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Boston Bubble Brief: The Real Story for MA - Sep 2007

 
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admin
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PostPosted: Thu Oct 25, 2007 8:34 pm GMT    Post subject: Boston Bubble Brief: The Real Story for MA - Sep 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 September 2007 on Monday, October 22nd, two days ahead of 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 - September 2007

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



Some observations:

  • Current prices are once again lower than in any other year in the time period covered, by the largest margin yet.
  • The real decline from September 2006 to September 2007 was 2.61%.
  • Prices are now 15.29% below the peak set in June 2005.
  • The year over year decline returned to the normal range in September after multiple, scattered months where the declines were less severe than normal.
  • As with August, the moving average is now about 1.6 standard deviations below zero, whereas it was over two standard deviations below zero for awhile. This indicates that declines have been moderating, at least with respect to the data reported by The MAR

As as been the case for at least several months now, The Warren Group reported greater declines than The Massachusetts Association of Realtors. The Warren Group reported a decline of 4.4% in the median price for single family homes with nominal prices falling from $317,900 in September 2006 to $304,000 in September 2007. Adjusted for inflation, that represents a real decline of 6.59%. Given that The MAR reported the September 2007 median as the much higher $340,000, the cumulative discrepancy puts The MAR reported price at a glaring 11.84% above The Warren Group's. Please see the Massachusetts Housing Market Blog for a nice graph of the discrepancies between the data from The MAR and The Warren Group.

The Warren Group also chose to post September data with foreclosures removed, which put the median price at $337,000 - much closer to the price quoted by The MAR. This confirms the hypothesis that foreclosures have been a major factor in the recent discrepancy, as was proposed here last month. Foreclosures are apparently becoming an important factor in setting area prices, and consequently lend weight to using the more thorough Warren Group data over The MAR data.

Further casting a shadow on The Massachusetts Association of Realtors' relevance, their president, Doug Azarian, had the following to say about the huge drop of 13.7% in September sales (emphasis added):

Quote:

It is definitely possible that all the reports about foreclosures, lack of financing, and the like have taken their toll and the result is that buyers are waiting on the sidelines. However, despite the disappointing news, interest rates are still low and for credit-worthy buyers now is a really good time to buy.


It is disingenuous to suggest that the problem is merely one of perception and attitude caused by negative press. The core problem has always been, and continues to be, lack of affordability. The fact that credit conditions are finally returning to normal after a lengthy period of extreme looseness only serves to expose the underlying problem of affordability. It is also questionable to expect that the usual level of buyers are merely waiting on the sidelines, given that home ownership rates only recently hit all time highs - movement toward the historical equilibrium would require a decline in home ownership rates.

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:

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AgentGrn



Joined: 28 Sep 2006
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PostPosted: Fri Oct 26, 2007 5:25 pm GMT    Post subject: Reply with quote

Just by eyeballing the graph and comparing it to the last two years, I don't think we've quite hit a trough yet for this year. The prices seem to be a lagging indicator of how well ... or how poorly the market is doing.

Once again, excellent work!
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PostPosted: Fri Oct 26, 2007 5:34 pm GMT    Post subject: Reply with quote

AgentGrn wrote:
Just by eyeballing the graph and comparing it to the last two years, I don't think we've quite hit a trough yet for this year. The prices seem to be a lagging indicator of how well ... or how poorly the market is doing.

Once again, excellent work!


Thanks, I think you're right. The whole credit crunch crisis started around August, if I remember correctly, and should be filtering into the results about now. That could very well explain why the number of sales in September plummeted so drastically - 19% according to The Warren Group. It may not filter into prices until further down the line (months? years?), once sellers capitulate to the new reality of where prices should be (which is really just the old, pre-credit-boom reality).

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JCK



Joined: 15 Feb 2007
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PostPosted: Fri Oct 26, 2007 5:52 pm GMT    Post subject: Reply with quote

admin,

In the short term, I expect a rebound in October. Interest rates spiked in June and July, and have since come back down.

That alone probably brought down September numbers.

http://finance.yahoo.com/q/bc?s=%5ETNX&t=6m

Longer term, I expect you're correct.
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john p



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PostPosted: Fri Oct 26, 2007 5:57 pm GMT    Post subject: Reply with quote

I think JCK has a point to some degree for another reason:

First: this is a seasonal dip and it aligns with the corresponding periods of prior years. There is a surcharge to the degree of decline, but that is attributible to the surcharge in the interest rate spike that JCK indicated.

Second: If I remember correctly, for the same period last year, although the rates were slightly lower, they were trending downward, so the pent up buyers from the Spring of 2006 waited for the rates to ease towards the end of the summer in 2006. In this period of 2007 rates were going through the roof so that could be read as an impetus to buy to not get priced out of the rate hikes, but, I think it might curtail some buying activity due to affordability...
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JCK



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PostPosted: Fri Oct 26, 2007 6:04 pm GMT    Post subject: Reply with quote

john p,

To give full credit, you had pointed out that the dip in rates Nov-Dec 06 correlated nicely with the rise in sales in January 07.

I suspect something similar is happening here, but in reverse.
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admin
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PostPosted: Fri Oct 26, 2007 6:08 pm GMT    Post subject: Reply with quote

JCK wrote:
admin,

In the short term, I expect a rebound in October. Interest rates spiked in June and July, and have since come back down.

That alone probably brought down September numbers.

http://finance.yahoo.com/q/bc?s=%5ETNX&t=6m

Longer term, I expect you're correct.


Right, rates have been coming down a bit. The problem is that the interest rate only captures one aspect of the loan, and the other aspects have been changing as well. Specifically, I have read that lenders have been getting much pickier about the credit worthiness of who they lend too, and substantial downpayments are coming back into vogue. Interest rates being down 0.5% may be overshadowed by far fewer people qualifying for loans now.

Quote:

First: this is a seasonal dip and it aligns with the corresponding periods of prior years. There is a surcharge to the degree of decline, but that is attributible to the surcharge in the interest rate spike that JCK indicated.


The 19% decline in sales was a decline relative to September 2006, so that number isn't the result of a seasonal decline. Your other point about the interest rate timing is well taken, though.

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john p



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PostPosted: Fri Oct 26, 2007 7:10 pm GMT    Post subject: Reply with quote

Also, watch the array around the jumbo. The two separated (jumbo- loan above 417k and those under).

Very weird, separation between the low end and high end and a tomahawk thrown right in the middle with the jumbo's.
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john p



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PostPosted: Fri Oct 26, 2007 7:23 pm GMT    Post subject: Reply with quote

Holy Cannoli, 19% drop in sales from Sept. 06 to Sept. 07, that is more than just the interest rate premium, that is drop as well for sure.

I was looking at your colored line chart of the prices adjusted for inflation and looking at the period over period alignment throughout the years to get a feel of the seasonal affect...

Some times I put the wrong emPHAsis on the wrong syLAble...
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PostPosted: Fri Oct 26, 2007 7:30 pm GMT    Post subject: Reply with quote

john p wrote:
Holy Cannoli, 19% drop in sales from Sept. 06 to Sept. 07, that is more than just the interest rate premium, that is drop as well for sure.

I was looking at your colored line chart of the prices adjusted for inflation and looking at the period over period alignment throughout the years to get a feel of the seasonal affect...

Some times I put the wrong emPHAsis on the wrong syLAble...


Yeah, that wasn't in the graphs at all, which only cover prices. I think AgentGrn was right and that prices are a lagging indicator here. The sales volume would react more quickly to a tightening in lending standards (or so I would expect). So it might take awhile for that 19% drop in volume to factor into prices.

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SoldAtTheTop
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PostPosted: Sun Oct 28, 2007 1:08 am GMT    Post subject: Rates, Credit Crisis, Prices Etc... Reply with quote

Hey ALL,

Although rates spiked a bit during the summer and have now come down a bit the real change responsible for the 19% decline in sales in Sept was the collapse of the commercial paper market.

As anyone who has lived in Boston for the last decade can tell you, you need quite a few bucks to buy even the most modest of homes within the 128 belt.

The majority of first time home buyers (and condo trade up singles/couples) needed to borrow big dough, using Jumbo (non Fannie Freddie, commercial loans) loans to buy these homes.

The commercial paper market is still in ruin and I have now spoken to several local mortgage brokers since the August turmoil and they all report the same thing.

If you want (need) a Jumbo loan its yours (from Wachovia, WaMu, and Wells Fargo) for 20% down, totally verified income, and roughly a percentage point more than conforming loans.

For most households that is essentially a denial.

Remember, 20% of a $600K (typical) home is $120K (fat deposit), at 7.5% that leaves the buyer with a PITI payment of roughly $3950/month.

Thats a pretty steep premium and most buyers are simply not qualified anymore.

When credit was footloose and fancy free it was a much better equation... no money down, low interest rate (almost 0 spread between conforming and non-conforming), low-doc no-doc loans, various exotic products (IO, neg AM, etc) all allowing virtually any buyer with reasonable credit score (and many without... subprime) to stretch for that ever inflating near-town home.

Those days are gone now and they are not returning anytime soon... certainly not until this cycle completely washes out, so bloated home prices... your days are numbered.

Be sure to watch for the latest release of the S&P/Case-Shiller index for Boston this coming Tuesday which will reflect prices from sales through Aug (June, July and Aug).

It may provide an initial glimpse of any pricing declines as a result of loss of confidence related to the widely publicized credit meltdown (anecdotally I seemed to notice a surge of price reductions in Zip during Aug) but the real effects will likely be seen many months from now as sellers realize that the rules have now changed.

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john p



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PostPosted: Sun Oct 28, 2007 2:20 am GMT    Post subject: Reply with quote

I think that the jumbo rate separation has been covered on this blog, but I think you're right to really put emphasis on how much impact that really has on the Boston market.

I hope Admin doesn't throw this blog away, so that first time buyers ten years from now can read to understand the context of the peaks and valleys of the market.

I hope you keep posting.
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admin
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PostPosted: Sun Oct 28, 2007 1:38 pm GMT    Post subject: Reply with quote

john p wrote:

I hope Admin doesn't throw this blog away, so that first time buyers ten years from now can read to understand the context of the peaks and valleys of the market.

I have the same hope. That's too far away for any certainty, but I would like for this to serve as a historical perspective in the future.

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john p



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PostPosted: Sun Oct 28, 2007 5:03 pm GMT    Post subject: Reply with quote

Great:

In that spirit, add this to posterity:

I just got off the phone with my sister who lives in Jersey. Today is Sunday, Oct. 28 and Dice-K just beat the Colorado Rockies, got a hit and drove in two runs to put the Red Sox in a 3-0 lead in the World Series.

Anyway, my sister in Jersey, said that the coverage of the World Series Game made it to page 3 of the sports section and the picture was of Manny being tagged out at the plate.

And then they trade Torre. What are they out of their minds???????????? Big Stein is the classic queen with out the clothes.
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john p



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PostPosted: Mon Oct 29, 2007 4:07 am GMT    Post subject: Reply with quote

12:06 am Oct. 29, World Champion Boston Red Sox.
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