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Boston Bubble Brief: The Real Story for MA - May 2007
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PostPosted: Fri Jun 29, 2007 2:40 pm GMT    Post subject: Boston Bubble Brief: The Real Story for MA - May 2007 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 May 2007 on Tuesday, June 26th, one day behind schedule. 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:

Full Price History




Change in Median Price From One Year Earlier, February 2004 - May 2007

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




Some observations:

  • The real decline from May 2006 to May 2007 was 1.58%.
  • Prices are now 11.21% below the peak set in June 2005.
  • The year over year decline in May poked above the normal range, as was the case in March as well. This may signal moderating declines.

Yet again, The Warren Group reported greater declines than The Massachusetts Association of Realtors. The Warren Group reported nominal declines on equivalent transactions of 4.6%, with the median price falling from $330,000 in May 2006 to $315,000 in May 2007. This translates to an ominous looking real decline of 6.66%. The Warren Group's data is more comprehensive than the Massachusetts Association of Realtors' data as it includes all sales rather than just Realtor affiliated MLS sales.

The gap between the data reported by the Massachusetts Association of Realtors and the Warren Group is starting to be noticed and has infuriated at least a few people. The median reported by the Warren Group was over 11% below the median reported by the Massachusetts Association of Realtors in May, a discrepancy of $40,000. This calls into question to what extent the MAR's numbers are still relevant as more sellers and buyers are opting for sales which aren't tracked by the MAR (i.e., without Realtor involvement). This could potentially overstate the impact of price declines as the Internet is helping to reduce the transaction costs. The older prices used in year over year comparisons are more likely to have a 6% commission built in, and so some price declines are to be expected as a result of this reduction in overhead.

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. 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 charts 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 2007 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. Alternatively, if you remove the bostonbubble.com signature from the bottom left hand corner of the two images within this post, those modified images (and only those modified images) can then be distributed under the Creative Commons Attribution 2.5 License. In all cases, attribution should be made via a hyperlink to http://www.bostonbubble.com/forums/viewtopic.php?t=251 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=251

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PostPosted: Sat Jun 30, 2007 2:57 am GMT    Post subject: Reply with quote

As always, Your work is great appreciated. I am wondering whether it is the time to include Warren Group's data because I am afraid MAR started to manipulate housing data. The housing data is so different between the two groups - a whooping 5.3% difference . Here is a quote from Boston Globe.

http://www.boston.com/realestate/news/articles/2007/06/27/hopes_for_real_estate_revival_wilt/
"Both groups said single-family home sales fell sharply in the month of May alone, with the Realtors reporting a 7.5 percent decline from a year ago and Warren Group a 9.1 percent drop.

But they again diverged on the impact of the slow market on prices. The real estate brokers group said the median price for a single-family home actually increased a tiny amount, 0.70 percent, from a year ago, to $355,000 from $352,700 .

Warren Group, meanwhile, said the median price tumbled 4.6 percent to $315,000 from $330,000."
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PostPosted: Sat Jun 30, 2007 6:54 pm GMT    Post subject: Reply with quote

I think one of the real differences in the reported sale prices comes from the fact that someone who hired a realtor is less willing to settle for lower prices (especially at the begining of the season), since they have a realtor wispering in their ear. Hence less houses moved, and the ones that did move through a realtor had a higher price tag.
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PostPosted: Mon Jul 02, 2007 12:51 am GMT    Post subject: Reply with quote

Quote:
I am wondering whether it is the time to include Warren Group's data because I am afraid MAR started to manipulate housing data.


I looked into this awhile back but wasn't able to find a long running monthly data series in one place. Off the top of my head, I think I was only able to easily find a single series for the then-current month in previous years (e.g., right now you might be able to get May 2006, 2005, 2004, ...). If you can point me to a monthly data series that has a long history, I will seriously consider switching the reports to it.

However, if there is going to be a switch, I think using the S&P/Case-Shiller Index would be an even better choice. Its main downside is that it is about a month behind the MAR and Warren Group.

jbw wrote:
I think one of the real differences in the reported sale prices comes from the fact that someone who hired a realtor is less willing to settle for lower prices (especially at the begining of the season), since they have a realtor wispering in their ear. Hence less houses moved, and the ones that did move through a realtor had a higher price tag.


Excellent hypothesis. That certainly sounds plausible.

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PostPosted: Fri Jul 06, 2007 9:28 pm GMT    Post subject: Reply with quote

I'm trying to get a housing market thread back on top. The white collar rust belt thread is getting a little off topic.
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PostPosted: Fri Jul 06, 2007 11:02 pm GMT    Post subject: Reply with quote

I don't think the "rust belt" stuff is off topic. On the contrary, it is a fundamental contributor to the Boston Bubble. Think about it, in order to understand a bubble and to know if it is going to pop, deflate, or grow you need to understand what was/is inflating it and what are the potential sources to puncture it. Passively looking at a trend line is the tip of the iceberg in the amount of effort needed to pull the trigger with responsibility. Think about it, the Big Dig inflated wages in the construction industry, the Internet Bubble inflated wages in the technology sector, this current corporate debt bubble has inflated the stock market, the sub prime mortgage fiasco allowed prices to further get beyond fundamentals and the Iraq War has affected the bond market. If a group of individuals take the time to analyze one of the contributing factors it might provide you some insight. If you're not interested you don't have to double click on the topic. Depending on your target market, a topic may hit home i.e. if you're in Hopkinton, EMC's future is not an unrelated topic. Boston has a portfolio of industries and trying to understand the future earning potential will help you understand the competition you're facing when putting an offer on a house. For instance, if you're in a dead end field and the financial kids are raking in all the money and you're losing offers to them on houses, you need to decide whether to get out of dodge or wonder if their earnings are going to be short lived. It is a very big decision that many are going through so I am pretty sure that it is why this topic is popular. Also, lots of people follow the latest industry trend and often find themselves in short lifecycle periods. The gut check of whether you truly love your work will determine whether it is worth cutting bait or weathering the storm. This whole feast/famine winners/losers cycles is a bit turbulent for young folks and they are getting wise so the future high earning forecasts that fueled people to put offers on homes 7 times their household salary days are over. This hangover that people are feeling will be part of the forces that reel this situation back in.

Lastly, you have to overshoot the effort to come out on top. Understanding the contributing factors and their trends will give you the ability to feel the pulse. When you hear about rich Europeans buying high end condos on the Boston waterfront, you'll also hear about how the Euro is kicking the Dollar's ass. Today's concern is inflation. Inflation is what making this trend line goes up. The big, big question is whether or not inflationary forces will make wages go up which will increase household incomes and bring fundamentals in line. My theory is that Boston is boiling at about 5 degrees above the boiling point. That extra 5 degrees is what is leaving Boston. The correction is going to be those extra 5 degrees. I don't think things are going into a deep freeze. Check out the trend line again on this topic; it is going up. Again, inflation is weighing into it. I bought at the lowest point on this trend line. I negotiated my price at the end of July 2005. Prior to that I couldn't get a straight answer from anyone. All I got was "depends, depends, depends". I think the value of this website is that it provides a diet of information that is important in navigating through the b.s. professionals in this industry and the changing dynamics. The stuff you put in your head will help you think on your feet when the time comes. The "irrational" part of the irrational exuberance can either make you laugh or cry. Sometimes you need to be reminded that there is a fat Samoan who's getting paid for sticking his face into people. This sort of information keeps you grounded, it reminds you that the world doesn't make sense and reality is stranger than fiction. It keeps you laughing instead of crying. That fat Samoan at least earned an honest living last year; the President of the NAR didn't. Think that’s funny, how about being a Biotech researcher and moving to North Carolina where you might send your kids to school and have some cracker teach them that Darwin, Galileo, et. al. are evil and that smoking cigarettes are good for you.
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PostPosted: Sat Jul 07, 2007 1:33 am GMT    Post subject: Reply with quote

Sorry, it was July 2006. My goal is to help everyone here. If a meathead like me can outplay and better forecast than "seasoned real estate professionals" it is either that they are incompetent or dishonest (neither of which is good) and further there is no excuse for any of you to outperform me. When I was going through this tough time some of these scumbags were really pushing me and messing with mine and my wife's future. By helping you folks succeed with everything I can offer, I am pushing back on an industry that tried to take from my family.
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PostPosted: Wed Jul 11, 2007 2:52 am GMT    Post subject: Reply with quote

john P, you are great. I enjoy reading your posts - although some of them are a bit too long for me. Very Happy

john p wrote:
Sorry, it was July 2006. My goal is to help everyone here. If a meathead like me can outplay and better forecast than "seasoned real estate professionals" it is either that they are incompetent or dishonest (neither of which is good) and further there is no excuse for any of you to outperform me. When I was going through this tough time some of these scumbags were really pushing me and messing with mine and my wife's future. By helping you folks succeed with everything I can offer, I am pushing back on an industry that tried to take from my family.
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PostPosted: Wed Jul 11, 2007 5:28 am GMT    Post subject: Reply with quote

I bore people into submission, sadly it is my only defense. That's why the dog is man's best friend; they just listen. All I have to do is say "treat", "cookie", "doggie", or "dogpark" if even the dog starts to doze off.

The great architect Louis Kahn said that the scientist starts at the seat of the measurable and works towards the immeasurable and the poet starts at the seat of the immeasurable and works towards the measurable.

I start at the toilet seat.
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PostPosted: Wed Jul 11, 2007 1:17 pm GMT    Post subject: Reply with quote

John P = NP
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PostPosted: Wed Jul 11, 2007 1:19 pm GMT    Post subject: Reply with quote

john p wrote:
John P = NP


Hard to figure out but easy to verify? Smile

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PostPosted: Mon Jul 16, 2007 2:38 pm GMT    Post subject: Reply with quote

To all real estate junkies:

The June report is where all the cards go face up. June has been the peak in the past several years.

The spike of mortgage interest started towards late May so the effect will show up in the July numbers. I think a number of sales with contingencies might fall through and you'll hear of stories of deals that had to renegotiate because of the spike in interest and the values dropping.

In 2004/05, people seemed to just try to find the ceiling in the market so they were adding percentages to last years sales. I think 2006 was about people padding their prices to find the last of the dumbells and to have some room for negotiation. 2007 seemed to be about "pricing right" to get noticed for the fewer buyers in the market. This late spring/ early summer has been about price drops to capture the musical chairs and get the last buyers available.

I think now is a good time to get out there and low-ball. The key is to find a seller that has an alternative, meaning is not a short sale and has a place to go where they won't lose too much value and if they wait longer they lose in the overall exchange. Finding out the profile of the seller is more important now than ever. If a seller has another property lined up they might be carrying two mortgages: on the one hand if they got a great deal, they might not be greedy and pass along a good deal to you; on the other, if they got an early spring market deal, they might not be able to afford taking a big hit on giving you a real deal on their place. The sad part is that the people that have to sell might be afraid of being upside down $20k or so really ought to be the ones who deal because if they wait, they might be $80k or so upside down.

I wonder what the appraisers are thinking about right now. Those guys seem to just adjust their prices to what ever the selling price is. The banks do risk a bit if the market corrects, so I wonder what their disposition is...
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PostPosted: Mon Jul 16, 2007 3:32 pm GMT    Post subject: Reply with quote

My gut tells me (on average) that if a property has done a price change of about 3% in the last month there is still about 8% still left on the table for negotiation.

My basis, so you can judge my prediction is that if they were not getting offers in early spring they were about 3-5% over valued in the asking price. If they were priced right, their property would have sold for about 5% off of asking. People feel more comfortable giving offers that don't feel like insults so the asking needs to be in the ballpark. If they've dropped 3%, they have dropped the a good percentage of the surcharge in the asking price so they are within 8% of the final price (5% to get to the normal asking to sell percentage, 1.5 percent decrease for post July 4th seasonal drop, and 1.5 percent for the interest rate premium surcharge. If a property is grotesquely overpriced, it will be much steeper if it sells at all.

Now, for the "Wealth" type buyers, people where income does not matter (I picked this term up in a recent newspaper article) the jump in the stock market might be a good time for people to cash a bit out and buy some property (which is what contributed to the bubble with the investor contingent surcharge of buyers, theeere baack). This, again, will be for the upper class homes. Some of the properties in the $750k-$1M might have to think hard about either dropping OR RAISING THEIR PRICE. The one thing that might hedge this will be that people will be rational enough this time to understand that this might be short-lived.

Again, I think that there might be good deals out there because the pent up buyer demand of those sitting on the sidelines might not have gotten a scent of the blood in the water yet, and when they do, this late summer/ early winter, you'll see some more buyers showing up. I could be totally wrong, so ask many others.

Lastly, the BIG correction that many of you are waiting for might happen. We are susceptible for any economic bug that's out there. People are a bit overextended; people are mentally squirreling away and aren't spending as much. Places like Target, Wal-Mart and Kohl’s are even socially acceptable to talk about shopping at even at the cocktail parties in the South End in the kitchens with granite countertops and bamboo floors. And guy's go out and get a real Guayabera shirt (you need a pocket for the cigar) my God, get with the program.

http://guayaberashirt.com/shop/

Anyway, if we do ride out this storm and don't catch an economic cold, I think that this is a very good time to buy. If we do catch a cold, the big correction will be bad for everyone so make sure you don't overextend and you have some cash reserve.

Lastly, again, think about the Hilltop Steakhouse in Saugus. That place was unbelievable (and still is in my opinion). It was so popular in the early 80's that next door a place called "Valley's Steakhouse" opened up. Valley's got the surcharge of people that didn't feel like waiting 1 1/2 hours for the Hilltop. The best part about this analogy is that it embodies two possibilities for Massachusetts: First, that the "Valley's" are like the Providence R.I.'s, the North Carolina's that got the overflow from the Boston’s are the most susceptible for a correction, or second possibility, that the Hilltop Restaurant in Braintree just closed down and that the Hilltop Dynasty has run it's course. I think the truth is that Frank G. died and his kids were too young to grab the reins and it was bought by a corporation. I think that if the kids (Frank's blood) get the control now, that they are older, they will bring it back hard. And you MIT kids don't go stealing those cows and putting them up on the dome. If you Sloan kids want to learn anything about how to run a business, check out the Hilltop and see how one was done old-school built on fundamentals, and note that I told you that it would come back.


http://www.hilltopsteakhouse.com/index.php?PHPSESSID=805aca0e8229199a54a67ff5f85c8caf
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PostPosted: Mon Jul 16, 2007 4:05 pm GMT    Post subject: Reply with quote

john p wrote:

Now, for the "Wealth" type buyers, people where income does not matter (I picked this term up in a recent newspaper article) the jump in the stock market might be a good time for people to cash a bit out and buy some property (which is what contributed to the bubble with the investor contingent surcharge of buyers, theeere baack). This, again, will be for the upper class homes. Some of the properties in the $750k-$1M might have to think hard about either dropping OR RAISING THEIR PRICE. The one thing that might hedge this will be that people will be rational enough this time to understand that this might be short-lived.


I'm curious about this. How many "wealth" buyers are there, percentage-wise? Who are they and why are they wealthy? I generally hear the "wealth" buyer invoked when somebody wants to make the argument that property is a good investment even if prices relative to incomes are higher than than they have been historically since there is this ever growing group of the independently wealthy, and they can and will eventually buy everything. This usually has the opposite effect on me, in that I know that I am limited by my income, and therefore I can't play the game and should permanently give up on the idea of buying since the implication is that prices won't fall back into line with incomes. I'm just wondering how large of a factor the "wealth" buyers are in actuality - I don't doubt that there are some out there, but their numbers certainly matter and yet are never produced (that I have seen). I get the sense that it may be a gimmick, though I'm eager to be proven wrong.

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PostPosted: Mon Jul 16, 2007 5:50 pm GMT    Post subject: Reply with quote

Keep an eye on the stock market. When you get a stock market bubble, sometimes people are inclined to cash in on their winnings and buy something tangible (otherwise it is just a paper gain). Also, rich people scoop up things when others are desperate. The truth is that housing is overvalued, but by comparison, it might be less overvalued than the asset that they are long in. The flip side is that people who had invested in real estate might be trying really hard to unload their condos because they want in on this Bull Run. I think that the decline in the dollar has buoyed the international stocks or US corporations that are global. A strong dollar is better for real estate than a weak dollar.

As far as it being a gimmick, I'm sure that stupid real estate agents are invoking this logic improperly. Just hit the buzzer and say "not applicable, thank you for playing". Better yet, let them think you’re dumb. I think learning all the ins and outs of the surrounding economy is important because the real estate agents try to be armchair economists and cobble together a forecast that favors a higher price. If you have a clue about the fundamentals, you can tell pretty quickly when the agent is full of it. I absolutely love the cocky high salaried salesman who work for big developers who think they know it all. If they understand that they are truely clueless and are very lucky they might not overextend themselves. If they believe their own b.s. they might be some of the first to go belly-up.

Lastly, keep in mind whatever the truth is just a lighthouse; be sure not to confuse it with St. Elmo's fire. If you have a sharper understanding of the truth and have your finger on where the perception lies of the masses and most importantly, the person you’re negotiating against, you'll know how to play your hand better. In a changing paradigm perception is all over the map.

As far as percentages go, I would imagine that it would of course vary depending on the price bracket. For those 43 years and up who have perfectly timed the real estate, and hit two stock market bubbles, they might be sitting on some extra cash, which is why I saw the $750k- $1M as the range where it is latent. The 43 year old most likely bought at age 25, so they have 18 years of appreciation and upgrades. They might have a couple kids and want 4 beds in a good school district and just have the cash available to compete for that neighborhood. The 34 year olds might have rented until age 30 or so and bought high in 2004. They haven't hit any "doubles" in real estate, maybe hit one of the stock market bubbles though. The under 30's have likely neither had a stock market or real estate run.

This income and wealth disparity will manifest itself in the housing market. This will create gaps in price strata. You will see certain strata behaving differently than other. I think with a significant amount of gaps, you'll eventually see them pancake together. Even economics strives towards equilibrium. If it takes too long, we'll get socialists like Deval to tip the scales back. I'd prefer to let the market follow its natural course, but unfortunately we have some macro international forces that are in play now. As far as detecting how many, again, you'd need to see the sales at different price strata.

The rich are getting richer so it makes sense that the higher end strata might be going up. The gap between is where the risk is in the investment.
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