bostonbubble.com

[FagerNasty]

http://money.cnn.com/2005/10/26/pf/megapolitan_biz20_1105/index.htm?cnn=yes

[admin]

This sounds very reminiscent of the book Dow 36000. Published in 2000, it predicted that not only would the good times continue for the stock market, but the fundamentals were so rosy that the Dow would hit 36,000 in short order, possibly as soon as 2003.

The article's "treasure map" lists Boston as a hot spot for future growth because of the emergence of the hot quantum computing and encryption industries. I'm not sure what they are basing that prediction on. Encryption has been around for decades and it's not clear why it would create a substantial growth spurt now. Quantum computing is a more likely candidate since the largest quantum computers only have a small number of qubits at present and I think that the record was held by MIT last time I checked. So the technology could be ready several years from now, but technology and the market's reaction to it are notoriously difficult to predict.

There are a chain of dependencies that would need to remain intact in order for any such new technologies to impact real estate prices. First, the technology needs to be made viable. Second, the market demand needs to be substantial. Third, the supply required to meet the demand must encourage substantial, new, localized jobs. Fourth, the increase in jobs must offset the decrease from waning industries. Fifth, the increased demand in the real estate market must be accommodated via increased prices instead of other alternatives such as less strict zoning or building underground. Break any link in this chain and a hot new technology won't necessarily lead to higher real estate prices. In fact, the "treasure map" predicts that growth will be accommodated by building upward within the cities, so it sounds like they think rezoning would cover much of the growth in Boston.

- admin

[FagerNasty]

Whether the Dow hits 36,000, or real-estate tanks in the next few years, I think it's important to look at the big picture in four dimensions. There are good times and bad times to invest in anything. There are also opportunity costs to consider when buying into any type of investment. Therefore, I found the article's valuation factors interesting from a long-term investment perspective. From my readings on very sucessful investors, it's not those that spot the trends early that make the most money, but those that spot the trends right before the masses that clean up. The key is to jump on the good ship lollipop before she comes ashore and gives everybody a toothache. It's that leap that I think a lot of people have trouble with... When my Uncle bought his first house in 1980, his interest rate was 18%. There will always be obstacles to home ownership, some are just more jarring than others. Overall, this area is one of the best to live in from the perspective that jobs are plentiful, they are relatively high paying, and that innovation is an overarching theme to the vitality of this local economy. In the long term, I can see nothing wrong with investments made here unless something truly devestating is lurking around the next corner. If that be the case, whether you've invested in real estate or not, you're fucked!

[admin]

I'm not sure I follow your argument. On the one hand you say that the successful investors are those that spot the trend right before the masses, implying the ability (or luck) to time markets, but on the other hand you suggest taking a long term view when investing in Boston area real estate. This "Megapolitans" trend predicted by the article is certainly a long term prediction rather than something which is right around the corner.

Also, the data that I have seen all suggest a bleaker picture for the area than your assessment. As of a year ago, Boston had lost 200,000 jobs since the dot-com bubble burst (if you can find more recent numbers, please post them - I only did a quick search). In fact, there was a Globe article just today about the number of Massachusetts software firms and jobs decreasing since last year. The population is also declining - in fact, Massachusetts was the only state in the US to lose population from 2003 - 2004. This isn't to say that the sky is falling here and everybody should flee, just that job growth and population growth are fundamentals which support real estate prices and they are both negative here. And while the jobs that remain do pay more than many places in the country, increases in income have been far exceeded by increases in housing prices such that the ratio is far beyond its historical norm.

Even if the local economy were on a solid foundation, it doesn't follow that real estate would be an attractive investment. Real estate prices in general have historically tracked inflation. So from a purely investment standpoint, it does not appear to be a good choice. This is an especially compelling argument if prices appear overvalued based on historical comparison with fundamentals. Of course, buying a place to live in is a totally separate matter - you may value the subjective benefits of owning as greater than the opportunity cost of investing the money in something with higher return and less risk.

- admin

[FagerNasty]

My argument was that some internet economists out there think that the area we're currently in has some inherent value to it over the next 25 years. This could be a trend... a long-term trend. One step can sometimes take years. Not all bubbles burst like the dot-bombs did.

As for the article in the Globe today, it didn't sound as dire as the headline suggests.

"Joyce L. Plotkin, the council's president, said the survey reflected structural changes in the software industry, as customers cut back on vendors, companies merge, markets globalize, and a new software-as-service model gains momentum. Under that model, customers buy software applications ''on demand" from third parties, rather than licensing software and putting it on their own servers.

Plotkin said Massachusetts continues to add software start-ups, even as more established mid-size firms are gobbled up by giants such as Microsoft Corp., IBM Corp., and Computer Associates International Inc. She said part of the decline in the number of companies can be attributed to the tighter criteria the council used in its survey this year.

''It's relatively flat," Plotkin said, noting that the software industry today is roughly the size it was prior to the Internet bubble. ''But we believe we're at a sustainable level of employment, and we believe software will continue to be a factor in the economy of this state."

As for the loss of population, it looks like this has happened before, albeit there was a decided decrease around the time of the last housing-price crash.

http://recenter.tamu.edu/data/pops/pops25.htm

It does appear that many estimates put Mass pretty low on the amount of population growth that will be seen in the next 25 years.

http://www.census.gov/population/projections/SummaryTabA1.pdf

It will be interesting to see how rents adjust to all the various economic pressures being exterted on this area.

http://factfinder.census.gov/servlet/QTTable?_bm=n&_lang=en&qr_name=DEC_2000_SF3_U_DP4&ds_name=DEC_2000_SF3_U&geo_id=04000US25

However, we do seem to have quite a bit of innovation for a state of relatively small population stature.

http://www.nsf.gov/statistics/seind04/mmslides/mm08-21/mm08-21.xls

Overall, I like the solutions presented in the article you posted by Michael D. Goodman. I think that he presents some cogent ideas for stemming the population flow from this area.

"Steps must be taken to reduce the state's high cost of living, especially housing. Local zoning and code enforcement in suburban communities already make it difficult to significantly add to the supply of affordable housing for working families and others. But the state already has an abundant supply of affordable housing units in many of its urban areas -- the challenge is to make these attractive enough for more people to live in these units. That means improving public education and public safety. Making our urban areas more attractive and compelling places to live -- for those residents already there as well as those who might be drawn to them -- is good social and economic policy.

Create the right environment to grow jobs. We have the workers; we have the brains to create new science and technology industries. What Massachusetts also needs is both the physical and intellectual infrastructure to grow the two together. That means not only laboratories and schools -- it also means better and more efficient investments in everything from K-12 education to higher education and lifelong learning.

Promote economic development beyond Greater Boston. Just as it makes sense to get people to live in housing units that are already available at affordable market rates, it also is good policy to locate jobs in lower-cost regions of the state where people already want and can afford to live. This means better marketing of the state beyond Route 495 to prospective job creators and investors. It will also require that strategic statewide and regional investments be made in the infrastructure and innovative capacity of these regions to better prepare them to meet the needs of growing employers.

Grow our own knowledge workers. The Census data show that people born here and immigrants who move here tend to stay. We cannot afford to lose them. We need to make sure that both populations achieve the education and skills training they need to be able to stay and thrive in the knowledge economy.

It is simply poor policy to have waiting lists for immigrants to get into adult literacy and ESL programs. But while learning to read and to speak English is necessary, it is not sufficient. All residents should have better and easier access to quality and affordable higher education as well as lifelong learning opportunities.

Such steps would help reverse the risks posed by the state's emerging population trends. That helps economic growth -- and it also truly spreads the Commonwealth to people who already live here.

Michael D. Goodman is director of economic and public policy research at the University of Massachusetts Donahue Institute and managing editor of MassBenchmarks, the quarterly journal of the Massachusetts economy produced by UMass in collaboration with the Federal Reserve Bank of Boston"

However, I do think there is something to the idea of Megapolitan areas, and that this area will service that definition quite nicely. The value of the land may not be in flipping a 3-family into condos, but in creating a facility out of an old industrial area to service the small start-ups that will continue to fuel the job growth and economic firepower for this area.

[Guest]

Boston real estate is just too high as compared to incomes in the area. It would seem that a 40-60% is in order to bring prices back in line.

It's gonna be a bloody crash.

[admin]

I just ran the numbers and it looks like the article isn't actually predicting anything different from the historical norm. If I understand the data correctly, they are predicting that the population for the Atlantic Seaboard region, which includes Boston, will grow 12% over the next 25 years. According to the population chart for Massachusetts which you posted, the growth for the most recent 25 years actually was 12%. So it doesn't seem that they are predicting any change in the growth rate at all for the area - it seems like a non-story.

In his book Irrational Exuberance, Yale professor Robert Shiller explains that it is common in investment bubbles that there are seemingly logical explanations for why prices have deviated from their historical relationship to fundamentals. The common argument is that there is a "new paradigm" that will make this time different. Frequently, there is even a substantial amount of truth behind the explanations. The problem is that it is very hard for humans to judge changes in rates of change and many markets that are susceptible to bubbles are an exponential growth curve to begin with. Yes, the Internet changed the world in ground breaking ways, but was it more ground breaking than many of the technologies that preceded it such as the telephone, the internal combustion engine, railroads, etc.? It merely allowed the exponential growth to continue rather than steepening the curve.

The point being, yes the Boston population may reverse the current short term declining trend and grow over the next 25 years due to the underlying causes covered by the study (which the article didn't exactly enumerate), but it has grown in the past. In fact, it has grown in the past at the exact rate predicted by the article. Therefore, I don't think that portends any shift in the fundamental of population which historically affects real estate prices.

You raised an interesting point that supports the assertion that there is no new paradigm. Most fundamentals which put upward pressure on real estate prices should also put upward pressure on rents. However, rents in many metro Boston neighborhoods have been sluggish, stagnant, or even falling. Perhaps there is a lag in when rental prices are affected, but the discrepancy has been there for many years now.

I do agree with many of the points that you quoted about how to improve the economy and general outlook for Massachusetts. It seems reasonable that we would see a return to the normal growth rate if the current problems are sufficiently addressed.

- admin

PS - Be sure to check out Schiller's Irrational Exuberance companion website for some additional interesting reading as a supplement to his book. The book is excellent - I very highly recommend it.