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Boston Bubble Brief: The Real Story for MA - May 2007
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Mon Jul 16, 2007 6:30 pm GMT    Post subject: Reply with quote

I think the last year of significant decline will be this year, and then it will stay flat for a year or two more. I think that will be the medicine. Selection is kind of tight, so finding a great fit might be tough. How towns do their taxes and if they value education or not will weigh in in home values too. Some towns have enjoyed this price run-up because it veiled their fat.
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admin
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Joined: 14 Jul 2005
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Location: Greater Boston

PostPosted: Mon Jul 16, 2007 7:05 pm GMT    Post subject: Reply with quote

john p wrote:
I think the last year of significant decline will be this year, and then it will stay flat for a year or two more. I think that will be the medicine. Selection is kind of tight, so finding a great fit might be tough. How towns do their taxes and if they value education or not will weigh in in home values too. Some towns have enjoyed this price run-up because it veiled their fat.


Does that assume a continuation of the current job market and economic expansion? If so, what changes if the economy enters a recession? It has been awhile since we've had a recession (officially), which in and of itself doesn't necessarily mean we are heading into one, but eventually we will.

The current decline is unprecedented in that it is occurring without the usual trigger of a bad economy. Last year David Lereah was trying to persuade people that a decline could not happen because the rest of the economy was good:

Quote:

We've never seen a general decline in the housing market against a healthy economic backdrop where jobs are being created, the economy is growing and interest rates are favorable.


Yet the housing market has been in a general decline since then. If the decline was precipitated without the typical triggers, what happens once the typical triggers are present again? Certainly the timing is pretty important here and could make the difference between a leveling off in nominal terms and a more pronounced correction.

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guest
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PostPosted: Mon Jul 16, 2007 7:56 pm GMT    Post subject: MAX of 3x median household income OR no sale Reply with quote

johnp,

I totally disagree with you. Home prices are still too high as compared to median household income for all towns I've been looking at in the greater Boston area. House prices must be less than 3 times the median household income for any area before one can call a bottom to this crash.

Let's put it this way. If a typical town north of Boston has a median household income of $90K, then median home prices for that town must drop to $270K. Current wish list prices of such homes are at least $100K+ higher than that price. There is still much downside to go, and lots of ARM resets to trigger the collapse.

Sit back and relax.
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admin
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Location: Greater Boston

PostPosted: Mon Jul 16, 2007 8:07 pm GMT    Post subject: Re: MAX of 3x median household income OR no sale Reply with quote

guest wrote:

I totally disagree with you. Home prices are still too high as compared to median household income for all towns I've been looking at in the greater Boston area. House prices must be less than 3 times the median household income for any area before one can call a bottom to this crash.


guest,

While 3X income may be a good rule of thumb in general, I think the multiple may be a little higher in desirable metro areas, like Boston. I ran the numbers awhile ago and got 4.5 - 5 as the historic multiple for Massachusetts. I hope to re-run the numbers once the Census Bureau releases income stats for 2006. Here is where we were at last check:



See: http://www.bostonbubble.com/forums/viewtopic.php?t=141

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PostPosted: Mon Jul 16, 2007 8:34 pm GMT    Post subject: 3X number Reply with quote

Interesting data Admin.

I get my numbers from city-data.com.

For example, consider Burlington, MA:

Estimated median household income in 2005: $85,400 (it was $75,240 in 2000)
Burlington $85,400
Massachusetts: $57,184

Estimated median house/condo value in 2005: $429,800 (it was $244,800 in 2000)
Burlington $429,800
Massachusetts: $361,500

That gives a price/income ratio of x3.25 for Burlington, MA in 2000. In 2005 it was 5.0.

I do agree though that Boston proper, the price to income ratio will bottom out higher. For towns further north, 3x the median household income is a good rule of thumb and any price paid should not be too far above that number.

Thanks for hosting this forum.
I sometimes wonder if real estate agents read this site Wink
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admin
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Joined: 14 Jul 2005
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Location: Greater Boston

PostPosted: Mon Jul 16, 2007 8:51 pm GMT    Post subject: Reply with quote

guest,

OK, I guess the critical thing is consistency. A 3X multiple could indeed make sense depending on which data series you use, provided that you use the same data series for getting a historical perspective as well as measuring the current over-valuation. At first glance, my main concern with the city-data.com data is that it only provides two data points, so I don't think there is enough there to be able to say that the year 2000 is what should be considered normal.

Quote:

Thanks for hosting this forum.
I sometimes wonder if real estate agents read this site Wink


You're welcome. I think that some actually might.

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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Mon Jul 16, 2007 9:01 pm GMT    Post subject: Reply with quote

If we catch an economic cold (outside of the housing) we're screwed and you folks will see a significant drop in house prices.

If not, I think the big drop will be this year and prices will stay flat for some time until inflation catches up. Because the dollar is declining, it will take more dollars to buy stuff. As we come more into equilibrium with other currencies things will come more into balance. I see a weakening dollar, inflation, then income inflation with house prices staying the same.

My forecast is just like a rear end, everyone has one....
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PostPosted: Mon Jul 16, 2007 9:11 pm GMT    Post subject: Reply with quote

admin,

I agree. I think one needs to be consistent with our data-sets. I also would love to have more data than just 2000 and 2005, but it gives a rough guide.

Also agree that 2000 was not necessarily the average. Using your graphed data, we can at least say that it was above the last bottom at 1994. So if anything, my numbers should be overestimates. That's why I state that they should be upper-bounds.

Thanks again
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JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Mon Jul 16, 2007 9:48 pm GMT    Post subject: Reply with quote

As long as the job market stays strong, and interest rates don't go crazy, then I'm going to agree with john p. A flat market for a few years would take most of the air out of the bubble.


guest,

I don't think housing prices "must" do anything. The historical ratios are just that: historical. While I agree over the long term ratios of both income to price and income to mortgage payments must maintain some semblance of reasonability (if no one can afford to buy, then prices must drop), I don't think you can necessarily conclude that prices will go one way or another within the next few years using such ratios.

In other words, the ratios acts
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john p



Joined: 10 Mar 2006
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PostPosted: Tue Jul 17, 2007 2:04 am GMT    Post subject: Reply with quote

http://homebuying.about.com/cs/mortgagearticles/a/debt_to_income.htm

When you look at the fundamentals here: 28% of gross monthly income to service: mortgage, taxes, mortgage insurance, home insurance and condo fees (if applicable) and 36% on housing and recurring debt;

you can see that within the 28% if you have a dramatic decrease in mortgage interest, it leaves more on the table for a higher price (principal). We had a salary bubble, a deep cut in interest and had low house prices in the early to mid 90's. It was a perfect storm for a redistribution within this 28%

This is old information, but it gives you a sense of how the numbers interplay.

http://chartingtheeconomy.com/USAHousingBubble12005.pdf

A better researcher than I will be able to find out what the associated interest rate was when they said that you shouldn't spend more than 3 times your gross family yearly income on a house. If the associated interest rate was say 9 percent, then, yeah, the ratio could go up if interest rates drop to 5 percent right?

Now keep in mind the whole pyramid thing here. If someone gets a double and gets like $100k in their pocket by the market bubble, they have a higher down payment and it skews the ratio. I would rather see the median household income of age segment of first time buyers versus mortgage payment as opposed to an average worker who might be a bit older due to the baby boom.
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PostPosted: Tue Jul 17, 2007 3:10 am GMT    Post subject: Patience Reply with quote

"A better researcher than I will be able to find out what the associated interest rate was when they said that you shouldn't spend more than 3 times your gross family yearly income on a house. If the associated interest rate was say 9 percent, then, yeah, the ratio could go up if interest rates drop to 5 percent right?"

Interest rates will reach 9% in the next few years, and the price-to-income ratio will be back to historical lows. But, hey, "it's different this time," right?

"Now keep in mind the whole pyramid thing here. If someone gets a double and gets like $100k in their pocket by the market bubble, they have a higher down payment and it skews the ratio."

Ah...the wonderful casino economy. Thanks to the wonderful private central bankers, aka GreenScam. This too shall pass, or soon, many productive workers will spend their days playing the casino. Why bother busting your bust when luck plays a bigger role in one's standard of living.

"I would rather see the median household income of age segment of first time buyers versus mortgage payment as opposed to an average worker who might be a bit older due to the baby boom."

First time buyers? There are none. No first time buyers can afford these inflated prices. Check out the Case-Shiller index for Boston. The down-trend line is firmly in place and there is no place to go but down. .... Patience. Save and play the casino instead of buying an over-valued house.
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Tue Jul 17, 2007 3:15 am GMT    Post subject: Reply with quote

Guy's: please keep in mind that there is a lot of data that could support a significant, SIGNIFICANT drop. I just see that as the economic A-bomb that would go off worldwide.

We wanted people to buy our bonds to pay for the war right? If rates go up we have to pay more out to the countries that buy our debt. If at the end of the war the dollar depreciates, the people that bought our debt will be pissed because their dollars will be worth less. All the "wealth" buyers will have more dollars that will be worth less as well so the wealthy want low inflation. The person with the $500k mortgage is the person that wants salary inflation so that he can keep more of his take home pay.

Corporate America is really corporate world. If this "New World Order" is not loyal to the United States and manipulate the US dollar to create wealth for an international aristocracy, the American people will remind them that we have the power. People will say "I've worked hard and played by the rules and paid for this Military, so nobody is going to tip the landscape to funnel money away from us". If the FED doesn't recognize this power, people will say "If you don't adjust to take care of us, we'll adjust to take care of you." I hope the rich are smart enough not to cross that line.
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JCK



Joined: 15 Feb 2007
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PostPosted: Tue Jul 17, 2007 12:13 pm GMT    Post subject: Re: Patience Reply with quote

guest wrote:
"A better researcher than I will be able to find out what the associated interest rate was when they said that you shouldn't spend more than 3 times your gross family yearly income on a house. If the associated interest rate was say 9 percent, then, yeah, the ratio could go up if interest rates drop to 5 percent right?"

Interest rates will reach 9% in the next few years, and the price-to-income ratio will be back to historical lows. But, hey, "it's different this time," right?


Will reach 9%? If you're that sure, I'd start borrowing money like crazy, because you'll be able to stick the cash into Certificates of Deposit and make a killing on the spread. Really though, no one knows what rates are going to do.

Quote:

First time buyers? There are none. No first time buyers can afford these inflated prices. Check out the Case-Shiller index for Boston. The down-trend line is firmly in place and there is no place to go but down. .... Patience. Save and play the casino instead of buying an over-valued house.


We're the real estate experts saying exactly the same thing in 2003 and 2004, except in reverse? "The up-trend line is firmly in place an there is no place to go but up. Real estate never goes down."

I think there are plenty of good reasons for real estate to go down. I'm not suggesting otherwise. However, there were plenty of good reasons for real estate to go down in 2003 and 2004 as well based on the same metrics you're using right now. Just because it should go down according to these various metric doesn't mean it will in the next five years.
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john p



Joined: 10 Mar 2006
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PostPosted: Tue Jul 17, 2007 12:28 pm GMT    Post subject: Reply with quote

I think it is fair to say that realtors should not need to be predictors of the economy. If they focus on their role and do it well, I think they are doing their service. I think when realtors become armchair economists and pressure people with "the market's going to do this or that" they are acting like stock brokers and not real estate brokers. I think it is fair to expect that a realtor can say "gee I don't know, I can just do a really good job on the realtor role here."
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PostPosted: Tue Jul 17, 2007 1:52 pm GMT    Post subject: Reply with quote

Would the yield on the 10 year treasuries correspond to the expected value of future interest rates? I don't know - I'm asking. I would expect some sort of correlation at the very least, which could act as an unbiased predictor of future interest rates.

Interest rates are clearly important to the price of real estate, but I see them as exogenous rather than fundamental in the way that incomes and rents are. Incomes and rents support property prices as they are revenue streams related to the location and quality of the property, whereas interest rates have nothing to do with the specifics of a given property. Expressed a different way, if you held onto a fully paid property forever, the interest rate would not matter and only rent and income would. Interest rates probably have been the dominant factor in setting prices over the last few years, I would just personally ignore them when making my own purchasing decision and look at other factors instead. This isn't to say that rates won't dominate price movements going forward - they probably will.

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