The Massachusetts Housing Market

Back with a full market wrap

2007-10-23T21:33:00.000-04:00

It's been three months since my last post. Way too long, but family and work deadlines come first.

After relatively strong months in July and August, the housing market in Massachusetts abruptly slowed in September. The mismatch in market results reported by the MAR (here) and the Warren Group (here) continues. Below is a comparison on the year over year change in SFH prices reported by both organizations over the past 19 months:

According to the more complete Warren Group numbers, SFH prices are down 4.4% from last September, and a cumulative 13.1% since September 2005.

Looking more closely at the MAR numbers, sales for both SFHs and condos plummeted in September:
Condo sales in September were the weakest since 2002, while SFH sales were the weakest since 1992 according to the MAR press release (PDF).

MAR continues to report that median prices are holding up fairly well:

Note that while median condo prices remain above past year levels, median SFH prices reported by MAR are down 5.5% from 2005 levels, and are below 2004 levels.

The one tentative sign of improving market conditions over the past year has been the better balance between for sale inventories and monthly sales (i.e., Months Inventory). The plummeting sales in September returned this figure to 12.1 months, close to last year's level.

June Market Wrap

2007-07-25T21:20:00.000-04:00

Here's the latest price data from MAR for SFHs (down 1.6% YOY) and Condos (up 4.4% YOY) plotted relative to recent history:
Frankly I'm surprised MAR has been so restrained about the new record high median condo price reached in June. Perhaps even they recognize that the relatively strong sales in the pricey downtown Boston condo market (see story here) are skewing the median price higher.

MAR also offered up a summary of Q2 data (see here) which I'll cover in a future post.

Once again the Warren Group reported prices that were much weaker than MAR, with SFH prices down 4.6%, and condo prices down 4.1% YOY. Here's a comparison of SFH YOY price changes over the last 16 months from the two organizations.

The reason I want to emphasize this plot is that the differences between the two reports are now spanning at least a two year period, so the trend is beginning to amplify. For instance MAR reported 2007 prices down 1.6% relative to 2006, and 2006 down 1.1% from 2005 (pretty much the market peak). That means MAR numbers indicate that the statewide SFH median price has fallen a cumulative 2.7% from summer 2005.

In contrast, the Warren Group has 2007 prices down 4.6% from 2006, and 2006 prices down 3.9% from 2005, for a cumulative drop in SFH median price of >8%. Now that is a meaningful difference, and one I don't see mentioned anywhere in the local coverage.

March-April-May Market wrap

2007-07-16T19:03:00.000-04:00

I'm back from a too long hiatus, and just wanted to post updated SFH and Condo prices published by MAR for March, April and May.

Reading the media and blog coverage of these data releases, I couldn't help but notice a growing move toward balancing MAR numbers with those from the Warren Group and others. Below, I've plotted the YOY change in SFH prices over the last 15 months from both MAR and the Warren Group. For comparison, I've also plotted the S&P Case-Schiller HPI for the Boston MSA, which differs from the others in that it reports prices from repeat transactions, in a smaller geographical area.

Clearly MAR numbers have trended toward less severe price declines than those from the Warren Group (I couldn't track down Sept 06 data). The difference was particularly pronounced in May (+0.65% vs -4.6%). One likely explanation for the trend: sellers at lower price points are increasingly selling without a realtor, hence some lower price transactions captured by the Warren Group are missed by the MAR.

Bear markets: how deep, how long?

2007-03-28T21:06:00.000-04:00

Using the S&P/Case-Shiller® Home Price Index for comparable sales of single family homes in the Boston MSA, the peak of the late 80's / early 90's market occured in July 1988. Plotted below in black are the percent price declines in the subsequent 106 months relative to that peak.

The market did not bottom until ~36-48 months after the peak. One way to interpret this plot is that on aggregate, a home purchased in July 1988 would be sold at a loss for the next 106 months (>8.5 yrs). A home purchased when half of the ultimate price decline was complete (-8% @ ~24 months) would be sold at a loss during roughly the next 56 months (>4.5 yrs). These are NOT inflation adjusted prices. This does NOT include commision costs.

There is no reason to expect history to repeat itself exactly, but the yellow bars on the plot show very similar price declines from the recent September 05 market peak. The arrow indicates the most recent data release for January 2007. The final five bars in the plot correspond to the CME futures for the Boston MSA for the next 12 months (as of March 27).

Only time will tell whether the current bear market wil match or exceed the severity of the previous cycle. But the plot does provide cautionary evidence that purchasing in a falling market is no protection from potential losses for extended durations. Next time someone tells you "now is a great time to buy," keep this in mind.

February Market Wrap

2007-03-21T20:48:00.000-04:00

MAR and the Warren Group reported market stats for MA this week. For once their numbers were in reasonable agreement. See the Boston Globe for the overview (here). Below are plots of SFH and condo median prices, as reported by MAR for the past few years:

One thing that I have been noticing is that MAR is continually revising their stats from past months/years. I don't have the time to keep up with their changes, and they don't bother to report the changes when they make them, so I will have to acknowledge that the numbers I'm plotting are "as originally reported." The differences are typically small, so not too big of a deal I guess. Doesn't do much for my confidence. I plan to spend more time from now on using the S&P/Case-Shiller® Home Price Indices, which have a number of advantages (see previous post here).

Months inventory continued to run below year ago levels in February:

December/January were unusually warm, and mortgage rates dropped, likely contributing to unusual seasonal strength in Jan/Feb closings. In Feb the weather turned and rates rose, and I expect the March closings and months inventory will suffer by comparison to last March (which was relatively strong).

Comparing the previous and current real estate cycles

2007-03-14T21:01:00.000-04:00

The Case-Schiller Home Price Index is available for a number of markets around the US. This index tracks the repeat sales of single family homes, and thus serves as a unique measure of changes in house prices across time, without distortions from new development, changes in sales mix, etc. A detailed discussion of the index methodology is available in PDF format (here). From this document:

The S&P/Case-Shiller® Home Price Indices are designed to be a reliable and consistent benchmark of housing prices in the United States. Their purpose is to measure the average change in home prices in a particular geographic market. They are calculated monthly and cover 20 major metropolitan areas (Metropolitan Statistical Areas or MSAs), which are also aggregated to form two composites – one comprising 10 of the metro areas, the other comprising all 20. The indices measure changes in housing market prices given a constant level of quality. Changes in the types and sizes of houses or changes in the physical characteristics of houses are specifically excluded from the calculations to avoid incorrectly affecting the index value.

The historical indices go back to 1987, and are available in Excel fromat from Standard & Poor's (here). I've extracted and plotted the data for the Boston MSA to emphasize a few points. The Boston MSA consists of these counties: Essex MA, Middlesex MA, Norfolk MA, Plymouth MA, Suffolk MA, Rockingham NH, and Strafford NH. Here's how prices in this MSA have behaved since 1987:

The prices are indexed to a value of 100 in January 2000, thus this plot shows relative price changes indexed to that date. Interestingly, the Chicago Mercantile Exchange (CME) now allows futures trading based on this index (here). The last five bars in the plot correspond to the contract prices for futures over the next 5 quarters, recorded on 3/12/07. The predictive value of these contracts are suspect, given that they are thinly traded, but they do give some indication if where bets are being placed.

To put the price changes into a more accesible format, below I've plotted the year over year change in Boston MSA prices starting in 1988, along with the CME futures contracts:

This plot makes clear the previous bear market starting in 1989, followed by a slow recovery, eventual multi-year bull, and the current bear market beginning in 2006.

Zooming in on the end of the last bull run, one can see the growing downtrend in prices (trending at -5% yoy for the most recent available data), and the CME futures for the next five quarters. Clearly, little immediate recovery is anticipated in the futures market, which are predicting continued deprectiation in SFH prices at around -5% yoy through next winter.

An interesting comparison can be made by examining the YOY % Change in the CS HPI for Boston MSA starting in the last bull year of each cycle (1988 and 2005). Here the black bars report % price changes in the 1988-1991 window, and the yellow bars % price changes so far since 2005, with the CME futures also included.

One striking point that comes out of this side by side comparison is how much sharper the onset of the current bear market in SFH prices has been relative to the last cycle (note that the comparison for condos would likely result in the opposite conclusion). Thus far the CME futures are not predicting anything like the severe price drops observed over the fall/winter of 1990-91. For reference, the light blue shading represents the early 90's recession which coincided with the depths of the bear real estate market. Given all the recent talk about recessions, it is interesting to ponder how the current cycle would fare in a similar scenario. It is also interesting to note that during the last bear market recovery, the yearly change in the Boston MSA CS Index did not exceed 5% until 1997, 5 years beyond the end of this plot. A long and slow recovery indeed.

January Market Wrap

2007-03-01T20:01:00.000-05:00

The Warren Group results for January (reported as yoy change):

SFH sales up 5.1%

SFH prices down 3.4%

Condo sales up 2.7%

Condo prices flat

MAR numbers were much stronger for January:

SFH sales up 12.6% yoy

SFH prices down 2.4%

Condo sales up 5.3%

Condo prices down 0.7%

Here are MAR reported median prices for SFHs and Condos relative to recent history:

In the January press release MAR no longer reports inventory broken down by SFH and condo, so I will omit those plots. The increase in sales, and decline in inventory from last January to this January led to a major decline in Months Inventory from 14.1 to 10.7 months:

Overall, these numbers reverse or halt many of the trends that have been consistent since the summer of 2005 (e.g. declining sales, increasing inventory). However, median prices continue to decline. The coming months will certainly be interesting. My sense from reading the MAR press release is that February numbers will be much weaker, likely due to the turn in the weather in January, and the surge in mortage rates that began in December (which should affect closings with a 2-3 month lag).

Urban condo market analysis: noise or signal?

2007-02-20T18:21:00.000-05:00

Here are two sets of urban condo data from highly reliable sources and that on the surface are difficult to reconcile:

1. The Warren Group "Boston" (defined as Beacon Hill, Back Bay, North End, and South End) condo median price for January over the last three years (available here):
2005 - $502,000
2006 - $364,000
2007 - $580,000
That works out to a yoy decline of 27.5% from 2005 to 2006, and a 59.3% increase from 2006 to 2007. Does anyone believe that the median condo in these neighborhoods increased in price 59% from last January to this January? An obvious problem here is the sample size. The total Jan. condo sales for each year were:
2005 - 172
2006 - 112
2007 - 143
If a new project or two comes online during a particular month, it can have an inordinate effect on the median price reported. To me these data are useless without more info about the projects that were coming online, and/or more data about the size and type of units that were selling.

2. Joe Wolvek of Coldwell Banker Residential Brokerage reports on his website (here) the price per square foot (obtained from MLS-PIN) for three of the four neighborhoods lumped together in the Warren Group "Boston" sample. Plotted below are the data for the past 3.5 years, plus the data for closed sales this year through 2/7:

Price per sq ft appears to have peaked in late 2005 / early 2006 for all three neighborhoods. A simple analysis of the quarterly YOY change in price per square foot results in the following plot:

The light blue line represents the MA statewide change in median condo price (not normalized to square footage). I added this line to show how closely these urban condo markets are tracking statewide trends when price per square foot is analyzed.

In contrast to the Warren Group numbers, there does not appear to be a significant surge upward in price per square foot in these neighborhoods. All three show price per square foot down 2-10% YOY so far in Q1 2007. Perhaps the North End is the critical piece of missing info that would reconcile the Warren and Wolvek numbers. Perhaps not. More likely the Warren numbers for nieghborhoods undergoing rapid development (at ever increasing price points) are subject to inevitable noise and sampling problems.

December Market Wrap

2007-01-27T09:12:00.000-05:00

This week the Warren Group posted Massachusetts housing market data for December and all of 2006 (link here). For the month of December they report SFH prices down 8%, and condo prices down 2%. For the year, SFH prices declined 5.8% and condo prices declined 1.2%.

MAR reported their numbers on Thursday. Below are their numbers plotted relative to recent years. NOTE: MAR incorrectly reported (and all other sources I have found failed to correct) that December condo prices were up 2% yoy. In fact, according to the data available on the MAR website (link here), condo prices were DOWN 1.8% yoy. The prices were up 1.9% over 2004 levels, which is where they likely made their mistake.

SFH prices for December were down ~5% from 2005 levels, and down ~2% from 2004 levels. They are still up ~8% from 2003 levels. This is the 5th consecutive month that prices have been below 2004 levels.

Condo sales in December strengthened slightly relative to the recent trends. SFH sales continue to deteriorate.

Both SFH and condo inventories showed their smallest yoy gains since early 2005. Importantly, inventory is still climbing (though much more slowly) and is well above recent year levels. The spring market inventory levels will be interesting to watch. We could see the first yoy decline in inventory levels for SFHs in the coming months.

Months Inventory continues to run at high levels as inventory levels out and sales deteriorate.

I'll put together the year end numbers in a future post and try to make some early projections for 2007.

Boston "Urban Core Condo Market" Performance

2007-01-17T19:34:00.000-05:00

Prompted by a frequent commenter, I downloaded condo stats from the Warren Report (link here) for all of 2005 and 2006. For this analysis I included all Boston neighborhoods, as well as Cambridge, Brookline, and Somerville (my "Urban Core Condo Market"). I then excluded West Roxbury, Roslindale, Hyde Park, and Mattapan from this analysis because these are the four smallest condo markets, each has the same or more SFH sales as condos, and I wanted to focus on condo-dominated neighborhoods. (Note: The Warren Report defines Boston as Beacon Hill, Back Bay, North End, South End, so I don't have breakouts for these neighborhoods)

First up, lets look at condo sales in 2005 and 2006 for these markets. To aid comparisons, I've labeled the % change comparing 2006 to 2005.

Only two markets showed an increase in sales, Dorchester (up 33.9%) and Somerville (up 17.7%). In every other market sales declined (sometimes precipitously), though the largest market (Boston) shows a modest decline (-1.4%). The total number of sales in these market declined 8.4% YOY.

Here are the median condo price figures for 2005 and 2006.

The only markets with an increase in median condo prices are Dorchester (up 5.5%) and JP (up 0.3%). Every other market is down YOY. On a sales weighted average basis, prices in these markets are down 2.3% YOY.

Interpret as you will. I doubt this will change anyone's mind about the state or trajectory of the market. The purpose is to provide a complete analysis, using year over year numbers and including all relevant neighborhoods, as a basis for discussion.

Bottom Spotting

2007-01-13T15:09:00.000-05:00

With the new year upon us, many "interested parties" are calling for a bottom in the Massachusetts housing market. I think their pronouncements are very premature. Keep in mind these points:

1. To real estate professionals, the bottom in a market occurs when SALES bottom, not when prices bottom. Their livelihood depends on turnover (commissions), not prices.

2. Affordability in MA is near record lows (see recent post). There is very little room for upside price movement.

3. Catch-22. Dropping prices will increase affordability and potentially increase the pool of buyers. But, stabilization in prices is needed to motivate and reassure buyers. This process will continue to play out with declining prices and sales.

4. Credit standards are tightening. An unprecendented number of mortgage holders will face rate adjustments and payment shock in the coming year.

5. The building cycle is still bringing new product to market as demand continues to dissipate.

6. Markets take a LONG time to turn. Think about how long the anticipated peak in the market took to come to fruition.

7. Psychology has only started to turn negative. At a market bottom, the psychology of fear will dominate greed. Sellers will capitulate.

8. Supply and Demand. "Months Inventory," the number of months it would take to sell all existing inventory at the current sales pace, continues to increase. This means more houses are coming on the market than are selling. By this metric, the market has not stabilized, it continues to weaken. Here is months inventory for the last 4 years:

Last November there was ~8 months of inventory. This November, ~12 months. Think the trend is decelerating? Here is the year over year change in months inventory over the last three years, along with a six month moving average.

How important is this metric to prices? Plotted below is the historical relationship between Months Inventory (averaged over each year) and Appreciation Rates (averaged over each year) for the past 14 years.

Looking for an early sign that prices will firm? Wait for "Months Inventory" to show a meaningful and sustainable year over year decline. Until then, all pronouncements of a bottom in PRICES are fantasy.

November Market Wrap

2007-01-02T19:25:00.000-05:00

Last week both the Warren Group (Globe link here, Herald link here) and MAR (link here) released November market reports for Massachusetts. Plotted below are the MAR price, sales, and inventory numbers relative to historical trends.

Typically, the most informative single metric is "months supply," which indicates how long it would take to sell all inventory on the market at the current sales pace.

More analysis to follow shortly.

Affordability is THE problem

2006-12-09T13:41:00.000-05:00

There's been talk recently about a potential bottom in the local and national real estate markets. After all, the economy is still growing, mortgage rates are low, what could keep our local market from re-igniting? In a word - affordability. Prices in MA rose much faster than incomes for the last 7 years. Sure mortgage rates are low, but can't we figure in the effect of mortgage lending rates to see if they compensate for the high prices? I've assembled three plots from a variety of sources that attempt to do just this.

First up is data from "The Greater Boston Housing Report Card 2005-2006" available as a PDF from CHAPA (PDF here). Lots of great information available in the report, but let's focus on their affordability analysis. Here is their description of how they estimate the number (and percentage) of communities affordable to existing residents and new buyers throughout Massachusetts in 2005:

A municipality’s housing is considered “affordable” for this analysis if the annual cost of supporting a mortgage, real estate taxes, and homeowners insurance does not exceed one-third of the annual median income of households in that community. CURP also estimated the affordability gap for those unable to come up with a 20 percent down payment. Considered a “first time homebuyer” analysis, the calculation is the same but both the homebuyer’s household income and the purchase price of the home are estimated to be just 80 percent of the median for the community and the down payment is assumed to be 10 percent.

Note this analysis does not tell you anything about how affordable each community is, just how many communities meet their threshold of affordability. But also note that their analysis takes into account the prevailing mortgage rates, local taxes, and insurance. Here are the historical figures from their analysis:
Clearly, we are reaching unsustainable lows when ZERO communities are affordable to "first time buyers," and ~10% are affordable to existing residents.

Next up is the National Association of Home Builders - Wells Fargo Housing Opportunity Index (available here). From their press release:

The NAHB/Wells Fargo HOI is a measure of the percentage of homes sold in a given area that are affordable to families earning that area’s median income during a specific quarter. Prices of new and existing homes sold are collected from actual court records by First American Real Estate Solutions, a marketing company. Mortgage financing conditions incorporate interest rates on fixed- and adjustable-rate loans reported by the Federal Housing Finance Board.

This analysis is similar to the CHAPA analysis above, except that it focuses more narrowly on the Boston area, looks at % of affordable homes (rather than communities), has data going back to 1991, and also somehow incorporates both fixed- and adjustable-mortgages into their "opportunity index."

High readings on the HOI index means greater affordability. From the NAHB data, it doesn't look like now is an "opportune" time to try to purchase a house in the Boston area.

Last up is an analysis performed by Moody's Economy.com, and featured on the NY Times website as an interactive graphics tool (link here). Plotted below is the % of income local buyers had to pay for mortgage costs (no taxes or insurance) to buy a house in three MA Metro Divisions since 1979. Again, their analysis takes into account prices, incomes, and finance costs.

The cost to service a mortgage in these areas is near or above the unsustainable levels reached at the last market top in the late 80's.

The fuel to make prices go higher is income available to support higher prices. According to all three analyses, this fuel is in short supply. That doesn't mean by itself that prices have to come down (although I think they will given the fundamental imbalance between supply and demand). But given that we are only slightly above historical lows in mortgage rates, there is very little room for inflation-adjusted prices to grow. Claims that "now is a good time to buy before prices rise" are ill-founded. There is not sufficient income to support higher prices.

October sales, prices, and inventory

2006-11-29T19:49:00.000-05:00

MAR (here) and the Warren Report (here) recently released Massachusetts housing market data for October.

According to MAR: this October SFH sales were down 16.5% and prices were down 2% from October 2005; condo sales were down 17.6% and prices were down 3.7% over the same interval (see below for historical plots). While the decrease in sales is smaller than in the previous few months, keep in mind that last October was already a weak period so the comparisons are getting easier. In fact, single family home sales this year were off 23% from Oct. 2004, and 33% from Oct. 2003.

The Warren Report numbers, which are more inclusive, show SFH sales off 14.9%, and prices down 6.9%. Meanwhile, condo sales were off 19.5% and prices were down 4.8%.

Here are the historical trends for sales according to MAR data:

Here are the historical price trends, again according to MAR data:

To put the current unsold inventory into perspective, here are the historical numbers according to MAR:

Finally, here is a look at months inventory (total SFH and condo inventory/total sales):

While certain parties continue to spin these numbers as best they can, Wellesley College housing economist Karl Case puts them into the proper perspective (House prices plunge): "All of the indicators - sales volume, prices, everything - are pointing downward."

Preliminary 3rd Q Analysis - Bear Market Deepens

2006-10-24T19:57:00.000-04:00

With the September market stats now in hand we have the all raw data for the 3rd Quarter (July-August-Sept). The official numbers for Q3 won't be released by MAR for another few weeks, but I've estimated the year over year (YOY) results and come up with similar findings to those of the Warren Group (link). Notably, sales trends are weakening dramatically, and price declines are growing more pronounced. Not even a remote sign of a bottom in these data.

September Price and Inventory Stats

2006-10-23T21:15:00.000-04:00

The MAR released September market stats today (link). Here are their reported median prices for SFHs and condos in relation to historical trends:

SFH prices for September are ~5% below 2005 levels, and ~1.5% below 2004 levels. The median price for sold condos was level with 2005.

While there's been noise recently about the market "bottoming," including a front page report in the Boston Globe today (link), the inventory picture does not show any signs of a market bottom:

The plot shows "months inventory," which is the ratio between total unsold inventory (SFH and condos) and total sales for the last 3+ years. While inventory level dipped briefly below 9 months in June of this year, the surge back above 12 months shows continued weakness relative to historical inventory/sales levels.

More details to follow...

August Market Wrap

2006-09-26T20:19:00.000-04:00

MAR and the Warren Group reported similar August sales stats yesterday. Here are the MAR numbers plotted vs recent historical trends for SFHs and condos in Massachusetts.

Quotes of the month in reaction to these numbers:

1. From the MAR report (PDF here): "Today’s lower prices reflect the moderation in housing demand and rise in the inventory of unsold homes, which has led sellers to make modest price adjustments. With the economy still healthy though, double-digit price declines seem unlikely." (emphasis added) Remember, it was a little over a year ago (8/15/05, see previous post here) that MAR stated "we don’t anticipate any decline in prices in the foreseeable future, unless the economy slips into a recession.”

2. From the Boston Globe (here, and thank you for finally interviewing someone other than a realtor for comment): ``Things are not over in terms of the price declines," said David Iaia, a senior principal for Global Insight, a Lexington economics consulting firm. Iaia said the state's price declines would continue in 2007 and possibly into 2008, though it is difficult to predict. (emphasis added)

3. From the Boston Herald (here): Warren Group CEO Tim Warren said prices are dropping because “buyers are tasting blood, and they’re starting to get more aggressive (about) pricing.” (emphasis added)

Historical Trends as a Guide to Future Price Movements

2006-09-24T21:14:00.000-04:00

The past few weeks have brought a flurry of housing news and statistics, accompanied by a rapid acceptance that prices in many parts of the nation are falling. The peak for the current market cycle has clearly passed in Massachusetts, and the key question now is: how low do prices go from here? It's commonplace to hear widely disparate estimates; many bulls project a modest drop then resumption of price stability or growth, while bears offer more dire predictions of collapse.

To try to cut through all the hype and hysteria, I thought it would be useful to look at the longest running data series I could find to see where we now stand. I settled on the Massachusetts Association of Realtors compilation of average sale prices for SFHs and Condos from 1968 to 2005 (the numbers are available as a PDF here). Note this data series differs slightly from other metrics in that it reports mean prices, not median, and SFH and condo prices are combined.

To filter out inflation effects, I adjusted prices using the CPI-U inflation numbers for the corresponding years (available here). I then indexed prices to a starting value of 100 for 1968, and plotted the the average real price (inflation adjusted for all subsequent years). Before looking at the plot, consider this point: if housing prices change proportionately with inflation, the plot would be a flat line. Clearly it is not. Periods of positive slope indicate prices increasing faster than inflation, while a negative slope implies prices that are rising more slowly than inflation, or falling.

It is commonly observed that housing prices over the long term rise ~1-2% faster than inflation. This historical relationship derives largely from the fact that incomes in America have, over the long term, risen faster than inflation. Hence, a higher standard of living, and the ability to pay more for housing. To help visualize what the long term trend might look like in an ideal world, I've included trendlines to show 2% real annual increases indexed to 1968 and 1973. You could do the same trendline starting with any year.

If you believe in a fundamental relationship between income and home prices (as opposed to a "new paradigm" of ever increasing home prices uncoupled from income) and reversion to the mean, then clearly current prices are far from equilibrium trendlines (although interestingly, not as far in % terms as we were in 1986-7). Prices would need to drop ~36-42% in real terms to bring us immediately back into the long term trend range.

A more likely outcome is that prices will fall over the next few years, while inflation and wage gains will help to correct the current imbalance. I've plotted one such scenario in light blue, assuming CPI-U inflation of 4% in 2006, then 3% each year out to 2010, and nominal price declines of 2%, 6%, 6%, 3% and 0% from 2006-2010. The combination yields real price drops of 6, 9, 9, 6, and 3% over the same years, and brings the price index down 31% over 5 years and into rough equilibrium with the long term 2% real trendline (indexed to 1973). I'll be the first to say these are only rough guesses based on the previous down-cycle, so feel free to quibble with my predictions. What I think is more important is the visual impression this plot gives of the general scope and timing of the current price cycle, and the time and price changes that will likely be needed to correct the current imbalance.

Note: There is nothing magical about the 2% trendline indexed to 1973, and no reason to believe prices couldn't drop through it as they did in the late 1970's. I just find it intriguing that prices after the last cycled dropped almost exactly to this trendline in 1996-7 before beginning the latest up-cycle.

Sales and Inventory Trends

2006-08-29T20:17:00.000-04:00

As detailed in the previous post, sales in MA in July were weak across the board. For comparison, here are the monthly sales figures (up to July) for the last 5 years:

The slowdown in SFH sales appears to be accelerating this summer.

Monthly condo sales were at record levels as recently as the 1st Q of 2006, but this summer sales have slowed rapidly, retreating to ~2003 levels in July.

Months inventory for the market as a whole continues to paint a picture of weakness, although the surge in inventory from 2005 levels has slowed. The bigger problem now is with slowing sales.

July Market Wrap

2006-08-23T19:58:00.000-04:00

This week saw the release of July market stats for Massachusetts.

First up, data from the Warren Group (reported here):
SFH sales: 5,070(down 27% YOY)
SFH median price: $339,000 (down 6.1% YOY)
Condo sales: 2,692 (down 23.5% YOY)
Condo median price: $277,000 (down 4.2% YOY)

Next up, data from the Massachusetts Association of Realtors (reported here):
SFH sales: 3,982 (down 25.3% YOY)
SFH median price: $361,750 (down 3.5% YOY)
Condo sales: 1,883 (down 21.4% YOY)
Condo median price: $276,000 (down 4.1% YOY)

For those graphically inclined, here are the MAR price and inventory data relative to recent history. First up, SFH numbers:

(Note the inventory numbers reflect corrections for June by MAR).

Here are the condo figures:

I'll post the sales graphs soon, along with the trend in months inventory. Needless to say, the numbers for July were unquestionably weak. The "soft-landing" scenario of moderate price growth seems to have suffered a rapid demise. The question of the day now is: how far down will prices go?

2nd Quarter Weakness

2006-08-20T13:36:00.000-04:00

According to the Massachusetts Association of Realtors, statewide 2nd Quarter sales (April, May, June) of SFHs fell sales fell 10.6%, and condo sales fell 8.9% year over year. Median price declines were more modest, down 1.3% for SFHs and essentially flat for condos YOY. The Warren Group reported similar numbers, with SFH sales off 11.7%, condo sales off 10.9%, SFH prices off 2.9% and condo prices inching up 0.7% (details here). For a recent historical perspective, here are the MAR reported YOY % changes in median price and sales for the last 8 quarters.

The SFH sales market began to contract in the 2nd Quarter of 2005. This quarter the Condo market joined in the contraction.

Median prices for SFHs and Condos are now clearly at or below year ago levels.

June Market Wrap

2006-07-25T20:41:00.000-04:00

June numbers were released today by the Massachusetts Association of Realtors (pdf here). First up, prices:

Prices for both SFHs and Condos were DOWN ~1% compared to the same month last year. Sales were also off, 17% for SFHs and 14% for Condos:

Reported inventory numbers seem absurd:

Any explanations? Houses flooded by the spring rains? Sellers giving up?

Slow Burn

2006-07-23T18:43:00.000-04:00

There seems to be some consternation among local market observers that price drops haven't yet proved to be "huge" (see example here from this weekend's Boston Globe). Let's try to put the current emerging downturn into perspective. Prices in MA typically plateau in the summer, decline somewhat in the fall/winter, then surge strongly in the spring. Here's a plot of what has happened to sales prices since last year's peak (August 2005) according to MAR. Clearly prices are down from the peak, even though condo prices made a strong move recently. But is this spring exhibiting typical strength? The short answer is NO. From the peak in '03 to May of '04, SFH prices went UP ~7% and condo prices went UP ~12%. From the peak of '04 to May of '05 SFH prices went UP ~1% and condo prices went UP ~2%. From last year's peak to this May, SFH prices are DOWN ~6% and condo prices are DOWN ~1%. Not huge, but clearly negative.

Given the fact that only 10% of homes on the market are selling in a typical month, we should also look at asking prices to get a more complete picture. It's been nearly a year since web tracking of asking prices and inventory for the Boston area have been available (see here). While this is only one segment of the MA market it is revealing to see the price declines broken down by quartiles. Clearly the highest priced properties (75th %ile) have suffered the most so far. Note: I averaged the readings for each month to provide a smooth trendline.
While the spring bounce in prices is apparent from the plot, asking prices peaked rather meekly in April well below last August levels, and asking prices have since returned to a downward trajectory. This is NOT a strong sign for prices for the remainder of the summer and the rest of the year.

How does the current weakness compare to previous experience? Plotted below are the nominal and real (inflation adjusted) percent changes in average prices in MA from 1988 to 1995.
Note that while this previous market shakeout is regarded by many as a "housing bust", the biggest nominal decline in prices in a single year was only ~7% (from 1990 to 1991). Notice also that once the market started slowing the biggest declines took time (2-3 years) to develop, and the recovery was agonizingly slow. Food for thought when you hear talk of soft-landings and impending market rebounds.

May Sales Volume Stats

2006-07-10T20:32:00.000-04:00

As requested by a reader, here are the monthly sales data for Jan-May as reported by the MAR. For comparison, the numbers are plotted relative to the past 4 years. As you can clearly see, monthly SFH sales have been gradually slowing for the past few years. So far this year only March 2006 escaped being weaker than each of the past 4 years.
In contrast, Condo sales have continued to set records until the past couple months. A momentary blip, or worrying trend?

To see how the modest flattening and/or slowing of sales compares with the the growing inventory of properties for sale, see the previous post here. Clearly the number of properties entering the market has FAR exceeded the number of buyers during the last year plus, even though sales remain at or near recent peaks.

May Market Wrap

2006-06-27T20:07:00.000-04:00

Both the MAR and the Warren Group released Massachusetts sales and price data in the last couple days. Before plotting the MAR numbers with historical data, here's a summary of the numbers.

Warren Group data (reported here and here):
May SFH sales: 5,208 (down 5.1% YOY)
May SFH median price: $331,000 (down 4% YOY)
May Condo sales: 3,037 (down 7.8% YOY)
May Condo median price: $285,000 (up 1.8% YOY)

Massachusetts Association of Realtors data (reported here):
May SFH sales: 4,055 (down 2.9% YOY)
May SFH median price: $352,700 (down 1.2% YOY)
May Condo sales: 2,113 (down 1.2% YOY)
May Condo median price: $286,000 (up 2.5% YOY)

I'm not sure what to make of the conflicting data. The Warren Group has a more complete data set that includes FSBOs, estate sales, foreclosures, and other transactions that don't show up on the MLS. Can any reader clarify whether sales of new SFHs and Condos are reported in MLS? If not, that may account somewhat for the much lower sales volume from MAR. Also the weaker price trends in the Warren Group report might be a reflection of some discouting done by builders to clear new SFH and condo inventory.

Unfortunately I don't have the historical data series from the Warren Group, so I will continue to plot MAR data below. First up, historical median prices for SFHs:

SFH inventories continue to climb:

Condo median prices recovered in May to post a small gain:

Meanwhile, Condo inventories leveled off last month:

While inventories are up strongly from last year, the Warren Group reports that SFH sales are down 9.3% so far this year (relative to 2005), and Condo sales are off 5.5% relative to last year.

In my opinion, the fascinating number to watch next month wil be SFH median prices. If prices don't increase from May's $352,700 to greater than $360,000, we'll not only be well below 2005 levels, we'll be back to 2004 price levels.

Abandoned?

2006-06-26T20:19:00.000-04:00

Recent posts from the Bubble Meter and Matrix blogs have chronicled the seeming abandonment of a few "bubble blogs." Based on the dearth of recent posts here, Bubble Meter speculated this blog might be heading toward the same fate. Well, thanks for the kick in the pants.

I certainly haven't added much analysis over the past three weeks to the often contradictory news coming out about the MA housing market. But I'm not one to spend my time repeating what readers can find elsewhere in the MSM and Blogosphere, especially when there are fine links right here on the page. There's no shortage of coverage of our local market, thanks to the efforts of Boston Bubble, Counter Intelligence, Boston Real Estate Blog and others. And if it's passionate discourse from local market observers you want, the Boston.com message board is often insightful, hilarious, and maddening in the span of a few messages.

But be assured, while posts may be infrequent during the summer months, I will continue to post observations, data, and links as time and inspiration permit. And nothing motivates like a fresh batch of market stats to plot, discuss, and de-spin. The Warren Group released May sales and price data today (here), and MAR releases their report tomorrow. So tune in then for a full breakdown of the numbers.

Inventory up + sales down = ?

2006-06-03T14:22:00.000-04:00

A few months back I showed how the inventory of homes for sale relates to changes in median sale prices (orginal post here). I'd like to update that post with the most recent market numbers, and talk about how current trends may shape this dynamic relationship.

Below is a plot of the months inventory recorded in each month of the past 3+ years. I calculated this number by adding up the number of SFH and Condos on the market, and divided by the number of sales recorded that month by MAR. As you can see, there is a seasonal pattern to the numbers, with months inventory dropping to its lowest levels during the summer peak buying season. What is also clear is the decisive break that began last fall and continued into 2006. I've also included the average months inventory for each year (dashed lines), and a guesstimate I made back in February of what I think the 2006 average may look like based on past years behaviors.

Now going back further in time and using the average months inventory for each of the past 15 years, I've plotted the appreciation rates for SFHs (blue) and Condos (pick) as a function of the average inventory for each year. There is a clear inverse relationship between inventory and appreciation rates. To emphasize the shift in the market, I've included dashed lines showing the inventory levels for 2004, 2005, and the guesstimate for 2006. The yellow lines connect the 2004 and 2005 data points, showing the downward trajecory that began last year.

As some have commented, even as inventories have ballooned over the past year sales have remained historically robust in MA, especially for condos. To some this is a sign of a strong but more balanced market. To others this is an ominous trend, as any slip in sales could further shift the market balance, which is already adding inventory at a steep rate.

Last month may signal the beginning of the next phase of the market, as sales weakened in the heart of the spring selling season. Plotted here are the sales in each month for the past 6+ years, both for SFHs and Condos.Clearly the future is not something we can predict with 100% accuracy. But the data I've presented here, in the context of historical market behavior, indicate to me a high likelihood that prices will continue to drop. The RE market is incredibly complex and has a number of interrelated moving parts (population changes, income changes, mortgage rates, 2nd home and investor activity, rental prices, new construction, etc) but sometimes the message from supply and demand is all you need to know. This, I believe, is one of those times.

Rents going nowhere in Boston?

2006-06-01T17:51:00.000-04:00

In an article at CNN/Money entitled "Rents heading up in '06" I found these numbers for the most expensive rental cities in the US:

City - Avg rent - % increase(12 mos. ending Mar 31)
1. New York* - 2,400 - NA
2. San Francisco - 1,669 - 10.3%
3. San Jose - 1,429 - 8.6%
4. Los Angeles - 1,422 - 6.8%
5. Orange County - 1,393 - 8.1%
6. Boston - 1,350 - 1.2%

Only one other city in the top 20 had a rental increase lower than Boston's. Keep in mind inflation was running ~3-4% over the past 12 months, so rents in Boston actually decreased over the last year in real terms.

Will this performance change anytime soon? I for one doubt it. Too much new construction in the pipeline (see here) for a region with flat or declining population (see here), and don't forget about unsold houses/condos that will end up back on the rental market eventually.

April Market Wrap

2006-05-26T20:34:00.000-04:00

April numbers came out this week from both the Warren Group (covered here in the Globe and here in the Herald) and the MAR (here). Given the historical numbers available from MAR, I'll continue to post updates based on their market stats.

The biggest surprise was the drop in sales from both last year and, shockingly, from last month. Typically sales rise throughout the spring, but that pattern was disrupted this year. SFH sales dropped 10% from last year and 5% from last month. Condo sales dropped 10% from last year and 3% from last month. The drop in condo sales is especially unexpected, given the strength in condo sales until now.

SFH prices recovered somewhat, and were basically flat from last year (up 0.3%).

Condo prices took it on the chin, and were down 2.5% compared to last year. The first drop in 88 months. The condo price chart is suddenly exhbiting an ominous trend.

The unsold inventory of SFHs continues to surge...

While condo inventories continue to build at an accelerating rate.

Below I've plotted the Months Inventory of combined SFHs and Condos to give a unified picture of the market's current state. Keep in mind MAR puts a balanced market at ~7.5-8.5 months inventory.

To put the surging inventory levels into historical perspective, here's the yearly appreciation rates and inventory for the last 15 years. Notably, inventory levels above 12 months have historically been associated with declining prices.

The Evolving Market

2006-05-18T20:12:00.000-04:00

Each quarter the Massachusetts Association of Realtors issues a press release to accompany the sales and price numbers for the quarter. These press releases are archived on their website (here), and provide a telling recapitulation of the market's recent evolution. Each quarterly report (until the latest) ends with a quote from an MAR official summarizing market conditions (and in some cases offering up rosy projections). Recent quotes are reproduced below, accompanied by a link to each press release, and the YOY change in SFH prices for the quarter.

3rd Quarter, 2004 (11/15/04) SFH prices up 11.1%

“With today’s attractive mortgage rates, low down payment requirements, and steadily rising home values, it’s an ideal time to get into the housing market,” added Moore, who also noted that first-time buyers, immigrants, and baby-boomers who’ve reached their peak-earning years are all helping to keep demand for housing strong.

4th Quarter, 2004 (link) SFH prices up 12.7%

“Today’s healthy price increases are consistent with a market in which demand has outpaced supply, and we think that trend will continue in the coming year as large numbers of immigrant buyers and baby-boomers in their peak earning years hit the market,” said Tomkiewicz. “The good news for buyers is that we should see some moderation in price appreciation in 2005, especially if mortgage rates rise as forecasted,” she added.

1st Quarter, 2005 (5/12/05) SFH prices up 11.8%

“The current low interest rate environment is likely to prevent prices from falling any time soon,” Tomkiewicz predicted. Housing prices generally reflect supply and demand levels, so as long as mortgage rates stay attractive home buying activity should remain strong, thus prices should continue to climb rather than soften, she explained.

2nd Quarter, 2005 (8/15/05) SFH prices up 6.4%

“Predictions of a price bubble are simply unfounded, and ignore the fact that housing production across the state has failed to keep pace with demand,” asserted Tomkiewicz. “On top of that, zoning restrictions in many towns are contributing to today’s higher prices because they add to the cost of land and require that the homes that are built be larger in size. For these reasons, we don’t anticipate any decline in prices in the foreseeable future, unless the economy slips into a recession.”

3rd Quarter, 2005 (11/15/05) SFH prices up 5.7%

“With more sellers than buyers, especially at the upper end of the market, and mortgage rates now starting to rise, there’s not as much upward pressure on prices,” Tomkiewicz said. While sellers have started to adjust their asking prices, declines in property values are unlikely, according to MAR’s president, primarily because the risk of the market becoming overbuilt is minimal due to tough local zoning laws that restrict new housing production. “We expect homes will continue to appreciate in value in the year ahead, but more modestly than in recent times,” Tomkiewicz remarked.

4th Quarter, 2005 (2/15/06) SFH prices up 1.5%

“Prices may soften, but look for flat to modest appreciation this year rather than sharp price declines,” said Wluka.

1st Quarter, 2006 (5/15/06) SFH prices down 0.9%

No quote.

Nightmare Scenario?

2006-05-17T19:37:00.000-04:00

Interesting article at MarketWatch today (Housing slowdown behind rise in inflation). The whole thing is worth a read, but here's the idea: housing is factored into inflation through rents, not house prices.

During the housing boom (while house prices surged) weakness in rental prices made CPI inflation (as measured) low, allowing the Fed to justify low lending rates.

Now this virtuous cycle is reversed: declining affordability means rental demand and prices are picking up, contributing to inflation pressures and further Fed action, which could further decrease affordability. The net effect in this nightmare scenario: increasing rents, increasing borrowing costs, falling home sales, and declining house prices (with increased borrowing costs offsetting an unknown portion of the decrease in purchase price).

The Bear Market Begins

2006-05-15T17:35:00.000-04:00

The Massachusetts Association of Realtors (MAR) released cumulative market numbers for the 1st quarter of 2006 today, accompanied by a press release (here). Overall, 1st quarter sales of single family homes were off 6.5% relative to the 1st quarter of last year, while condo sales were basically flat relative to last year. SFH prices dropped 0.9%, while condo prices were up 2.4% relative to 1st quarter 2005. I have some doubts about the condo prices they report, given that their own monthly reports for Jan, Feb, and Mar report YOY price increases for condos of 1.9, 2.2, and 2.2%. No way this could result in prices for the quarter being up 2.4%. Nevertheless, the downward trends in price appreciation that began in the second quarter of last year remains intact.

In one year we've decelerated from double digit price appreciation to flat or negative price appreciation. Those with the most interest in keeping the market afloat continue to paint lipstick on this pig (see the MAR press release, and the latest Boston Magazine - BUY, BUY, BUY), uttering all the reassuring phrases about normalization, healthier levels of inventory, soft-landings, buyer's market, etc.

But their reassurances seem to be failing. How do we know? A stunning article in the Boston Herald last week revealed that Coldwell-Banker is, brace yourself, pressuring SELLERS to LOWER PRICES!!! This admission, more than any other, signals the end of the bull market and the true beginning of the housing bear market in Massachusetts. Market participants are out of excuses (weather, hurricanes, wait for the spring market, etc.), and it's clear to almost everyone that the sellers vastly outnumber the buyers. Want to sell your house? Price below the competition, and be prepared to negotiate. First time buyer? Wait if you can. If not, take your time, find exactly what you want, and offer below asking (after all, prices will likely be lower in a year).

Don't believe me? Ask Fortune, who labelled the Boston housing market a "Dead Zone" that is 30% overvalued. They lay out a worst case scenario:

For the past few years the housing boom has driven the economy, adding jobs in construction, remodeling, and real estate services. And consumers gorged on the equity in their homes, taking out a total of $2 trillion via loans, refinancings, and sales over the past five years.
Those powerful stimulants, which added a full point to annual GDP growth, will soon vanish. If corporate spending or some other force doesn't come along to pick up the slack, we could go into a recession that would cut income growth to zero. Then inflated housing prices would have to shoulder the entire, wrenching adjustment, falling 30 percent or more over several years.

Why worry about a seemingly unlikely worst-case scenario? Take a look at the homebuilders, on the front lines of the housing market nationwide. Their confidence in the future of the market is falling like a rock, and has reached an 11-year low (link here), while their stock market values have been tanking (52-week lows today for PHM, CTX, HOV, RYL, DHI).

Given the hand-wringing at Coldwell-Banker, I'm guessing the April numbers (to be released next week by MAR) are not pretty, and the spring market will prove insufficient to reverse current trends. At that point reality will be harder to sugar-coat, pressure on 'must-sell' sellers will continue to ratchet up, and price declines should accelerate.

March Market Wrap

2006-04-25T18:59:00.000-04:00

Results for March were posted today by the Massachusetts Association of Realtors (link). Before going to the results, let me remind you that the March numbers represent sales typically originated in the preceding two months, in this case January and February. Given the mild winter of 2006 (especially January) and the brutal winter of 2005 (blizzard), I was expecting a nice bump in the numbers. Sales were up, but barely (about 2% yoy),, and prices were down for SFHs and up only slightly for condos.

Here are the median sales price data for March:

SFH prices were down 1.7% relative to last year. Cumulative 1st quarter prices are also down. These results clearly demonstrate falling SFH prices on a statewide level.

Condo median prices were up 2.2% relative to last year, and will be up about the same for the 1st quarter. (Up in nominal terms, but down in real terms) Last year in the 1st quarter condo prices were appreciating at ~14%, so the market deceleration is clear.

Inventory numbers continue to surge. According to MAR, inventory levels are the highest in more than a decade - and they show no sign of slowing.

Notice I had to extend the y-axis range in both plots to accomodate the growing inventory of unsold homes.

Similar MA sales and price numbers were also released today by the Warren Group, as reported in the Boston Globe (here).

Metrics of market direction

2006-04-17T20:16:00.000-04:00

The Wall Street Journal's Real Estate Journal recently addressed the metrics to evaluate when sizing up a market's near-term direction. Let's see how MA stacks up:

As a rule of thumb, assume that most home shoppers won't want to take on a mortgage that's more than three times their annual income.
Creative financing and record-low mortgage rates made this rule of thumb temporarily obsolete, but rising rates will bring it back into play. While I don't know the average mortgage to income ratios in MA, the current ratio of median SFH price (2005) to median (2004) income is ~6.5, for condos it is ~5 in MA.

Among the local factors you should check are inventory levels, which measure how long it takes for houses to sell, assuming no other houses were listed. (Equilibrium is between five and six months -- anything shorter indicates tight supply, which tends to lead to higher prices).
No need to add to recent posts covering the surge of inventory levels that continues unabated.

Also check out housing starts and permits -- rising numbers could mean that a market is becoming overbuilt, which can cause prices to drop.
This is not typically a problem in MA, but I've made the case (here and here) that even the relatively modest increases in new construction currently underway will glut the market as outmigration and demographic changes play out (see here).

Also, take a look at time on the market -- if this number is rising, it can be an early warning sign that a market is cooling.
Check out this recent Boston Herald article that points out the growing inventory and days on market in MA.

Of course, you'll want to find out if prices are being cut in your target neighborhood.
Statewide median prices have already peaked and look poised to turn down as the year progresses. According to ZIP Realty, of the 46,500 houses for sale in the greater Boston area, >33% (15,700 houses) have reduced list prices. For a closer look at individual homes, towns, and zip codes, including historical value plots, check out the wealth of info available at Zillow.com.

Soft-Landing, or Meltdown?

2006-03-30T19:41:00.000-05:00

The recent housing numbers out of Massachusetts confirm that a decisive downshift in the market is in progress. Some observers, especially those in the real estate business, continue to argue for a leveling of prices at a new plateau, and a soft-landing for house prices and sales. I'd like to present several recent news pieces that paint a decidedly bleaker picture - one that points to sustained weakness that will wrench the speculative excess from current prices.

Let's start with demand. We first reported on the stagnant/declining population in MA back in January. This recent story from the Boston Herald emphasizes that the exodus from Boston proper continues unabated.

People are leaving Boston at a stunning rate of about 27 a day - with nearly 10,000 bolting Suffolk County last year alone, according to new U.S. Census Data. That’s more than 1 person bailing out on life in the Hub every hour... The county’s population was about 654,428 in 2005 - off 5.3 percent, or 36,795, from a recent peak in 2001 of 691,223, according to census estimates.

Later we find out where the escapees may be going, if they're not leaving the state altogether:

Many people are moving to smaller cities such as Brockton and Lawrence or moving to the outer suburbs in the Route 495 area to find cheaper housing...

But not to worry says Seth Gitell, spokesman for Mayor Menino, who noted:

Boston is currently undergoing a historic housing-construction boom, proving people want to live and work in the city.

Guess what Seth, increasing supply does not guarantee demand. Moreover, the people moving to Brockton and Lawrence aren't candidates for the major trend in Boston housing, the million dollar (and up) condo.

But surely the wealthy people of Boston will provide an endless stream of demand for uber-chic city living, right? Maybe not for long, according to this recent report from the Boston Globe:

With a wave of new condominium units now available in Greater Boston, real estate developers are offering incentives to boost sales and move hard-to-market units. Developers are often willing to pay closing costs, forgive monthly maintenance fees for a year, or throw in amenities such as free hardwood floors. These incentives are rarely advertised, but buyers, sensing that the leverage in negotiations is shifting in their favor, are bargaining harder for extras.

''All of a sudden, in the last year, there are so many projects that we haven't really been facing this kind of surge of units and projects in the city before," said Lili Banani, a Back Bay agent for Coldwell Banker Residential Brokerage. ''There's a lot of competition, and that's why you see more of these incentives."

The market for single-family homes in the suburbs slowed considerably in 2005, but Boston's condo market remains strong as aging baby boomers downsize their lives and first-time homebuyers find condos more affordable than houses. Yet there are currently about 1,350 downtown condos for sale, up from 880 a year ago, according to Listing Information Network, which tracks that market.

And the pipeline is full of new construction and apartment-to-condo conversions. The Boston Redevelopment Authority recently estimated that 14,000 residential units are under way or approved, and, over the next five years, an estimated 1,000 new units will come on the market annually. That's on top of existing units that would come on the market due to normal turnover in the real estate market. (emphasis added)

So let's summarize: we've got a shrinking population and growing supplies. But surely those who've already bought have nothing to fear, secure in the equity gains of the preceding bull market? Not so fast, says the Christian Science Monitor:

If the nation's real estate boom collapses, its first victims may well be low-income minorities and immigrants in a big US city like Boston. That is the picture emerging here as foreclosures rise and the housing prices falter. More than one-quarter of Boston's mortgage-holders appear to be stretched thin financially, spending at least half their income on housing, according to an analysis of census figures. That's more than twice the national average and the highest of any major city except Miami.

In Boston, a shift in market forces is now putting many of these vulnerable homeowners into a double bind. Rising interest rates are pushing up the costs for those who have adjustable mortgages. At the same time, these homeowners are finding it harder to sell.

"I would suspect that as home prices soften, you are probably going to see a ramp-up in defaults, delinquencies, and foreclosures," says Nicolas Retsinas of the Joint Center for Housing Studies at Harvard University. "It is not that they were not stretched before, but if you couldn't make the mortgage payments, you would sell. If the market is softer, it is not as easy to do this."

Clearly, at the low end of the economic scale, the situation in Boston housing is tenuous. What could tip the scales? How about jobs, especially for dual income couples. More bad news on this front, from the Boston Globe:

The state's unemployment rate rose from 4.6 percent to 5 percent in February, the first time in more than decade that the state's rate has exceeded the nation's jobless figure. The last time the state's rate was higher than the nation's was March 1995.

The number of jobs in the state has grown by nearly 45,000 since December 2003, but is still about 160,000 jobs below the state's historic peak employment in February 2001.

That last figure is stunning. Between February 2001 and December 2003, Massachusetts lost more than 200,000 jobs, only a quarter of which the state has since regained. During that same time, population in the state was declining. And prices? They kept on going up. Why? In no particular order: momentum, speculation, record-low interest rates, and easy lending. But guess what? These remaining supports are melting away, and there is nothing left in their place but brave talk, blind faith, and over-priced houses.

Let me end with an excerpt from Realty Times, reporting on the New Hampshire market, that I think also sums up the current situation in Massachusetts:

For investors who are grabbing an opportunity to sell (because the market may go lower, or their adjustable rate mortgage may go higher) their motivation to sell at almost any price could be quite strong (waiting won't help.).

For newly-weds who want to buy their first house, there are values if they are patient (waiting will help.).

For move-up buyers, who need another bedroom, or a better school system, there are some great values, but they will probably not get all the money on the resale of their existing house (waiting probably won't help).

For old-time Yankees who heard their farm might be worth a couple of million dollars -- that was last year (waiting didn't help.),"

It's All About Supply and Demand

2006-03-25T12:19:00.000-05:00

Back in January (original post here) I explored how the inventory of houses for sale influences appreciation rates. Now that we've had a couple data points in 2006, I thought it was time for an update.

Plotted below is the "Months Inventory" over the past 3+ years. I simply divided the total number of houses and condos for sale in any month by the total number of sales in that month, as reported by the Massachusetts Association of Realtors. As you can see, inventories follow a pattern through the year, typically peaking in February as homes come on the spring market, and sales reach their low. In the fall of 2005 inventories broke out of their typical trend behavior, and in 2006 the deviation from the trend has accelerated.

I've also plotted the average annual inventory for each of the last three years (dashed colored lines). Note that over the last three years, a quite reasonable forecast for annual inventory could be made using data from the first two months - the annual average tended to be ~1 month below January levels, and ~3 months below February. Applying this admittedly simplistic analysis to 2006, we can predict annual average inventories of ~13 months. While plenty can change in the coming months, this should provide a rough estimate, and is likely conservative given the recent trend to the upside.

Now we can look at how appreciation rates for single family homes (SFH) and condos have correlated with annual inventories, using data from MAR over the past 14 years. I've highlighted the inventory levels for 2004 and 2005 (gray dashed lines), and the deceleration in appreciation rates over the same time span (yellow arrows). I've also incorporated the forecast for 2006 inventories (black dashed line).

Given the sparcity of data at these high inventory levels, it's not advisable to be too specific with predictions. But clearly, given the growing imbalance between supply and demand, the peak in median prices is well behind us; YOY declines in prices should accelerate as the year continues.

February Market Wrap

2006-03-23T19:21:00.000-05:00

MAR released February market stats today. As in the past, I've plotted the price and inventory numbers for single family homes (SFH) and Condos relative to the last few years.

First up, prices:

These plots graphically emphasize the deceleration in price trends - just look at the jump in prices from February 2004 to 2005, and the flat prices from 2005 to 2006.

Why the flattening prices? How about ballooning (or perhaps bubbling?) inventory:

More analysis over the next few days as time permits. In the meantime, surf on over to the Real Estate Cafe for more discussion of the February numbers (here).

Balloon or Bubble? No matter, it's all hot air.

2006-03-20T18:36:00.000-05:00

Today the Boston Globe reported a priceless gem of a quote from David Lereah, chief economist for the National Association of Realtors, who was speaking at the New England Realtors Conference in downtown Boston:

New England "will have negative sales like the rest of the country" in 2006, "but prices will still go up," Lereah said. "There's no bubble bursting," he said. "You can put air in the bubble, and it inflates and now the air is going out of the balloon -- it is not bursting."

I've read this quote a dozen times, and I'm still stunned by its ridiculousness. Does it matter if the balloon is mylar or latex? Filled with air, or helium? Perhaps it is filled with hydrogen like the Hindenburg - we know how well that worked out.

Perhaps the funniest part of the Globe story was the lead in:

Two of the nation's top economists said today...

My condolences to economists everywhere.

Overpriced, but by how much?

2006-03-15T18:58:00.000-05:00

As bubble-reality becomes the consensus, everyone wants to get on record predicting price declines. The Real Estate Cafe gave readers the chance to submit predictions (here); the results were impressively bearish (the most popular choice was for >10% price drops this year in Greater Boston). Not sure what this means for real estate prices, but it definitely indicates the bearish inclinations of real estate blog readers (you know who you are).

Others have grander ambitions, and have produced predictions for many cities. In a story covering 30 markets nationwide (available at Yahoo Finance here), Ingo Winzer (president of Local Market Monitor, a Massachusetts-based real estate analysis firm) has this to say for the Boston market:

Until about a year ago, homes would go on sale and be gone in a week," he says. "Now they're sitting on the market for a year." He doesn't see the prices dropping rapidly here -- or in any market, for that matter -- because while real estate prices escalate rapidly, they drop slowly.

"In markets that are well-overpriced, prices don't really fall because people just won't sell," he says. "The adjustment mechanism is skewed by people's emotions getting involved. People will grit their teeth and hang on as long as they can to get the price they want."

They might not be able to hang on for long. Burns ranks Boston fourth on his list of markets likely looking at a bubble; Winzer's analysis indicates the market is 33 percent overvalued.

Over at CNN-Money, National City Corp. checks in with an analysis of 299 markets, including several in MA:

Metro Area (Median Price) %Overvalued

Essex County ($344,900) 26.50%
Pittsfield ($189,100) 11.90%
Barnstable ($352,800) 45.80%
Springfield ($208,400) 19.40%
Cambridge-Framingham ($392,400) 9.70%
Boston-Quincy ($358,800) 16.30%
Worcester ($251,700) 28.90%

I can't make much sense out of these numbers. For instance, given their proximity, how can Cambridge-Framingham be only 10% overpriced, while Essex County is 27% overvalued and Boston-Quincy is 16% overvalued? Wouldn't enough people move if such a gradient in value existed to quickly balance the numbers? Do incomes vary enough across these regions to account for the variation in % overvaluation?

What's even more curious is how these numbers have changed since last August, when the same company published a similar study. Back then Boston was 31% overvalued, Essex County 30%, and Cambridge 24%. What happened - did the methods change, or have we already had half the correction from overpriced levels?!? At least in this earlier study the overvaluation numbers were more reasonably clustered.

So what can we take away from these nubers? Not a whole lot, if you ask me. There is no single magic metric for valuation - a house after all is worth what someone is willing to pay for it. But it is becoming increasingly clear that the same house is likley going to be worth less in the near future than it is today. Under those conditions, who knows when and where the new trend will end.

Predictions anyone?

Rents in Hub still lower than in 2001

2006-03-09T19:55:00.000-05:00

On Wednesday the Boston Herald published a story titled "Hub rents going up." Let me humbly submit that the title of this post more accurately captures the news value of the story.

The key points:
M/PF Research, which tracks rental markets nationwide, says in a quarterly study due out later this month that average Hub-area rents rose 1.5 percent in 2005 to $1,300 a month. That’s the first annual gain since 2001, when average apartment costs peaked at $1,379 a month.

A measly 1.5% increase (less than the inflation rate) trumps the fact that rents continue to be lower than they were 4 years ago.

More reasons not to worry:
...Hub landlords report little evidence of higher rents.
“We’re seeing a slight increase in overall occupancy, but not much of an increase in rents,” said Chris Reilly of Equity Residential Properties, which owns 9,000 Massachusetts apartments.
Market watchers add that the large number of apartment projects now in the pipeline should keep rents in check in the future. MP/F says 8,337 Hub-area units are currently under construction - more than all of the apartments built in the 1990s.

1 in 48 Massachusetts Houses For Sale

2006-03-05T10:49:00.000-05:00

According to the 2000 US Census, there were ~2.44 million owner-occupied households in MA. In January, the MAR reported an inventory of 51,122 homes for sale. That means that ~2.1%, or about 1 in 48 MA homes were for sale. No wonder "For Sale" signs seem to be everywhere you look.

By comparison, at the peak of the 80's market there were ~30,000 units for sale. By 1991 that number swelled to >44,000.

Playing both sides

2006-03-04T11:41:00.000-05:00

While the monthly market stats continue to deteriorate in MA, they are inevitably accompanied by reassuring words like "normalizing" or "soft-landing". These words are surely aimed at buyers hesitant to commit to a housing purchase at what may be a significant market peak. But the market doesn't function, and realtors don't get paid, if sales don't happen. So what are sellers hearing from realtors? In the latest release of "Bay State Realtor" available at the MAR website, you can get a glimpse. Some highlights:

Pricing in Massachusetts has enjoyed an explosive decade-plus run. The result is not only vastly higher prices, but high expectations embedded in sellers. Having been conditioned by a market that virtually guaranteed unimaginable appreciation, many sellers are reluctant, at best, and unwilling, at worst, to accept this inevitable shift in buyer behavior.

How should Realtors confront the daily challenge of persuasively managing clients with pricing demands not in step with the market?

Unrealistic Expectations
“Their expectations aren’t unrealistic,” says Chuck Lemire, regional director for RE/MAX of New England in Natick, about sellers’ pricing. “They’re just based on the information they have at the time.”

“The agents are having a really rough time with them,” says Margie R. Richard, vice president and broker/owner of RE/MAX First Choice Real Estate based in Northborough, about sellers with high price points. Agents are under pressure both from sellers to maintain high prices and the competition from other Realtors to acquire listings, according to Richard.

The Price Factor
For clients thinking about pulling properties and waiting for the spring market, Montalto advises against it. She cites increasing inventory and rising interest rates as factors that will make those sales even more difficult.

Jack Attridge, sales associate with Carlson GMAC Real Estate in Marblehead also suggests using nearby over-priced homes that have lingered on the market as ominous examples to a client. He includes a warning to sellers that initial high pricing can eventual end up with lower offer prices than correct pricing would originally attract.

No mention of "soft-landing" and "normalization" here, just a hard-nosed and realistic survey of a changing marketplace.

January Market Wrap

2006-02-28T18:29:00.000-05:00

MAR released their January sales report today. Here are the latest SFH numbers plotted to show their relationship to recent trends over the past few years.

Here are the latest price and inventory data for Condos.

So far it hasn't made the headlines that I've seen, but prices are DOWN (albeit slightly) year over year for SFHs. This breaks a string of 115 consecutive months of positive appreciation.

And inventory numbers continue to accelerate to the upside - looks like I'll need to expand the y-axis for these plots by summer.

Money quote from MAR press release:

"...sales of detached single-family homes fell to their lowest January level in 10 years..."

Spin from the MAR Talking Points:

"False assertions of a price bubble in the local market also have prompted some buyers to delay their home buying decision in anticipation of sharply lower prices come this spring."

"Inventory, as stated in months of supply also rose steadily from 8.2 months last January to 14.3 months of supply in January 2006... In Massachusetts, the market is at equilibrium for buyers and sellers when 7.5-8.5 months of housing supply exists, thus despite concerns about an inventory glut, there’s a healthy balance between supply and demand at the present time."

As noticed by a reader, the statement above has been edited by MAR. The new text is shown below, and now reflects a more "reality-based" assessment of the market:
"In Massachusetts, the market is at equilibrium for buyers and sellers when 7.5-8.5 months of housing supply exists, thus a strong buyers market emerged has emerged over the past month due to surging supply levels and more moderate demand."

"The number of condos for sale has increased 47.8 percent in the past year... Inventory, as stated in months of supply, also has risen in the past year, climbing to 13.7 months of supply
this past January from 9.5 months of supply in January 2005."

To see where these "balanced" inventory numbers will likely be sending prices, check out my recent post.

But in case anyone might be worried about the market, MAR is here to reassure you:

"Predictions of steep price declines in home values made this past fall remain largely unfounded."

How about long, slow grinding declines in home values for years to come? All the pieces are in place: exploding inventory, record low affordability, net out-migration, stagnant job growth and wages, uptrending foreclosures, payment shock from resetting mortgages. The only questions now seem to be: How fast, and how far down?

Homeowners or Homedebtors?

2006-02-21T20:45:00.000-05:00

The real estate industrial complex and our elected leaders continue to extoll the virtues of homeownership. Certainly it's a laudable goal to own one's home. But while headlines trumpet homeownership rates (the percentage of households that pay a mortgage or own outright, rather than rent), they do not typically address how much of our home's we actually own. The following chart (from Barron's Econoday courtesy of The Big Picture: Real Estate , 4/17/2005) shows that Owners Equity (as a percent of home value) has declined markedly over the past 25 years.

Notice that even over the last few years during a time of strongly increasing home prices, owner equity has continued to decline. How? The housing ATM has induced the continued growth of mortgage debt (the red bars) at a faster rate than real estate values have grown (blue bars).

This borrowing has been a major contributor to GDP over the past few years. Calculated Risk has used the Goldman Sachs estimate that ~2/3 of mortgage equity extracted ends up fueling consumption to calculate US GDP over the past 10 years with and without the housing ATM.

While the continued binge of borrowing has fueled consumption and GDP growth, it has created unprecendented indebtedness in US consumers. The Federal Reserve tracks several metrics of debt. Among these is the Debt Service Ratio (DSR), which is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt. The financial obligations ratio (denoted Total in the plot below) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio. Both data series plotted quarterly over the past 25 years tell the story of escalating consumer debt.

What does all this have to do with the housing market? Present conditions, marked by highly leveraged homeowners with a shrinking share of equity fueling a debt-dependent economy, represent a fundamentally unstable environment, and a potential recipe for downward spiraling house values.

Spin City

2006-02-15T18:32:00.000-05:00

MAR has 4th Quarter and 2005 market numbers out today. The Boston Globe has commentary from David Wluka, MAR president:

"The accelerated sales pace of recent years has all but ended, and we're returning to a more normal market," said the association's president, David Wluka. "Our strong seller's market has been replaced with a more balanced one that will help stabilize home prices."

Wluka is predicting continued moderation in prices. He said demand should remain high because of low mortgage rates and a bigger supply of unsold homes.

Pardon my ignorance, but exactly how will the increasing supply of unsold homes spur demand? This is realtor reasoning at its most wishful and non-sensical.

"Prices may soften, but look for flat to modest appreciation this year rather than sharp price declines," Wluka said.

At least he didn't invoke the "soft-landing" phrase. Now that we've heard the spin, how about a dose of reality. Here's a look at YOY appreciation rates for the last 6 quarters, as reported by MAR:

Headed for a soft-landing? Looks more likely that the MA market is headed for a crash-landing.

Boston poised for downturn?

2006-02-13T20:01:00.000-05:00

Boston is becoming a favorite exmaple for those expecting a downturn in real estate prices. Case in point, this piece from Fortune: A Tale of Two Markets (free link here).

...talk to almost any broker in Boston, by contrast, and he'll tell you that business has slowed in the past several months. Consider John Ford. Just two years ago, five properties was the most he needed to show a prospective buyer before eliciting an offer. "And then it would be a bidding war," says Ford, who employs 30 agents in three Boston area offices. Today he's averaging 14 property tours before a skittish client is ready to buy.

In the city's suburbs, single-family homes have gushed onto the market. Inventory increased to 4,281 by January, 79 percent higher than a year earlier, according to MLS Property Information Network.

LINK, a company that tracks the downtown market, shows an inventory increase of 61 percent in the last year. And 2005 foreclosure filings were up 45 percent in Suffolk County, which includes Boston. Massachusetts was one of just three states in the union to lose population last year -- never healthy for real estate, which depends on population growth. Prices are still holding up, but there are no Gary Wattses in Boston guaranteeing another year of gains.

On the subject of predictions for the coming year, Fiserv Lending Solutions recently came out with price forecasts for 379 markets. No methodology provided, so your guess is as good as mine how they came up with their predictions. The local markets (excluding Western MA):

2006 Predicted Price Changes
Boston-Quincy, MA -1.3%
Cambridge-Newton-Framingham, MA -0.1%
Essex County, MA -0.9%
Barnstable Town, MA -2.4%
Worcester, MA -0.5%
Providence-New Bedford-Fall River, RI-MA -2.1%

Couple these predictions with expected inflation of 2.9% and we could easily be looking at real declines of 5% across many parts of the region. A crash? Not according to this forecast. But the emerging consensus for price declines is likely to have profound and long lasting effects on market psychology. Snowballs rolling downhill start small...

RE cheerleaders changing their tune

2006-02-07T19:37:00.000-05:00

First up, the always quotable David Lereah, chief economist at the NAR:

August 12, 2005:
SmartMoney: Do you think the real-estate market will still be able to provide a sound investment?
David Lereah: Real estate is still a great investment opportunity for households. Price appreciation will continue. It may not be at 20%. It may be at 10% to 15%, or may even go down to 5%... You don't need a 20% price appreciation to do well. You could still have price appreciation of 10% and beat most stocks. I think for the remaining years of this decade real estate will still be a good investment... The fundamentals are there. The demography trends and population trends are there. It's a once-in-a-generation opportunity.

Feb. 7, 2006:
"Sometimes people lose sight of the fact that real estate is cyclical," he said. Lereah said the national median existing-home price for all housing types is expected to rise 5 percent to $219,200 -- a rate of increase far below the double-digit annual gains notched during a five-year market rally.

This is the same David Lereah who wrote:
Are You Missing the Real Estate Boom? : The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade - And How to Profit From Them. Published February 22, 2005

His previous book coincided with a major market peak:
The Rules for Growing Rich : Making Money in the New Information Economy
Published June 27, 2000

And what about Robert Toll, CEO of Toll Brothers, who sold more than $120 million worth of stock and was paid more than $31 million in 2005 while spouting the following:

October 2, 2005:
Insana: But are the solid housing fundamentals that everyone's talked about for the last couple of years supportive to housing through 2006?
Toll: And '07, '08, '09 and '10. Absolutely.

February 7, 2006:
Toll also said slowing demand and delays obtaining inspections, certificates of occupancy and utility hookups forced it to cut its outlook to sales of 9,200 to 9,900 homes during the fiscal year ending Oct. 31 from a previously lowered view of 9,500 to 10,200. (Toll Brothers rattled the market in November when it first cut its forecast range from 10,200 to 10,600).

New orders during the quarter fell to 1,572 from 2,209, while the value of the contracts declined 21 percent to $1.16 billion.

Spring Market Kickoff

2006-02-06T20:29:00.000-05:00

The Superbowl is over, which means the unofficial kickoff for the spring real estate market is here. Let's face it, the winter is a slow time for real estate and it's tough to discern much about market strength. That hasn't slowed down postings to the epic message board over at the Boston Globe site (Where are real estate prices heading?) - 910 posts and counting.

To celebrate the season I took in an open house yesterday. Showed up 90 minutes into a two hour open house, and was the third to sign in - it did pick up while I was there, at least a couple other people came through. It was a small cape, on a reasonable lot (0.35 acre lot), and in a nice western 'burb of Boston. Not much to distinguish the house - no recent updates (56 yr old), one bath, two small bedrooms. The price? $469K, marked down (in hand on the listing sheet) from $499K. Experiences like this reinforce my sense that the suburban market in particular seems out of whack.

Needless to say, the next few months will be interesting. Hopes and fears abound, the market will reveal its answers in due course.

One intriguing early return on 2006, courtesy of Boston Real Estate Watch:

The following information was obtained form MLS:

Boston condo market statistics

January 2005
Average List Price: $445,767.00
Average Sales Price: $430,408.00

January 2006
Average List Price: $417,936.00
Average Sales Price: $403,512.00

That's a 6% decline in YOY average sales price!

Current number of Boston area homes on the market, courtesy of ZipRealty:
38,055
Number of listings that have been reduced at least once:
11,061
That's 29% (and doesn't account for homes relisted at new prices under different MLS #).

Enough with the trash talk, let the games begin!

Inventory as a predictor for price changes

2006-01-31T19:01:00.000-05:00

The seemingly random assertion that 7.5-8.5 months inventory represents a "balanced" market in MA got me thinking - that figure must come from somewhere, right?

Let's take a look back at market history over the last 14 years. Plotted below are two sets of numbers: the annual "months inventory" as reported by the MAR, and the annual appreciation rates (avg prices) for SFHs and condos. The "months inventory" represents how many months it would take to clear all the inventory of homes on the market. (2005 data are my estimates based on monthly/quarterly MAR reports; official numbers will be released in Feb).

Looks in general like appreciation rates and inventory are inversely correlated. Makes sense - if supply excedes demand, prices should drop, and vice versa. How tight is the correlation? You can see it most easily by plotting appreciation rate as a function of inventory:

Pretty cool. So what does a 7.5-8.5 month inventory predict for appreciation: loooks like around 4-7%. Fair enough, I guess that is what MAR expects in a balanced market. One of the interesting things about the plot - it emphasizes how infrequently the market has been in "balance" over the past few years.

So what's been going on with inventory recently? Here are the monthly reports for inventory from the past 3 years (calculated from MAR data). Clearly there are seasonal patterns, but the divergence from established trends is crystal clear beginning around July. If December is any indication, the divergence appears to be accelerating.

Even so, it may take some time for the continuing inventory build to put us in the predicted range for price declines (sustained 11+ months of inventory). Ofcourse, accelerating supply (here) and demographic trends (here) could speed up the process.

What else might accelerate any change in the market? Interest rates appear to be the wildcard.

Mortgage rates over the last 14 years were generally (though not smoothly) trending downward. This provided a tailwind to price appreciation through increasing affordability. It's no stretch to argue that if mortgage rates increase appreciably (and they already have for ARMS), the entire relationship of appreciation versus inventory will shift leftward. In other words, the inventory levels associated with price declines will drop, and the tailwind of lowering rates will be replaced by the headwinds of rising rates.

Foreclosures: Tip of the Iceberg

2006-01-31T18:42:00.000-05:00

The Boston Globe reports some startling statistics on MA foreclosures in "Housing Slowdown Squeezes Borrowers." Here's the telling graphic:

Keep in mind:

In 2005 appreciation rates were still positive.

As discussed earlier, resets for I/O and ARM loans will swell over the next few years.

And the Fed just raised rates another 0.25 point today, further increasing rates for adjustables.

Prestige no protection from price drops

2006-01-28T11:36:00.000-05:00

Inspired by Lowball! over at the Northern NJ Bubble and some reader suggestions, I put together a list of some recent sales that stand out for their price cuts. I don't have access to this info on a searchable database - I just went to Coldwell Banker, logged in, and searched MLS for recent sales in some prestigious Boston suburban towns. Plenty of homes are still selling for close to their list prices. But even in these desirable areas, sale prices are consistently below asking, and some much lower. I'm not able to access info on whether homes were relisted at lower prices before they sold, so the drops could be even more significant from original asking prices. Here are some recent standouts:

NEWTON , MA 02459
MLS# 70270545
Ask: $554,900
Sale: $450,000 (1/13/2006)
19% reduction

NEWTON , MA 02459
MLS# 70283827
Ask: $699,000
Sale: $625,000 (12/30/2005)
11% reduction

NEEDHAM , MA 02492
MLS# 70256995
Ask: $729,000
Sale: $655,000 (1/5/2006)
10% reduction

LEXINGTON , MA 02421
MLS# 70194581
Ask: $2,195,000
Sale: $1,730,000 (1/6/2006)
21% reduction

LEXINGTON , MA 02420
MLS# 70299424
Ask: $669,000
Sale: $600,000 (1/12/2006)
11.5% reduction

WELLESLEY , MA 02482
MLS# 70223416
Ask: $575,000
Sale: $450,000 (12/29/2005)
22% reduction

I'm not a big fan of anecdotal evidence, so I won't make too much out of this. But these numbers do emphasize that risk in this market is not restricted to less desirable neighborhoods. Most of these sellers no doubt made plenty when they sold, even at the reduced price. But if you moved in next to them last summer, they just set the new comps for your neighborhood.

Prices for New Homes Deflating?

2006-01-28T09:26:00.000-05:00

Numbers out yesterday on sales of new homes. While the headlines focused on the surprise increase in sales (a volatile number with great statistical uncertainty), less attention was paid to the prices paid for new homes.

December 2004 Median Price: 229.6K
December 2005 Median Price: 221.8K
Percent Change: -3.3%

December 2004 Average Price: 284.3K
December 2005 Average Price: 272.9K
Percent Change: -4.0%

Those are YOY declines! Granted the decrease in prices reflects in part the sales weakness in the West (which has highest prices), but this is a stunning development, and one conveniently ignored by most interested parties.

A graphical summation of the trend from Calculated Risk:

Sixth Busiest December Ever!!!

2006-01-25T19:46:00.000-05:00

MAR has the December market numbers (pdf) out for the Bay State.

December 2005 sales volume ranks as the sixth busiest December on record for single-family home sales in Massachusetts, an indication that the market is merely returning to a more normal sales pace after experiencing an accelerated pace for much of past three years.

Prices are up marginally year over year, and condo sales continue to run stronger than SFH sales, at least relative to historical trends. The real news is a return to ballooning inventory (the telling data are plotted last).

Interestingly, the MAR seems perturbed about the bubble chatter:

False assertions of a price bubble in the local market also have prompted some buyers to delay their home buying decisions .

Their reassurance for those in doubt:

Despite concerns about an inventory glut, there’s a healthy balance between supply and demand at the present time.

Truth or fiction? They state that equilibrium in MA occurs at 7.5-8.5 months of housing inventory. OK, but in one year inventory has surged from 5.8 to 8.3 months for SFHs, and from 6.4 to 9 months for condos. Think inventory is going to magically stabilize now that we've reached a 'balanced' state?

Here are the numbers:

In my opinion, here's the real news - check out the shocking surges in December inventories.

Greenspan's Legacy

2006-01-24T21:42:00.000-05:00

Excellent article by Nell Henderson at the Washington Post about Alan Greenspan and the US economy.

My favorite bits:

Under Greenspan's watch, the economy thrived despite stock market crashes, international financial crises, terrorist attacks, wars and other shocks. No wonder, as Greenspan prepares to retire next week, economists have lauded him as the greatest central banker ever.

Still, his legacy will be judged not just by his record at the Fed, but also by the economy he bequeaths. And when he leaves office Jan. 31, Greenspan leaves a nation awash in debt -- record household debt and a record trade gap.

...low interest rates worked like an intoxicant on consumers, who snapped up new cars and trucks with no-interest loans and seized on low mortgage rates to buy new homes and refinance old home loans. Household spending rose in 2001, 2002, and 2004, even as the wealth and income of the typical household fell or remained flat in the same period, according to an analysis by Moody's Economy.com... household debt rose faster in recent years than wealth or disposable income, reaching an unprecedented 126.1 percent of after-tax income in the third quarter, double its 1980 level.

When questioned on Capitol Hill in June about criticism that the Fed's strategy had helped inflate a housing bubble, Greenspan suggested that such imbalances were an acceptable price for avoiding another depression or a Japan-like economic stagnation. "We knew that in the process of what we were doing -- that is, addressing the consequence of a very severe deflation of a [stock] bubble -- carried with it potential side effects," Greenspan said. "As best we can judge, things have turned out reasonably as we had expected, both positively and negatively, but in our judgment, the positive effects of the policy far exceeded the negative ones."

So there you have it straight from the Maestro's mouth - the housing bubble is an acceptable price, and a predictable and necessary side effect of rescuing the economy from the last bubble.

Which leaves one to ask, what (or who) will rescue us from the curent bubble (or is it still just froth)?

Ghosts from another time...
As we near the time of Greenspan's exit, let me quote from John Kenneth Galbraith in "The Great Crash":

A bubble can be easily punctured. But to incise it with a needle so that is subsides gradually is a task of no small delicacy. Among those who sensed what was happening in early 1929, there was some hope but no confidence that the boom could be made to subside. The real choice was between an immediate and deliberately engineered collapse and a more serious disaster later on. Someone would certainly be blamed for the ultimate collapse when it came. There was no question whatever as to who would be blamed should the boom be deliberately deflated. The eventual disaster also had the inestimable advantage of allowing a few more days, weeks, or months of life.

When reflecting on the current state of affairs, definitely wait for the sands of time to flow before passing ultimate judgement on the success of our current Fed.

Don't Panic

2006-01-24T21:12:00.000-05:00

When the National Association of Realtors says "Don't Panic, " what do you think?

In November, housing inventory – the number of homes available for sale – rose to its highest level since April 1986. Once again, the Chicken Littles came out of the henhouse shouting the “sky is falling”. They suggest that, with mortgage rates rising and demand slowing, a rise in inventory will inevitably cause home prices to crash.

Hmmm, a wee bit overly sensitive about the term crash?

Well, for those waiting for the crash, you can leave your protective headgear behind. Home prices are not going to crash. It’s simply not in the cards.

Why not? Check out the link. It's the same old stuff - money is still cheap, demand is still high, the economy is sound. All are true, but notice that all of these things are backward looking, and the current trends are all in the wrong direction. Best of all is this reason there won't be a crash:

Homeownership has proven itself as a viable investment alternative to stocks and bonds. Since 2000, there have been $4 trillion dollars in home equity gains. That is equivalent to $70,000 per household, an exceptional return on investment. For most homeowners, their home has an additional benefit – it provides shelter for them and their families.

There you have it - the NAR has so embraced the speculative mania of the housing market, they now view the fact that a house can provide shelter as a nice secondary benefit.

Still, shouldn't we be worried about all that inventory?

At the national level, we can see that home sales are slowing, the month-supply is rising, and as a result, balance is returning to the market. As a result, we do expect home prices to soften in the coming months. And slowing sales are good for the long-term health of the housing sector. So we should welcome a moderate slowdown, not panic from it.

But later on...

So, even though inventory may rise, home prices are not necessarily headed for a downturn. It is true that price appreciation may slow due to a softening of demand because of higher interest rates. But there will still be buyers out there. The good news is that there will be an available supply of homes for them to purchase.

So which is it? I guess with a press release like this, you can't get it all wrong.

Now for the local angle:
What markets had the biggest surge in inventories from the 3rd quarter 2004 to 3rd quarter 2005?

Chicago/Naperville/Joliet....132%
Binghamton, NY...............125%
Boston/Cambridge/Quincy......115%
Washington, DC................98%
Baltimore/Towson..............95%

Affordability - Stretched to the Max?

2006-01-21T13:40:00.000-05:00

The issue of "affordability" is complex. It combines elements of income, cash available as down payment, mortgage interest rates, creative mortgage practices, and ofcourse price.

The simplest argument in support of rising prices: incomes are rising in tandem to support the prices. One look at the image below refutes this notion in MA.

Real household incomes (adjusted for inflation) have been stagnant in MA for the past five years. The average home price has increased 46% and the average condo 70% over the same timespan. Yes, I've compared inflation adjusted income to non-inflation adjusted house prices, but one could easily argue that since house prices aren't included in inflation measures (rents are), then real income is the proper comparison.

So how to account for people's ability to afford these prices? The cost of borrowing money reached multi-generational lows in the last 4 years. Here are the 30 yr fixed, and 1 yr ARM rates on January 1 of the past 7 years.
No question, low rates increased the purchasing power of those stagnant incomes. Couple this with the well-marketed message that only "monthly costs" are important, and suddenly people could afford to pay higher prices for an asset using "affordable" monthly payments.

Here's where things get worrisome. The escalating prices, and the psychology of "real estate never goes down," and "get in now or you'll be left behind" led inevitably to panic buying, bidding wars, and speculation.

Nothing epitomizes speculation better than interest-only mortgages. (I know they can be a cash-flow tool for the financially savvy, but come on, how many IO loans are being used that way?) Take a look at the explosive growth in IO mortgages in MA as people have been stretching to purchase inflating assets.

Keep in mind, with these loans no principal is payed for a defined period. The principal is then payed down on an accelerated basis after the interest only period - leading to payment shock. The only equity accrued during the IO period is through price appreciation - and the only way to refinance these mortgages without spending a big pile of new $ is to have some equity. If you want to see some amazing home-financing horror stories, and get a sense of the crazy lending practices that got us to this point, check this blog out.

Even if you can refinance, the rise in short-term interest rates almost guarantees some amount of payment shock. What happens if you can't afford the new payments? Sell, or face foreclosure. If you don't have any equity, selling is a $ losing proposition. MA foreclosures rates have already begun to climb.

And I haven't even talked about the enormous value of adjustable rate mortgages in the US that will begin resetting in 2006 ($300 billion) and 2007 (a staggering $1 trillion), and are already creating problems for MA borrowers.

So have people really been able to afford the homes they have purchased over the past few years? Perhaps more importantly, will they continue to be able to afford their payments? The answer to these questions will likely have far-reaching consequences for the local, and even global economy.

Demographics, Demand, and Demise?

2006-01-13T21:05:00.000-05:00

It was hard to miss the recent news that MA is losing population. But the recent demographic trends are perhaps weaker and more pervasive than most appreciate. For instance, population growth in MA has stagnated since the turn of the century, a trend last seen in the 1970s (US Census Data).
In Boston the downturn has been even more striking, from 3.31 million residents in 2000-01 to 3.275 million in 2004, a loss of ~35,000 or >1% of the population. The most recent data, while more than a year old, suggest that the trend is accelerating.

We know these demographic trends haven't resulted in weakness in home prices (at least not yet). But what about a housing market that exhibits a more direct response to changes in supply, demand, and affordability - the apartment rental market? From the CURP website, we can see a surge in apartment vacancies that mirrors the declining Boston population.

These vacancy rates are the highest since 1996. Incidentally, the peak in vacancies for the last 20 years was about 7% in 1991-92. Data from Northeast Apartment Advisors demonstrate that the improving supply to demand ratio has caused rents to decline modestly.

If you were a naive observer, having seen these data, would you ever guess that sale prices for homes and condos have been increasing in MA at a double digit pace for the past several years?

What does the future hold?

Predicting future changes in demand is a difficult business, mostly because a housing market is driven largely by psychology. Recently though, a demographic study has raised even more ominous questions about the demand equation in MA.

"Thirty-five percent of boomers said they want to leave the state for their retirement years. As a result, the state could lose 650,000 people -- about 10 percent of its population."

And who could have missed the fact that the first boomers are turning 60 this year. How many are planning on selling to help fund their retirement? How will their plans be shaped by the growing inventory of new and resale homes?

The Pipeline, Part II

2006-01-09T19:26:00.000-05:00

The Center for Urban and Regional Policy (CURP) at Northeastern University has a series of presentations online here. They contain a wealth of information on the regional economy, housing, development and demographics.

The following plot contained in several of the presentations shows housing units permitted in the Boston PMSA over the last 36 years. The boom-bust cycle is apparent - as is the recent growth in multi-unit permitting.

In my last post, I quoted Global Insight from this Boston Globe article (12/30/2005) estimating that "there will be 16,220 housing starts in the Boston metropolitan area this year." Add that info to this graph and what previously looked like an orderly growth in permits now looks a lot more like past boom-bust cycles.

The CURP website also introduced me to this, from CHAPA, the Citizens' Housing and Planning Association:

A picture is worth a thousand words.

-DT

The Pipeline

2006-01-07T10:30:00.000-05:00

I've been digging around, trying to understand how the inventory picture for SFHs and condos in MA will evolve in the coming years. It is not a data rich environment to say the least. However, here are the highlights of what I've been able to piece together:

Single Family Homes
For a historical perspective on single family home permits over the past 20+ years, you can check out the MAR website here. They don't seem to have historical data on condos, perhaps because of the variable origins of condos (conversions vs. new construction). No signs that SFH permits are surging, but they haven't reported data for 2005 yet.

For some 2005 data, look at this article from the Boston Globe, 12/30/2005: "2005 housing starts, including condos, have reached their highest levels since the 1980s real estate boom. Global Insight, a Lexington economics and consulting firm, estimated there will be 16,220 housing starts in the Boston metropolitan area this year, second only to the 18,400 starts recorded in 1988. But the firm forecast a sharp decline next year, to about 11,900." One obvious question not addressed, why the expectations of a pullback? Keep in mind these numbers differ from the MAR numbers linked above because they include condos, and are limited to the Boston area.

The Massachusetts Home Builders Association (no date given) haven't see a big surge in SFH permits, but "the area in Massachusetts seeing the most growth was permits for buildings with five or more units – a total of 4424 such buildings were permitted, an increase of 82% over the previous year." Which leads us to...

Condos and Multifamily Developments
The surging development of condo and multifamily rentals is undeniable:

From the Boston Globe, 11/17/2005: "Tom Meagher of Acton-based Northeast Apartment Advisors, which tracks rental housing, estimated that, with as many as 50,000 new apartments in the pipeline, the Boston area is poised to gain the largest amount of new multifamily housing since the late 1980s."

From the Boston Globe, 11/18/2005: "Nearly 14,000 residential units, primarily condominiums, are currently in the construction pipeline in Boston, the city's planning agency said yesterday. Though exact comparisons don't exist, officials believe the number of units under development equals or exceeds the building spree of the 1980s... Projects in the pipeline include those that have been approved by the BRA, have obtained city permits, or are under construction. Total residential units include rental apartments and condos, though the vast majority is condos."

"The BRA could not provide data on how many units were built during the late-1980s boom, though spokeswoman Meredith Baumann said longtime officials believe today's development exceeds the prior boom." "Kevin Ahearn, president of the Boston brokerage firm Otis & Ahearn, agreed. Based on BRA data, he estimated 4,930 condos are currently in the pipeline downtown, including the Back Bay and South End, and are slated for completion over five to eight years. That compared with about 3,300 condos in the pipeline in 1988 and 1989, he said."

From the Boston Globe on12/23/2005: "Marc Draisen -- executive director of the Metropolitan Area Planning Council... said the state has seen a recent acceleration of housing production, particularly in multifamily complexes. According to the state Office of Commonwealth Development, multifamily housing starts have doubled to about 7,000 a year."

From Northeast Real Estate Business, November 2005: "There are 8,700 age-restricted condominium units and 39,500 un-restricted condominium units in the development pipeline, from early-state design to sell-out phase. "

From US Dept. of Housing and Urban Development (pdf available): "Multifamily building activity increased (in MA), with permits issued for 15,232 units, an increase of 11 percent during the 12-month period ending September 2005. Massachusetts, and particularly the Boston-Cambridge-Quincy, Massachusetts-New Hampshire metropolitan area, supported the bulk of this new multifamily construction, with 9,549 units permitted. Reis, Inc., estimates that 2,831 apartment rental units will be added to the Boston market in 2005 and an additional 5,435 units will be added in 2006."

So is there pent up demand for all these new rental units? "According to Reis, Inc., the third quarter 2005 apartment rental vacancy rate for the Boston metropolitan area was 5.0 percent, unchanged from the third quarter of 2004. Reis, Inc., projects the completion of nearly 7,700 rental units by the end of 2006. In addition, if the condominium market slows further, unsold condominium units may be added to the rental inventory. This inventory increase could result in added vacancies and more competitive conditions if job creation remains sluggish."

Finally, for some fascinating insights into how the condo market has surged nationwide, with occasional mention of the Boston market, check out Condo Candor from PNC Real Estate Finance (August 2005). It's a terrific read, and lays out some of the speculation that has helped to fuel many markets around the country.

Conclusions
So what to make of all these numbers? The Boston Globe sums up the big quesion (11/18/2005): "With so much development in the works, an obvious question on the minds of realtors, bankers, and developers is whether Boston is repeating the 1980s housing boom and bust, when prices soared and then plunged after investors pulled out of the market."

Perhaps this question should be on the mind of everyone in the market - buyers, sellers, and especially speculators.

No matter what numbers you use, supply is clearly increasing. To really address this crucial question, we need to look at the other side of the picture - demand. I'll put together a post on this issue next.

-DT

P.S. If you're curious what some of these new condo developments look like, try CondoDomain.com or the list on the left border of John A Keith's blog to get a taste.

Condo Sales and Inventory

2006-01-04T19:01:00.000-05:00

Below I've posted the monthly sales and inventory levels for condos in Massachusetts (compiled from the Mass. Assoc. of Realtors) over the past 6 and 3.5 years, respectively. The increasing trend in sales is much more apparent than for SFHs, especially in 2003 and 2004. Sales increases continued in 2005, although the trend slowed.

As with SFHs, the condo inventory picture is telling. 2005 saw a profound increase in condo inventory levels, spiking in late summer. Since then condo inventory has dropped precipitously, plummeting nearly 5000 units over two months. Over those same two months, only ~3500 condos were sold. Where did all the condos go? And perhaps more importantly, will they be reappearing on the market in the coming weeks and months? Looking to the future, how many more condos are in the planning and construction stages throughout Boston and Massachusetts? I'll look around and see what I can find - tips and comments welcome.

-DT

SFH Sales and Inventory

2006-01-01T18:41:00.000-05:00

Below I've posted the monthly sales and inventory levels for single family homes in Massachusetts (compiled from the Mass. Assoc. of Realtors) over the past 6 and 3.5 years, respectively. Sales have been fairly consistent over the 6 year span, with inconsistent but gradual increases. The trend appears to be slowing in 2005, but also slowed in 2002.

What is more intriguing is the striking jump in inventory in 2005. It started in the spring, leading to big gains in inventory throughout the summer, followed by a late summer spike of truly unusual proportions. Then, as suddenly as this spike appeared, it dissipated. Speculative sellers seeing what the market would bear, or hidden inventory waiting to come back on the market this spring? Cleary, the scope of the ballooning inventory will determine the fate of the market over the coming months.

Median Price - Condo

2005-12-30T11:09:00.000-05:00

This plot shows the median price of a condo (thousands of $) in Massachusetts for the last three years. The data are freely available from the Massachusetts Association of Realtors. As with the prices for single family homes, the prices have flattened noticeably in 2005. We are now at median prices below those achieved as early as May of 2004. A cross-over to year over year losses looks imminent, especially with continuing condo construction evident around the Boston metro area and swelling inventories.

The Boston Herald has an assessment of the November numbers, with typical spin from various interested parties. The Boston Globe has a similar report.

Note: The MAR switched from reporting average price to median price in 2003; the raw data go back much farther in time, but for the sake of accurate comparisons I am only plotting median data here.

-DT

Median Price - Single Family Home

2005-12-29T16:20:00.000-05:00

This plot shows the median price of single family homes in Massachusetts for the last three years. The data are freely available from the Massachusetts Association of Realtors. The seasonal patterns in price change are clear and consistent. The distinguishing characteristic of the plot is the flattening of prices in 2005 relative to previous years, showing a slowing of appreciation. My guess is that this represents the limits of affordability, coupled with the recent increases in inventory (more to come on this) and mortgage rates.

-DT

November Market Analysis

2005-12-29T15:50:00.000-05:00

Today the Mass. Assoc. of Realtors released sales data for the month of November. These lagging data show the continuation of trends that have developed over 2005 - slowing sales, and price appreciation dropping from double digits, to single digits, and now close to flatline. No year over year decreases yet, but the trend is ominous.

Over the next couple days I will post historical data for single family and condo prices and sales for the last three years. I think these give the best indication of where we've been.

-DT