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Boston's Crumbling Economy
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john p



Joined: 10 Mar 2006
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PostPosted: Fri Jul 20, 2007 1:17 am GMT    Post subject: Reply with quote

Here's another thought:

If prices start to nosedive, what do you think banks will be asking for to protect their interests? Do you think they will still be doing the no money down deals? or will it be 20% down?

If the value of the dollar is going down and there is a possibility that the short term value of the asset (your house) drops, wouldn't mortgage rates go up as well as lending standards?

If you plan to wait for a potential crash, make sure you have enough to get over the possible hurdles at the associated time.
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admin
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PostPosted: Fri Jul 20, 2007 2:01 am GMT    Post subject: Reply with quote

john p wrote:

If you plan to wait for a potential crash, make sure you have enough to get over the possible hurdles at the associated time.


If you can qualify now but couldn't qualify using the historical lending standards, shouldn't that be a red flag that your risk in taking on a mortgage is high? Think of the alternative buying scenario - you buy now, a crash occurs, and you are left with an underwater mortgage and negative net worth, probably in the midst of a bad job market. That sounds worse than the alternative where you wait, a crash occurs, and you still can't buy - at least in this case your monthly burn rate and debt would both be much lower and you would therefore be in a better position to weather any employment setbacks.

- admin
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john p



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PostPosted: Fri Jul 20, 2007 2:15 am GMT    Post subject: Reply with quote

Last point about herd mentality:

People feel safety in numbers. Just like the illegal aliens, if enough people get over the line, logistics make it difficult to deal with the problem. This behavior isn't like giving tickets to catch speeders; it's almost all or none. I mean think about Ben Bernanke’s position here: He can swamp out millions of people because they overextended. Whether or not they brought on that problem themselves doesn't wipe away the absolute mess we'd have if they all go belly up.

This exact situation is a perfect example of Republicans and Democrats. If you look at the county map of red and blue counties, it is abundantly clear that the denser areas are mostly blue and less densely populated red. When you already live in a mess you have to live with the mess like traffic in Boston. If you live in the country you can have a more preventative attitude like Nancy Regan's "Just say No". The Republicans have this waterproofing barrier strategy to seal off the basement, the Democrats say hell, water's already in, let's make sure we don't let any valuables get damaged. Democrats focus on dealing with existing problems realistically, while Republicans focus on preventing realistic problems. Democrats say, "Gee, that advice would have been great 100 years ago, but this is what we inherited". The water that is trying to get in was greed. The aristocracy will always try to push the limits to see what the market "bears". They try to see how much pain people will settle with first before they back off. The problem is that the more and more people that get overextended, the more material the clean up will be. This current battle Ben Bernanke is having with inflation is his and his predecessor's own doing. They got rid of a stock market bubble by creating a debt bubble / housing bubble. This is going to either push up the demand for higher wages or decrease the value of the dollar or you will have masses and masses of people in serious financial trouble. As much as I absolutely hate the socialistic approach to bail out the sub prime buyers, it may prove to be the stun gun approach to get the financial industry to stop attacking the weak. Bernanke is saying to the socialists that "We get it", but I don't believe they really do. There is a good chance we will have a socialistic leaning President come 2008 and the Republicans deserve it for letting the rich get too greedy. Just like the illegal aliens will most likely get off, I think that the sub prime might get off too because they were protected by their shear numbers. If Bernanke digs his heels in, more will flow to the rich the poor will get poorer and the middle will dissipate and Bush will end up going down as the divider not the uniter. In all fairness to Bernanke and Greenspan, they didn want Pay-Go (pay as you go policy for spending in government) and they didn’t start this Iraq War, but they could have damped and dissipated things instead of letting bad forces resonate.
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john p



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PostPosted: Fri Jul 20, 2007 2:59 am GMT    Post subject: Reply with quote

Admin:

You're the voice of sobriety. Additionally you're perspective is gaining momentum in the masses so it brings more more probablity to your point.

If you can wait, I think it makes sense to wait. If you find it difficult to wait, I'm trying to offer the better options right now. On the one hand you want to protect your family from harm by getting into a risky situation, but on the other side, you've got to live. My father had a heart attack and now has a stent in him. I'm Uncle Johnny and it is great to have the little ones down and my folks up from Florida to have a family bender at our house. I mean people are now having to wait to retire, buy houses and have kids. It's risky to have kids really late in life. I waited pretty long to save like you said to get the fundamentals in line, so I recommend doing the same, but the thought of not having a place to have the family over was motivation to negotiate hard. To some of these old school cultures out there, the value of family outweighs the financial fundamentals that tell you to wait or not have kids (they are a financial drain). So what I'm wondering is that if people play by the rules and the light never turns green, should they run the light?

Again, I do think that there are some skewed fundamentals like what is the associated interest rate versus the corresponding multiple of household income to price. I see other economic climatic factors (your term) absorbing some of the force, a potential for higher interest rates due to inflation, possibly higher more restrictive lending standards and significant drop already last year. I see things breaking further lower this summer and with the current inventory levels there will be some unbelievable deals for agressive negotiators. I think that if you work really hard and are tough now you'll get the best deal in the next two to three years (interest might go up with inflation and the depreciation of the dollar). This year you will have a combination of risk taker buyers (agressive) with the fearful sellers who want to be the first to cut their losses; that combination of disposition and with the uneven ratio of buyers to sellers, this will be a bloody summer for sellers.

I would assess what you think the "crash" would be like, what the price would be and the associated interest rate for your target house. Then run the numbers for the monthly mortgage and then roll the dice and make a low ball offer, what do you have to lose at that point?

I made a $450k offer on a $750k home. This home is now selling for $580k See it right here:

http://homes.realtor.com/ ...truncated...

Take the risk away by low balling, if anything you'll advance your negotiation skills.

Editor's Note: This post was edited to abbreviate a URL which was widening the page due to the way that the forum software lays out posts. No other changes have been made, and the URL still points to the original destination - only its display has been shortened.
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admin
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PostPosted: Fri Jul 20, 2007 12:50 pm GMT    Post subject: Reply with quote

john p wrote:
So what I'm wondering is that if people play by the rules and the light never turns green, should they run the light?


Yes, you can run the light if you don't care about the cost of the ticket, should you get caught. What I was saying was look both ways and make sure your family is buckled up first so that the cost of the ticket is the only downside. Less abstractly, feel free to ignore the fundamentals if you can weather the downside financially, but the precautions which protect you are independent of the fundamentals and should not be part of what is ignored - e.g., a significant down payment and an emergency cash fund.

- admin
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john p



Joined: 10 Mar 2006
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PostPosted: Fri Jul 20, 2007 1:49 pm GMT    Post subject: Reply with quote

Totally sound advice. Keep your eyes open and your wits about you. I would never advise someone to overextend in a declining market where we could get an economic storm.

When you see that house I posted though, it was asking $750k and now is $580k, that's already about 23% off of asking in Spring 2006.

Read my posts back in 2005, I thought things were 30% overvalued (that's alot). You still have the greedy types that want $879k for a tiny cape (write them off). However, if you take inflation 2.5% for 2005/6 and 2.5% for 2006/7, that's 5% there. If you take the 23% from this sale's drop and add the two years of inflation, that's about 28%. If you offered 2% less than the current $580k, I think this seller would hug you, so there's your 30%. The reason why I think there is even more on the table for you to negotiate is that the interest rate in 2005 was around 5.5% and you wash away about 6% of affordability with the interest rate premium. So if I really, really loved this place and it was in decent shape (passed home inspection) I'd offer about 8% off of it. The reason why is that interest rates might be up .5 percent next year and add another year in for inflation.

Again, if you can wait, I'd wait. If you are going to pull the trigger, be aggressive. I'm just trying to give you a few points to make (to yourself) in case a realtor puts the full court press on you.
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PostPosted: Fri Jul 20, 2007 2:07 pm GMT    Post subject: Any thoughts on offering inflation adjusted 1993 prices? Reply with quote

Consider the following: a current owner paid $150 in 1992, and they are currently listing for $410K.

Let's say we add 4% inflation for each year from 1993 to today, that would give an adjusted price of $150K*1.04^15 = $270K.

That's the most I'd pay for the place. So how do I get the sellers to come down to that price? Should I offer even lower? Maybe $200K as an initial offer?

Thanks for the advice
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john p



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PostPosted: Fri Jul 20, 2007 3:36 pm GMT    Post subject: Reply with quote

This is how I'd go about looking at it (I have no idea about the majority of the details so take this with a pile of sand about the size of the place in East Boston). This is just a fantasy approach just to see the model of thinking...

Anyway, the guy bought in 1992. The economy was tanking then and it was a good time to buy so maybe add about 5-10% of value to the price because it was in a down market.

If the person bought in 1992 for $150k. I'd assume that their household income might have been $54k and they may have been in their mid 20's. I base this on a $1300 mortgage payment and it being 28% of their gross monthly income. Now, they're about 41 and could be making about $85k one earner or $140k, two earners. If mom's at home, assume $85k. If they made much more than that, they would have already have moved, unless they have done work on the place or are frugal.

Now when you check out the place are they growing or downsizing. Also, look for any "zoning" issues like do you see girly stuff on the walls next to an autograph of a professional wrestler. If this is the case you know that there is a woman who is envisioning having her man moves his stuff to a basement situation. Also, you will be able to tell who wears the pants in the situation. I lost this battle b.t.w. This will give you also a sense as to where they are in the pressure to move. If the place is absolutely jammed with stuff, especially the bathroom, there is a mad hen in the house.

Now, think about his down payment and where he might be in financing. My guess is that he put 5% down so his mortgage is for $135k, but may have refinanced for a lower rate. He could be more than halfway through his mortgage and his payoff is $90k or so. My guess is that they might have taken some equity out. See if there is a Cadillac in the driveway, a motorcycle in the garage, or pictures of a trip to Vegas on the wall.

Now 16 years is a long time for a house if you don't do maintenance. Did they put in replacement windows? Did they put a new roof on? If you see an uneven distribution of money like say they put in granite countertops but don't have a new roof, they may not have put the money where it needed to go and you might need some cash reserve to pay for the leaks or a premium to pay for a higher heating bill because of the old windows.

My expectation is that they might hope to get $385k on the sale of their home, and after realtor fees and mortgage payoff, they get $250k. If they're making $85k, one earner multiply that times 3 and add the $250k (this is their target price range to move up to). So they're looking at the $500's. If you saw a lot of yuppie stuff in their place, they might be looking higher. I think if they were hard core yuppies they might have moved already. Maybe they are conservative and are playing right up the center of the fairway... Go to see the sales of homes in the $500k's and see what they're doing. Now you've got to study what's going on in their target price range. They need a place to land you see. If there is some price movement in their target landing, it will transfer to you. Also, if there isn't that much of a value difference between the $550k and the $385k, they might decide it's not worth it. Again think about how crammed it is and if it feels like they are uncomfortable in the place. If there are double beds in the master bedroom, they might have a winning formula like the Costanzas so don't even bother try to negotiate, they'll kill you. Look for things like if Mom's maybe going back to work, how old are the kids, are they townies and have the town's mascot in the back yard grazing (in which case they're going to stay in town). Try to figure out what they value. If they seem frugal and conservative, it's going to come down to their best value for their money, so if they have a 4.5% note and about $90k left, they're socking away a lot and might see the value in that.

If this is a condo, I wouldn't touch it unless it has a gorgeous view of the ocean or city and two parking spaces. Do you think that this is above or below the "median" for this town? If it is at the median then I would say no more than 3.8 times the median income. If you think it needs less than $40k of personalization and maintenance and you love it, I'd offer about $320k. He'll be able to walk away with about $200k, and the target house he's looking at might have backslid about $80k as well. Think of two moving walkways next to each other, you want him to step from one to another. If his target hasn't backslid, he can't pass the savings on to you. In order for the overall market to actually correct, people need to buy and sell and have the adjustments click, click, click back. At first, the more aggressive buyers will be out while it's dangerous, so the deep discounts could be out there. For the seller to justify taking a bath on their property, they need to be able to get it on the other end.

Again, the ratio of median price to median income has to be seen in climatic factors: the median person most likely bought their home 14 years ago, so compare their current salary against the price they actually bought it for. The median person profile might be in fantastic financial shape while the new buyer is screwed.

I think right now $320 is the lowest you could go right now; that could change in a year. Also, make sure you could live in this place for 5 years or so...
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john p



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PostPosted: Fri Jul 20, 2007 4:22 pm GMT    Post subject: Reply with quote

Hey Dorchester Grandma:

Why don't you weigh in, you made out better than I did.
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Mallrat
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PostPosted: Sat Jul 21, 2007 12:41 am GMT    Post subject: Reply with quote

admin wrote:
JCK wrote:
This isn't even anecdotal evidence. No comparison is being made; just a few pictures of "for lease" signs. Third rate Italian restaurants and couple movie rental places go out of business and economy of the whole city is crumbling? Please.


JCK,

A comparison is not necessary for something to be anecdotal. In fact, a comparison would make something less anecdotal. I fully agree with you that this article doesn't offer any solid evidence, hence the "anecdotal" qualifier, which in other words means that this should not be the basis for any conclusions. What it does offer is the starting point for a discussion on what might be worth investigating. Are the number of "for lease" signs actually higher than in the past? If there is an increase, is this just a Mass Ave phenomenon? Is it limited to certain types of businesses, as you suggest?

- admin


I read the whole thread before replying, I'll roll all my points into this one reply.

The number of for lease signs seems higher to me, but I didn't keep records so I can't be sure by how much.

The person who said that Harvard Square isn't suffering may not know the history. At one time Harvard Square was a huge draw with many unique stores, especially bookstores. Paperback Booksmith, Reading International, the original Wordsworth (now stuck in a basement under a kid's bookstore), Macintyre and Moore (on the edge of the square), and the science fiction bookstore.

Most of what made Harvard Square unique has vanished, replaced by chain stores. The same chain stores you can find in any mall where the parking is free.

Which brings me to the point. Downtown shopping and main street shopping districts haven't been killed by the collapse of the economy, they've been killed by malls, and the corpse has been given a few swift kicks by the internet.

The unique stores in Harvard Square were wiped out because people realized that they could find just as big a selection in Barnes and Noble superstores as they could in the combined inventories of four competing medium sized bookstores in the square, and not have to deal with Cambridge traffic and limited parking.

This was going on in the eighties, and continued in the nineties. It transcends the fluctuations in real estate, though the eighties bubble bursting did provide a stay of execution for some small stores by slowing down the escalating rents.

I give the example of bookstores because they were my reason for going into Cambridge. The same argument can be made about almost any specialty store. The stores have moved into the malls or onto the web to escape the congested main streets and they're never coming back.

This probably won't have much impact on the local economy since the big chain stores will rent out the property in order to have a prestige location and lock in their mindshare with the soon to be elite Harvard students.

But for everyone else who once loved shopping there it's as good as dead.
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PostPosted: Sat Jul 21, 2007 1:01 am GMT    Post subject: Reply with quote

I remember during the 80s, Harvard Sq had nearly two dozen bookstores, more than anyplace else in New England including other college towns like Amherst/Northampton and Burlington VT. Though I haven't spent much time in the big apple, even NYers attending Harvard, BU, or BC have told me that during its heyday, the combined bookstores of Harvard Sq rivaled 'The Strand' and/or much of the West Village's offerings in Manhattan. Now that's a compliment, esp coming from one of the world's most "head in the cloud" cities. In a sense, outside of the NYC public library system, Harvard Sq was the "It" for books for much of its halcyon days.

Today, the square's a dead zone and unfortunately, well-to-do Milton Academy types combing Harvard Sq, isn't go to change it. What Harvard Sq was, was the cultural mecca of eastern Mass and essentially, was one of the reasons to be living in the Boston area esp if you're an intellectual and wanted to attend bookstore seminars and gatherings with others of like mind. Yes, it still goes on but it's a real step down from before and I think the transformation of the Square into an outside mall did it. There's no point in another Natick/Framingham Rte 9 district in the middle of Cambridge MA.
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PostPosted: Sat Jul 21, 2007 1:19 am GMT    Post subject: Reply with quote

Former Harvard Sq fan wrote:
I remember during the 80s, Harvard Sq had nearly two dozen bookstores, more than anyplace else in New England including other college towns like Amherst/Northampton and Burlington VT. Though I haven't spent much time in the big apple, even NYers attending Harvard, BU, or BC have told me that during its heyday, the combined bookstores of Harvard Sq rivaled 'The Strand' and/or much of the West Village's offerings in Manhattan. Now that's a compliment, esp coming from one of the world's most "head in the cloud" cities. In a sense, outside of the NYC public library system, Harvard Sq was the "It" for books for much of its halcyon days.

Today, the square's a dead zone and unfortunately, well-to-do Milton Academy types combing Harvard Sq, isn't go to change it. What Harvard Sq was, was the cultural mecca of eastern Mass and essentially, was one of the reasons to be living in the Boston area esp if you're an intellectual and wanted to attend bookstore seminars and gatherings with others of like mind. Yes, it still goes on but it's a real step down from before and I think the transformation of the Square into an outside mall did it. There's no point in another Natick/Framingham Rte 9 district in the middle of Cambridge MA.


I agree. This cultural aspect translated into tremendous foot traffic and (at least based on what I remember hearing from real estate people at the time) Harvard Square was one of the greatest retail locations in the world. Not just in the US, the entire world. By jacking up rents to the point where only national chains can afford them (and even then only as loss leaders with the storefront serving as a sort of billboard for the brand) the owners may have screwed themselves. I don't know if the rich brats at Harvard, along with the rich people who live in Cambridge, can make up for the losses but I doubt it.
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PostPosted: Sat Jul 21, 2007 2:54 am GMT    Post subject: Reply with quote

Quote:
Harvard Square was one of the greatest retail locations in the world. Not just in the US, the entire world.


Yes, even students from London Univ, the ultimate international school, said a lot of good things about Harvard Sq during those times when they came over for their graduate studies. One of them, who later did his PhD at Carnegie-Mellon, always reminisced about bookstores like Seven Stars and Wordsworth because he really thought that those places attracted the most interesting Americans which a lot of Europeans didn't believe existed.

Quote:
By jacking up rents to the point where only national chains can afford them (and even then only as loss leaders with the storefront serving as a sort of billboard for the brand) the owners may have screwed themselves.


Absolutely. They've sort of begrudingly accepted it but aren't taking the steps to make the changes. I guess they figured they could just sell out to a higher bidder down the road.

Quote:
I don't know if the rich brats at Harvard, along with the rich people who live in Cambridge, can make up for the losses but I doubt it.


Nope. They serve no purpose whatsoever; one can start up a bridge club near Milton Academy or Philips Exeter in a more posh, suburban locale. What stagnant rich people do is drive out the middle classers with intelligence and ideas. A lot of middle income bright people don't want to hang out at a bookstore if the average conversation is about when daddy's going to buy one a Mercedes.
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PostPosted: Sat Jul 21, 2007 3:08 am GMT    Post subject: Reply with quote

Giving it some more thought it's obvious retail sales must have declined severely, not just shifted from one sort of retailer (specialized bookstores) to another (high end chain stores). In its heydey Harvard Square's retail outlets had the local rich, the students, the tourists and the many pilgrims to the cultural mecca as their customers. Now they've got the local rich and the students. That has to translate into a huge loss in cash.
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PostPosted: Sat Jul 21, 2007 3:19 am GMT    Post subject: Reply with quote

Former Harvard Sq fan wrote:

Absolutely. They've sort of begrudingly accepted it but aren't taking the steps to make the changes. I guess they figured they could just sell out to a higher bidder down the road.


They have no motivation to think long term. It's the tragedy of the commons. Every landlord benefits most by stripping the place bare for every nickel they can. If someone sacrificed their profits by renting to smaller stores for less rent the landlords who charged top dollar would benefit from the increased traffic while bearing none of the costs. This is the problem with bohemian enclaves. They either collapse into real poverty and become dangerous or they gentrify and become boring. It's a natural cultural cycle.

Quote:

Nope. They serve no purpose whatsoever; one can start up a bridge club near Milton Academy or Philips Exeter in a more posh, suburban locale. What stagnant rich people do is drive out the middle classers with intelligence and ideas. A lot of middle income bright people don't want to hang out at a bookstore if the average conversation is about when daddy's going to buy one a Mercedes.


The other factor here is the lack of new rich. Other posters here have commented on the unwillingness of new MIT graduates to start high tech companies in Cambridge. They head for the burbs or right out of the state.

Cambridge has the momentum of Harvard and MIT but that only goes so far.

Look at New Haven to see how far a hollowed out city can sink.
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