A couple of tidbits

I can understand the purchasing price should be the top concern but value of homes are not unreasonable in those places that escaped the froth from real estate bubble from few years ago. My wife and I still searching for a reasonably priced house around Boston suburbs after 1year with no luck. Price is our top concern. We don’t want to spend 50% of our income on cost of owning a home.

I don't understand the Boston area real estate market. Not sure if the run up of prices in the area in last few years was due to the bubble or just normal year to year market price appreciation. Can anyone help shed some light on why prices are just so high in this area?

Real Estate experts and agents keep telling us this is a great market for buying a house. They market is bottoming out etc. They said the same thing last summer (07) and the price have gone down slightly from last year in some of these areas that we are interested.

Just doesn’t make sense.

Odd priority list. Obviously people who don't remember home mortgage rates of 12-14%. I'd be more worried about ending up with a home that needed more repairs than expected after still recovering from the initial purchase. Glad to see at least some respondents recognize that closing costs can get a bit expensive as well...

On a similar note, beautiful Toles editorial cartoon today (10/8)
http://www.washingtonpost.com/wp-srv/opinions/cartoonsandvideos/toles_main.html

A fair and realistic purchase price would be my biggest concern. I wouldn't overpay even if the interest rates were extremely low. I also would take a hard look at the property taxes and the maintenance costs. There would be no reason for me to buy a home if I couldn't afford to live there for very long.

Real estate agents (not experts) have said every year was a great year to buy a house. It's pretty clear they were wrong in 2005, 2006, 2007, & 2008. Even around Boston, where the good markets have been flat rather than down 25%. In Miami and California it was severely bad advice.

As to whether borrowers will pay the 2,000 - of course they will. Coase got the Nobel prize in economics for proving that. It may not get billed explicitly, but it will be rolled into rates going forward.

Was it the New Jersey legislature that some wise guy got to re-define Pi? The mere fact you legislate something doesn't make it so, despite the general touching faith in govt around here. Why I keep bringing up King Canute.

NH, the WSJ has a map associated with their front page article, "Nearly 1 in 6 Owners 'Under Water'", that says Boston has dropped 15 percent since the peak (in late 2005 for us), and has another 9% to drop before it returns to historically "normal" prices (based, I assume, on price/income ratio). That roughly lines up with Goldman Sach's prediction for the future price drops.

IMO Boston and its immediate surroundings will always have a premium, because most of jobs and cultural stuff is in Boston. You're never going to score a three-bedroom SFH in a nice town near Boston for $250,000. But it's still a bit overvalued and will come down more. If you think the market is likely to overshoot on the downside -- very possible -- it could be more.

My two cents.

Agree with accidental landlord. If you think of the Boston housing market as a spider web - the epicenter being Boston, all things being equal, housing closer to the city will command a substantial premium over outlying communities. With gas prices and a long commute, people won't pay for even nice towns like Rockport, Westford, Groton, etc, what they will for a similar town closer to Boston. Towns in a similar area see variability based on schools, town services and amenities like water views or scenery.

If you want to save money, move to a town that sacrifices some of the things you don't care as much about. If you don't have school-aged kids and don't plan to soon, you can sacrifice on schools for instance. If cultural things like a good library, museum, etc, don't appeal to you, you can sacrifice on that. Just also understand that those things will also impact your resale value.

Bottom line, nobody knows for certain how far the housing market has yet to fall, but some further correction in the market seems inevitable at this point. If you have the time to wait it out some more, I'd advise looking during the winter months - you'll be one of the only buyers on the market and sellers are particularly desperate to unload (especially right now), so you'll get a glimpse of how far down the market has yet to go.

Of course, any real estate agent will also tell you that many sellers tend to take their homes off the market during the winter months so there isn't as much inventory to look at - which is also true to a point.

Interesting the comments on 'good time to buy a house'. It sounds like we're speaking about house value. If you plan on living in a house for 5+ years, there really is no "bad time" to buy a house, is there??? If your home value plummets - so what? You pay the mortgage and continue to live there. It's only if you ever decide (or have to) move that it's a 'bad time'...

thoughts?

John Mc ... I agree, in the abstract. But the issue isn't long term value, but rather the ability to pivot in the event that something unfortunate happens - like job loss. I mean how many people who got foreclosed figured "worst case, i sell it and at least break even?"

Lots of really good, thoughtful advice up above.

For me it has to be price with property taxes just behind that.

What's happening in real estate is very much like what happened to the dotcoms a few years back. Just as there was no rational economic theory to support such insanely high stock prices for companies with p/e ratios through the roof, there was nothing to support real estate "values" that doubled or more during the boom (read Peter Shillers "Irrational Exuberance"). And eventually economic theory proved correct, and the dotcom segment failed miserably. I think now essentially the same thing is happening to real estate - the difference being that gov.'t is getting involved - in my opinion at the behest of it's corporate sponsors/banking lobbyists. Economic theory works. We should've just taken our lumps and moved on.

Oliver Stone paranoia aside, there are variables involved now that either didn't exist before or just weren't as severe - outrageous fuel costs and what looks like the commonwealth's financial crisis. Skyrocketing gas and home heating oil are taking a bigger chunk than ever out of the household budget. Kind of important considering 1 out of 3 homes in this area are heated by oil. And with what promises to be less local aid coming from the state, property taxes are sure to take a hit.

There's also the dillution of true real estate professionals - when teachers and whoever else decided to get a real estate license when things were hot. Half of them were car salesmen without the plaid jacket.

I just can't see where home prices in this area can stay so high for much longer. There has to be a leveling out, and we're not there yet.

If you're looking for a little hope amid the desolation, Calculated Risk has a great post this morning titled "Adjustment process." The main point is that things were scarier in 2005 because we were standing at the precipice then and staring into an unknown that was all bad. At this point, despite the daily torture of the crisis, many basic indicators say we're a good ways into the correction that was necessary and inevitable. This makes me happy. I suspect like a lot of people, I feel like I can survive most anything if I can see that pinpoint of light in the darkness, if I know it'll end and roughly how and when.

Another thing I was thinking about NH: trying to time price declines is probably not a winning strategy, but if the smart people I read every day are right, next year should be the bottom, or close enough to it that if you buy a house then (for the long term), it won't be worth so much less in six months that you'll feel like a dope. Most important to me when buying was actually monthly cash flow. So after housing was paid for, did I have enough to maintain my lifestyle and still save significant money? The rest was details. IMO anything is fixable if your cash flow is good.

I used to think summer 2009 would be the bottom. Not as sure now, but its still the likely event. We'll know after spring market if the ratios and metrics are coming into alignment.

When asked, as I frequently am, I do point to people to aim to start shopping summer 2009 as a back of the envelope. One is unlikely to get hurt too badly by doing so, even if it isn't the precise bottom.

Credit availability is going to be very interesting though, I'm sad to say.

charles, clearly I'm no economist but doesn't it seem like a complete freezing of credit can't last? I mean, at some point banks have to start lending again because isn't that how they make money!? I have to believe credit will start flowing again relatively soon. One of these govt plans is bound to thaw things out. And the sooner that happens the sooner low interest rates can have effect, perhaps even on mortage rates. So we have a possible scenario where prices have fallen to near historical norms, and mortgage rates are extremely low. I would think that would encourage the sidelined buyers to start poking their wet noses out of the bushes again, increasing sales and lowering inventory. And then we're on our way to normalcy.

Sincerely,
Sunshine and Blue Ponies

AL - complete freezing? Hope not. Don't know. It is pretty much a worse case scenario, and I really really hope it won't come to that. I don't want to live through a great depression.

Things is, even once credit starts flowing again, its going to be gun shy I'd bet. So a strong bias to AAA credits. Meaning deal flow, but slow deal flow.

As an aside, have really enjoyed reading your analysis lately, even when I disagree with it, it makes me rethink. Thanks.

charles, the "slow deal flow" theory is hard to disagree with at first glance. Even if there is a thaw, you can't imagine happy lending days are here again for awhile. Too much damage has been done you'd think....

...On the other hand (ever the optimist), if trust returns and lending becomes somehow very profitable in this environment, one would expect there to be a lot of it.

Imagine you're a bank that the federal government has just recapitalized. You're swimming in money and you have all sorts of federal guarantees behind you. Now you look out at the landscape and see thousands of borrowers desperate for loans. Here you are, a guy in a desert full of thirsty people, and you're driving a water truck. I'd say more than a few institutions in that position would see opportunity.

(I admit that scenario could be totally ludicrous, but hey we're thinking out loud here. I'm just a simpleton optimist trying to grasp this stuff.)

I enjoy your posts too charles, you're obviously a smart guy with real estate experience and understanding, which these days we're all a bit hungry for. Of course in the process of discussing things we have become dreaded "regular posters," but what the hell.