported prices. The reporting period is too short for that conclusion.
  
• The real decline from January 2007 to January 2008 was 9.17%.
  
• Prices are now 21.05% below the peak set in June 2005.
  
• The year over year decline was below the bottom of the normal range in December for the third month in a row. This may signal that declines are in the process of deepening, though only time will tell for certain.
  

One important thing to note which is not reflected in the above data is that the number of homes sold fell a dramatic 27.7% compared to one year earlier. Bear in mind that sales in January 2007 were up 13% over January 2006, so the large decline this year could partially, though not entirely, be attributed to unusually high sales last year.

In previous months, The Warren Group reported a median price for single family homes which was noticeably lower than The MAR's reported price, due to the inclusion of foreclosures and other non-MLS sales. However, the price reported in their press release for January 2008 excluded those sales which set it apart in the past. The timing was quite unfortunate as the median looked poised to break into the $200K's, and now we won't know if it truly has reached that point when the diversity of sales types are included. Given this change in circumstances, the data from The MAR may now be preferable to that of The Warren Group as both limit diversity of sales, but The MAR provides more open access to its historical data.

The S&P/Case-Shiller Index for Boston is likely superior to the data from both The Massachusetts Association of Realtors and The Warren Group as it corrects for many flaws that are inherent when only using 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:

• http://www.bls.gov/cpi/
  
• http://www.marealtor.com/content/monthly_reports.htm
  
• http://www2.standardandpoors.com/ ...truncated...
  

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[Phil O. Math]

Thanks again, this is great to see every month. I have a request: could you post, perhaps among your 'observations' bullet points, the nominal decline from peak, as well as the overall rate of inflation from peak? That would help us to see how you arrive at the overall decline in real home prices from peak to present.

Thanks for the good stuff.

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