The audacity of hope

I think the end of the beginning is a fair description. And I think it's clearly the case Boston won't fare as poorly as the sunbelt - not due to any inherent superiority on our part, but the fact that supply is very constrained in this area.

But housing clearly has a long way to go down in Boston. Real estate is cyclical - it's normal to have lower inventories in the winter months, as the graph shows. None of us will really know how things are going until the spring market is over - it's really too early for the data to mean anything.

To reiterate my refrain, it's about math. Houses can only sell if buyers can buy them. So the price of Boston houses is dependent on what Boston buyers can afford. And without imaginative financing, that number will be lower than it has in years past.

At conservative debt-to-income ratios, family's can usually afford a house price at roughly 3.5 times family income.

House prices will need to come down for that to be the case in Eastern Mass.

The differences between Boston and the Sunbelt metros like Phoenix are circumstantial, not fundamental. Phoenix saw faster rates of price hikes and a greater degree of speculation leading up to 2005, so now it's YOY price declines are steeper than in Boston. Also, according to Case/Schiller and a plot of home price to income, Boston's housing bubble began to burst about a year earlier than the rest of the country. Since Boston home prices have been falling for a longer time, their YOY rates of decline now seem more moderate than the rest of the country. But, Boston metro homes still cost >6 times nominal income and >7 time real income and those ratios need to get down to ~4 before prices begin to climb again. With the ongoing recession, that probably won't thappen until 2012.

The fact that our inventory build situation is not as bad as LA and Miami is not much cause to celebrate. The situation in Boston is different as we have not had as many speculators as in Miami. I think there is also a large pool of buyers ready to purchase once prices correct off the bubble pricing in relation to average incomes. This is really the bottom line fundamental right? What can people afford to pay for a home is the basic physics. Incomes since the start of the bubble are up maybe 2% a year on average. Homes went up 20% a year. The fundamentals that sustained that rise are now gone (access to easy mortgages, a panic sense that the market should only go up, economic conditions, etc.). Why is this so hard for people to figure out? Is this just denial?
Binyamin, why not go visit the MIT center for Real Estate Economics and talk to the experts?

Hope?!

What kind of perverted "hope" is that?

Do you also hope for high bread prices ?

Do you also hope for high chicken prices?

Falling RE prices are GOOD for people.

Let the prices fall.

Government, we need more affordable life!

Government, move out of the picture. We need freedom.

Let people own their homes instead of banks!

People produce stuff, while banks produce nothing, they bough all these houses with the money created out of thin air.

Let all banks collapse.

Abolish the FED.

Downsize government.

Give us freedom. Give us freedom. Give us freedom.

I live in both Boston and Miami. I can tell from first hand experience that the sunbelt is a completely different market from Boston and has a long way to go before the end is visible. Here however, is a different story. The condo market within the city of Boston is already starting to show signs of tighter supply. Open houses have buyers and quality product is moving albeit not at the same pace of years ago. If the mortgage market settles - as it certainly will - Boston prices will develop a flat line and slowly begin to move forward. The days of 10 - 15% price reductions is over here.

"cautious optimism" when describing the health of our real estate market is at best naive, at worst dangerously misleading.

As Charles implies, median home prices tend to revert to median household incomes. In this case the massive divergence that took almost ten years to build will not correct itself in a mere 1 to 2 years, or this year's spring season.

That house prices will need to come down is putting it mildly. More likely, house prices will collapse. The questions iare simply: how much will they plummet, and how many years will this correction last?

So this in no way is the end of the beginning; this is only the beginning of the end. A very ugly end.

This may temper your optimism:

Data from the graph reflects inventory only through the end of March. Eye balling the chart indicates at March end approximately 38,000 properties for sale in Massachusetts. According to the same data source used to compile the chart, as of this morning there are now 48,155 homes for sale in Massachusetts, an increase of some 10,000 properties or 26% in less than two weeks. Hardest hit by the jump are areas previously deemed "bubble proof" by some. Inventory in the South End has swelled to 550 properties with 192 new listings in the last month alone. Newton has seen its inventory increase by 147 properties during the last month, available inventory now stands at over 390. Too many knives not enough catchers...

Sure. It's different here.

See, Boston has a different national banking system from the bankrupt one that's out of regulatory capital. A different global credit market. A different U.S. economy from the one that entered a serious recession in December or January with skyrocketing inflation in food and energy. A different mortgage broker network from the one that's collapsing across the country. Different underwriting systems from national lenders than the ones that are requiring sharply higher down payments and turning away good applicants.

It's just different around my house.

For the complete Movoto.com report on Massachusetts real estate market, you can access the information at:
http://www.movoto.com/reports/movoto_ma_inventory_report_mar08.pdf

The report contains information on inventory levels, days on market information, distressed property information, etc.

- Henry

[Ed. Note: Thanks Henry. Couldn't find the link Friday.]

Temper my data when it comes to the increased inventory in the South End, Zip Realty has made a total mess of the listings, double counting almost everything. Newton numbers seem to be accurate. My mistake for not checking first, makes me wonder about the data used to create the graph....

Whenever I read about housing prices crashing, I always think about replacement cost. Right now, raw materials for new construction or remodeling are still rising. Oil prices have increase all transportation costs, vinyl and plastic products, virtually everything. Copper, steel, and other raw materials are being shipped to China and India, so the prices remain high here. I think the market for existing homes has almost leveled, because in most instances you could not replace this house with new construction.

Eastern Mass. should not have much more of a pricing plunge it seems to me. It's mostly about available land and inventory. Boston area simply has no room to build new compared with ( say) much of the Sunbelt. Boston has little growth in population that can be expected.... maybe even a decrease could be seen. But there are affluent folks from around the country and even globally that find Boston attractive. The combined dynamics of short supply, low inventories compared to other regions, the global market attractiveness of Boston, and the multi facted economy that is reasonably healthy and diverse should help Boston weather the real estate downturn better than most metropolitan regions of the country.

Boston peoples (liberal?) pessimism never ceases to amaze. The negative commenters are reaching for negative and biased things to point out. The real estate market in MA is not great, not even good but it is far from the disaster some people try to make it.

In time the market will turn around and I bet it won't be very long from now. Lenders need to lend money to stay in business and people with income and decent credit can still get a good loan.

Cheer up, Doomsayers!

I mostly agree with comment 2 (Weston Broker) except for one thing that sticks in my craw.

We are not in a recession.

A recession is generally defined as a decline in GDP over two consecutive quarters. We haven't had that. What we've had is slower growth than we've had over the past several years.

It burns me up that people don't understand being in a recession or not is not a matter of opinion. There's a real, objective way to determine whether we're in one, and we're just not. The people who insist we're in one in the face of the create the danger of a self-fulfilling prophecy. You convince enough people that we're in a non-existent recession, and we'll end up in one.

Bill,

You wrote, "It's mostly about available land and inventory."

What about price-to-income ratio? Doesn't that play a role in the cost of housing?

It burns me up that people don't understand being in a recession or not is not a matter of opinion

Those "people" would include you.

Recessions are formally declared by NBER, the National Bureau of Economic Research, www.NBER.org.

The Bureau does not simplistically define a recession as two quarters of negative GDP growth. They have made this clear repeatedly.

The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, the committee refers to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. The committee also looks at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see http://www.macroadvisers.com). Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process.

And from a story right here on the Boston.com, reporting comments by the head of NBER:

Recession is here, economist declares
Feldstein heads key forecasting group
Slump may be worst since World War II

By Todd Wallack
Globe Staff / March 15, 2008
The United States has already slipped into a deep recession that could be the most serious since World War II, said Martin Feldstein, president of the Cambridge group that is considered the official word on economic cycles.

http://www.boston.com/business/articles/2008/03/15/recession_is_here_economist_declares/

So, yeah, a recession is objectively determined. And we're in one. The worst since the Great Depression.