The myth that nothing is selling

We are closing next week on a single family in Somerville very close to Porter Square. I just got the assessment, and my guess is that they were just barely able to do a fair comparitive analysis with 4 other homes. The volume of SF homes sold in this area is down significantly.

Rona -

I think we all agree that there was a real estate frenzy in the US over the past several years, and prices and sales volume have both certainly cooled. We were all expecting this. But, the near-apocalyptic post-bubble expectations of some are simply not going to happen. A nice, well-maintained home in a good location in Massachusetts is still both desired and in short supply relative the population. While not this is not fun when its time to pay the montly mortgage, be thankful for what it means. It means this is a great place to live.

Hi Frank,

Congratulations on your purchase in Porter Square. It is always hard to do a CMA on single family houses in Somerville. The housing is mostly 2- and 3-family homes, many converted to condos.
In the last three months, there were 22 sold. In 2007, in the same three month period, there were 31. Even with the 30% decline in that type of property sold, your appraiser was able to find homes to confirm your value for the lender.

BTW, the appraiser only needs three homes to do the job.

Thanks Rona,

One thing I found though is that they sometimes appraise a similar home that is farther from the "action" and conveniences of Cambridge and also farther from the T. For some people, these things are very important and increase the value of the home.

For everyone I know the appraisal has always come in at the purchase price or a few dollars more. I have never heard of one coming in for anything less (or more).

Middle,

"A nice, well-maintained home in a good location in Massachusetts is still both desired and in short supply relative the population."

Population is only one part of the equation. Affordability is the other. If wages are steady, but interest rates increase then fewer people can afford the median price home. If wages fall - in real terms and/or through layoffs/downsizing, then fewer people can afford the median price home.

Unfortunately, the short supply of these homes serves to accelerate both appreciation and depreciation.

The facts are that: Bear Stearns and IndyMac; Lehman is on the edge as are Fannie and Freddie; Countrywide was bailed out at a significant cost; 12 FDIC insured banks failed in from 2007 to present and that only 7 banks failed from 2003 to 2007; the value of the underlying collateral of mortgage bonds (aka peoples homes) fell ~17% from the peak value (Case-Shiller, through Q1:2008); outstanding mortgage bonds for ONLY Government Agencies and Government Sponsored Enterprises was $4.6 trillion dollars in Q1:2008 (Federal Reserve).

Because of recent excesses, people cannot divorce themselves from the macroeconomic realities. It does not matter that all real estate is local. The money to buy real estate is global. Actual events and rational evaluation point to a very tenuous economic position for the US, Massachusetts, your block in your neighborhood.

It does not matter that all real estate is local. The money to buy real estate is global.

I just wanted to repeat this, because it bears repeating. A wonderfully concise summary.

Which relates to charles's point on an earlier post. Nice, well-located housing in Eastern Mass. has been relatively "scarce" for a long, long time. But prices can only go from 3x incomes to 5x incomes in the presence of cheap credit. And we're not even close to the end of the tunnel on the credit crisis. We've passed the liquidity crisis, and have plunged headlong into the insolvency crisis.

WsJevons beat me to it, and eloquently.

Put simply, supply IS important. But Ability to pay is equally important. And things won't go apocalyptic, though that may seem to be the case for underwater owners. But they will go down to normal income ratios - ie what people can actually afford, based on salary, not cheap money.

Which is roughly 3 to 4 x income.

I believe lack of supply can indeed cause (local) prices to be above 3 to 4 x income. Simply put, if there are only 50 houses for 100 families, then the incomes of the lower 50 don't matter. They are out of the game.

Of course, it's not quite this simple. Those people are going to have to live somewhere. They'll rent, commute further, pick less desirable neighborhoods, or leave the area. (Maybe even some house will get built). At the end of the day, you need to include all of these people somehow, but I don't expect to be straight-forward.

To my mind, the big question is: are a significant number of people on the verge of loosing their houses in these desirable neighborhoods? If not, then you can expect that most of the people in these neighborhoods are going to stay put until prices rebound. (I'm guessing it'll be about 10 years). Any housing supply is therefore going to be small, and the prices in these areas may not fall as much as the surrounding regions. (Of course if the economy tanks, everyone is in trouble).

Factors to consider regarding the economics discussion:
Boston is a great place to make a living, according to Forbes Magazine.

In addition, we haven't discussed the amount of wealth in our area. This area has a well-established community of just plain wealthy people. I'm not one of them, but I know they are here.

LL, you're right. The lender's appraiser almost always brings the appraisal in right at the sale price. Why? The lender's appraiser has the P & S in hand, then finds data to show that the home in question is a good investment for the lender. When the market was going up, that was really too easy. Now it is a bit tougher to justify lending money on overpriced property.
Broker's CMAs are designed to define what a house should sell for based on what others are paying for things like it. The lender's appraisal is verifying the investment for the lender. It's different data for a different purpose.

This thread brings to mind the phrase, "Not Clear on the Concept."

If houses are expensive because people in Mass. are so rich, why are they suddenly paying 5 x income to buy a house?

Why are the simplest concepts so difficult to grasp ?

steve, that's a fair point that we've referred to before - household creation. But the numbers are running ugly.

And the fundamental still remains - what is 3.5x the income of the house buying public? If you drop the bottom 50 out of a hundred, what is the average income of that remaining 50? My guess is that's the 100k group that we are talking about, not the multitude of households making 40-60k a year.

And if you compare the number of 100k+ households in Mass to the amount of houses for sale, you'll see that the houses WAY outnumber the households.

Or as Marcus puts it effectively, that's already built into the numbers.

Rona - the wealthy people are indeed a different market, and the 2 million plus market is moving differently indeed. But that market doesn't really overlap - we're talking in the 10s of people looking max at any one time. You see the same people at every downtown 2m+ listing. I'm actually friends with a fair number of them - 2 of them just executed on washington, you probably know the sales. But in neither case did they really think it was a good financial move, there were other reasons.

In terms of wealthy people being different, the manhattan market is just downright fascinating right now. In general it gets to the group that really cleaned up this decade, and they cleaned up at a rate that we haven't seen for a hundred years or so. The inequality of wealth dispersion is a different topic though.

Steve2, sounds like you are kind of making the "they are not making any more land argument". Well, Japan, a country with approximately a third the population of the US and approximately 1/25th the land area has been going through real estate deflation for over 15 years.

As others have pointed out, what is important now, is access to credit. No money = no sales = collapsing prices. Quite simple really.

volume is down sharply. i find myself spreading comps thinner by the day. the pendulum has swung and access to capital is being restricted. that being said it's not being eliminated. to compare eastern mass to the japan run up is nonsensical. it somewhat resembles what's going on in parts of california but our use of leverage is fractional compared to what our asian brothers saw fit. there's tons of talk about income and affordability. i am not the fed. my interest is not how the market as a whole will react to median income as it compares to median home price. to me there is one relevant number regarding external affordability, notices of default in my target market. that's not to say that inflation, interest rates, access to capital, international confict, the umbrella of regulation, etc does not affect every property. real estate is national and international, but you can not take the local out of the equation, try as you might.

I did not imply that real estate can be divorced from local influence, but stated that the macroeconomic factors significantly overwhelm macroeconomic factors.

Local markets are like a buoy in the ocean. That buoy may be at crest of a wave, but the wave will certainly pass (or crash) and the buoy will be bobbing along at whatever level the sea is at that moment.

So, is the ocean waxing or waning? Evidence says waning.

"It does not matter that all real estate is local. The money to buy real estate is global. "

Repeat it all you want. All data contradicts it.

ws i agree that the macro can overwhelm the micro. the perception of that risk is keeping us on the sidelines in our search for a primary residence unless we find a unique opportunity. an actual elimination of access to credit would obviously be catastrophic to real estate values. that has not and will not happen. but to say that it is currently overwhelming on all fronts is to ignore the preponderence of the annectdotal evidence that suggests that in some local markets the impetus to sell is weaker than the desire to purchase. prices are sticky and minus a motivating event many ride out the depreciation. unlike other markets real estate generally doesn't create that feeling of i better get out before it's too late among owners. most recognize that the market ebbs and flows. it also encourages potential buyers to put off purchasing until they find bottom. until notices of default rise in significant numbers in those communities i believe you're likely to see continued nominal price drops.

Middle,

I'm sorry. I don't quite understand your point - perhaps it was lost in the nuance of the voluminous data supporting said point.

However, for single family homes in MA for the first half of this year compared to last:^

- 19% fewer sales representing ~ 24% lower dollar volume in sales;

- 239 of 297 counties had fewer sales;

- 232 of 297 counties had lower median price;

- 260 of 297 counties had lower dollar volume;

- 8 counties had an increase in sales & an increase in median price - aka "Healthy";*

- 88 counties were mixed i.e. higher sales / lower median or lower sales / higher median;

- 201 counties have lower sales and lower medians aka "unhealthy".

One last way to look at it, people in 201 counties have lower home values, 88 counties either lost value or are in jeopardy, and 8 counties are doing ok. E-I-G-H-T of 297!

Where should I invest in housing? I have two requirements: no more than 45 minutes at 7 AM and 7 PM door to door in the financial district by any transportation mode; and, where will I not likely lose money? If you know, I have a pot of cash on the sidelines.

^The data set is comprised of counties that had more than 6 sales in either 2006 or 2007; Boston, Nantucket and Chilmark counties were also removed because single family homes in the communities are in no way representative of general housing stock e.g. have median prices >$1.4 mm or on an island; Surprisingly, the comparative analysis did not materially change!

* They are Truro, Norwell, Monterey, Millville, Rutland, Salisbury, Becket, & Dalton.

"an actual elimination of access to credit would obviously be catastrophic to real estate values. that has not and will not happen."

That has happened through tighter lending standards. Fewer people can obtain loans and that mean less money is going into real estate. Less money for real estate means prices and valuations must come down. Fewer dollars chasing too many goods.

"prices are sticky"
See my response to Middle that is from empirical not anecdotal evidence.

"many ride out the depreciation."
Riding out depreciation is loss. Homeowners are highly leveraged (higher leverage than the median equity hedge fund in fact) and the single largest component of a households total savings is in their house. As I illustrated on another post response to you, a new homeowner faces extremely uncertain (uncertainty = risk) housing market that has the potential to significantly erode their savings power in the very near future and will impact them for the balance of their lives.

"until notices of default rise in significant numbers in those communities i believe you're likely to see continued nominal price drops."
Unfortunately, default is a contagion that feeds a vicious cycle of deflation until something breaks it - like job growth, higher than average GDP growth. Defaults in, say Lawrence, do spill over into Waltham, Hingham, Ipswich, etc.

If the economy snaps to, then people who buy now will look like geniuses. However, if the vicious cycle of prices, liquidity, deflation persist, the same people will have made a mistake that will impact their savings power for years to come.

ws - you may or may not believe me but bottom line, prices have dropped nominally in my target market. interest rates have risen and offset any depreciation from a monthly cash flow perspective. distressed properties have been a virtual non-factor. access to credit has been tightened not eliminated and that is a pretty big distinction from my original point. depreciation in home value is a loss only if you convey the property or if you harvest home equity. i'm not trying to tell you that your core evaluation is irrational or wrong. what i am telling you is that it is inconsistent w/ what has happened in my target market. you are free to predict that it will hit that market in the future. i wish it had b/c that would obviously be beneficial to me but it has not thus far.