How low can prices go?

Scott, you say that my assessment (that's my post you quote) of home prices dropping below $200,000 is too low. What is your basis for that assessment? You mention that Massachusetts is a high-cost, high-income state. Is that your only basis? I use economic metrics in my analysis. Just saying that there is "no way home prices in Massachusetts will fall xx%" as many have posted countless times without any fundamental basis for that opinion, is nothing more than speculation. (I'm talking state wide here, so hold off on the "real estate is local" posts)

Even if you use a more generous 4 times median income as the metric, median single family home prices in Mass should still be around $240,000, which is still another roughly 20% drop from current levels (based on October numbers). And since markets tend to over correct on the downside, another 10% drop is probably likely.

I don't have a crystal ball. All I can do is look at where the market is now, where the market should be based upon historical averages and economic fundamentals and factor in the current state of the economy, financial markets, etc. to arrive at what I believe to be a logical value for real estate. Am I going to be dead on? Probably not. Am I going to be close? I believe so.

Bottom line, I'll buy when homes are valued properly based upon the fundamentals. Until that time, I'm content to enjoy my cheap rent, save some cash and wait it out.

To follow up on my previous post. What you call doom and gloom, I call being a realist. Saying that prices could fall 50% because I believe that's what the fundamentals point to is not being a doom and gloomer, it's being a realist. It might be doom and gloom for anyone that bought at the peak, but it is probably going to become their reality. Better to acknowledge it is possible and prepare for it accordingly.

There are many people that predicted the bubble and collapse in real estate. There are many people that predicted the current problems with the economy. There are many people predicting worse things to come. Most of these people have been labeled doom and gloomers. Unfortunately, most of these people have been proven correct.

No -- those gloomy scenarios overlook:
supply/demand of housing stock
workforce sector diversity (health care, higher education,etc) that's protected from wild ups/downs
heading toward historically low interest rates (again)

The only thing that will stop prices from going down is the 1st time homebuyers... The problem is that the 1st timers of which I am one of them are graduating with much higher debt loads (student loans + CC's) once they graduate than 10 or 15 years ago. Wages have not gone up at all in the last 10 years. If you were disciplined not to buy in the run up I don't think you are going to prematurely enter the market when there is a very significant possibility that prices fall another 15-25% from here in the next year... I think its going to be absolutley carnage this spring and there will be blood in the streets come Fall of 2009 in regards to the Housing in Mass (and overall economy, ie jobs). Its a DANGEROUS thing to buy a home. And my wife and I are comfortable making our $1,200/mo rent payment and not eager to enter into a $2,500+ monthly nut to pay mortgage, PMI, Taxes, Heating, Electricity and other miscellaneous upkeep. I think Housing will fall to 250k for a nice 3 bed 2 bath 1750 sq ft home... Thats where the market is. As 28 year old newlyweds who make about $110k we are not going to overextend to buy at $350k... What happens when we have kids... 1,500/mo on childcare, we can swing that if we rent. In fact we can have my wife stay home and be a Mother if we continue to rent. Houses must fall. It should not be dangerous to own a single family home in this state but that is exactly what it has become.

I just purchased a foreclosed home in Aug. I will say that this downturn was a must. I have a good job and earn a good salary, and have a masters degree etc... With all of this, I had to sit on the sideline and watch in horror as home prices escelated far beyond my reach. Prices hot a point that even if you made 100k, you would have a tough time buying even a cruddy condo. Kudos to this market correction. It was a neccesity for younger workers who were priced out of the market for years by gready people.

Just as prices reached a height they should not have during the boom, I would expect they will go a bit lower than they probably should when all is said and done. Everyone is sitting on the fence waiting to get a feeling of when we have hit bottom, and I think we all agree that we're not there yet. Throw in the current economic crisis and predicting when things will stabilize becomes almost impossible. My wife and I bought a house last January for 10% less than the asking price. It has probably fallen another 10% in value since then. While a part of me obviously wishes we had waited, we really do love the house, in fact it was one of the only ones we did like after seeing close to 60 properties. Our plan is to stay a minimum of five years and I feel for anyone who absolutely has to sell right now. It's a dark world out there getting scarier by the week.

Yes. The market has much further to go. Event before the new market conditions initiated during October, the housing market was already cleared for another 15% drop before end of 2009. With the new market parameters since Oct, it's clear to me that we are more likely see 20-35%. The American constriction in all sectors and overall global contraction will continue to exacerbate the housing market, even here in MA.

MA is a high income state in certain metro/suburban areas. The majority of this state is closer in line with the rest of the housing market. With just a few exceptional communities, the majority of metro and suburban areas will see this heavy drop during the course of 2009 and beyond. It's going to be a blood bath for homeowners and one that we need to be prepared to bear.

Why is this necessarily a "doom-and-gloom scenario"? While a 30% drop would certainly be bad for flippers and irresponsible baby-boomers who decided that their house should be a big part of their retirement plan, it would be wonderful news for the many young people, immigrants, and newcomers from lower priced regions of the U.S. who have been priced out for years.

Why do journalists continue to promote this shortsighted notion of "high prices: good"/"low prices: bad"? What is bad is when prices stray too far (this could be below or above) what the market considers to be the "right" price.

For people who can't afford houses in Massachusetts (and that includes both people who foolishly bought too high and are now in trouble AND the people like me who are on the sidelines waiting to jump in), prices could not go low enough. I fully expect to be able to choose from among houses in the $200K-$275 range in the next few years. Housing should not be difficult to secure. It's a basic need.

GOOD!!!!! I may sound bitter,but I was forced out of my hometown in Somerville because of unrealistic home prices. I grew up in Somerville and when I was ready to buy back in 2003, I could not afford to buy in Somerville or Greater Boston and still live a comfortable life. My wife and I bought in western Mass and love it here. For what I bought out here for 165,000 (2500 sq feet, 5 bedrooms, and 1/3 acre) would have cost me 500,000 in eastern Mass. I cannot feel sorry for anyone who bought during this time because they are the ones that forced prices up by paying for houses that should have never been priced that high. Greed destroys!!!!!!!

The scenario you describe as "doom and gloom" are what I consider the dawn of a bright new day. This past few years were a dark period in which responsible, sober workers making decent and good salaries were shut out by fraudulent housing values that were the product of a systemic ponzi scheme based on derivatives, on poor lending practices, and on legal and illegal looting by corporate and hedge profiteers.

If the state-wide average price to statewide average salary ratio is in line with traditional norms, that is good - I and many other will be able to buy without overextending ourselves, and we can be the reliable engines of a sustained recovery.

Those that did overextend and were bubble dupes or risk takers - persons and institutions alike - will unfortunately have to take their medicine. I don't say that unsympathetically - I'm resentful but also fearful for family and friends who got swept up in the frenzy encouraged by the governement policy. Righting housing prices might not be enough to save the economy, but from what I read, the economy won't be saved until it happens.

My husband and I are fairly well off and have been extremely greatful to have not yet been strongly effected by the bad market. When I check the median household incomes of the wealthier towns in Northeastern Mass with small rental populations, I'm surprised to find that we are above this. However given our income even with a decent sized down payment we can only afford a small single family in towns where our income far excedes even twice the median household income. How are these prices sustainable?

Tough times all around... Anyone who's bought in the last eight years are looking at potentially zero equity for what they've paid into. Those who are looking to buy for the first time face tougher lending standards, perhaps unreasonably tough. The potential of a deflationary spiral could be grim.

Hope we can all ride out this storm!

2007 median household income in Massachusetts was $62,383. Historical home-price-to-income multiple is 2.5-3. That puts us at $187,149 for the median house in Massachusetts at historical multiples. We still have a ways to drop. Think I'm too gloomy? We are currently experiencing deflation. Assets are dropping in value as the money in circulation disappears. Incomes will soon follow. I fully expect that median income in 2012 in Massachusetts will be lower than 2007. So my estimate above is actually a best-case scenario. I haven't even mentioned the much tighter credit standards for lending (20% down and 720 FICO) nor the increase in foreclosures due to unemployment and Alt-A mortgage resets come 2010-2011. I wouldn't buy a single family in Mass until 2011 at the earliest, and only if prices are in line with rents and incomes. If you want a modern example of what we're experiencing, study Japan's "Lost Decade"...

Don't catch yourself a falling knife...

There is a remarkable amount of conjecture on the part of the doomsayers here. If everyone who bought a house was a first time buyer then your income analysis would hold water. An awful lot of home buying is upgrading. "My condo or my community isn't my ideal for raising kids", etc. I currently have about 80% equity in my home. Were I to upgrade, my ability to buy any house would be driven not by the price of the house but by the amount of debt that I assume to get it.

"alan greenspan" pointed out some of the other reasons that Boston is high.

TOugh to add to John's excellent explanation.

Its not gloomy to say it will be cold in January. Its just a fact. And it happens because of the physics of winter. It would be painful to be out there in a tshirt, but by predicting that it will be cold one can prepare.

Most will see where I am going with this. Same with real estate. Mass prices will not stay somewhere because Massachusetts is special (though amazing how many people think that. Other states don't have healthcare?). Nor will they go to Mississippi levels.

Instead, Massachusetts prices will reflect Massachusetts incomes and Massachusetts employment etc. And by looking at that, we can say we have a long way to fall in a lot of places.

Predicting just how much is like predictin the temperature on Jan 15. One can't do that. But one can predict that it will be cold.

And one can say the last 8 years were a bubble. And that bubbles don't immediately repeat. And that we are in a VERY bad recession. And prices tend to overshoot on the bottom, just like on the top.

And therefore, seeing 1998 prices again wouldn't be a shock.

We don't even really need to guess. Look at history and what happened 1987-1996

Scott:

I totally agree with John for his analytical support, Matt and Dave. This state is about to become a LESS than high income, high cost state, with incomes going first. As incomes continue to decline, where do you see enough new buyers coming in to move prices higher?

Just as surely as newspapers will go the way of the buggy whip shop, including yours, unless the Sulzbergers have a lot more to draw on-and they don't-home prices are headed for even more of a decline this coming year. GOOD!

It is truly time the prices dropped. I am happy about that, not happy that people are losing their homes. I am glad that the banks are losing, because they too contributed and granted loans for homes that were grossly overprices.

We purchased our home in June 2006 after renting for many years as we slogged through graduate and medical school. We put 20% down and paid over $500K. The house is worth a fair bit less than that today, but we are not upside down. Our credit is excellent and we are able to afford our mortgage at 5.25% interest. My point? When we go to sell, if we can't at least break even then I expect we will simply walk away from the house. There is no way we are going to pay the bank money above and beyond the many thousands of dollars that they have already received in interest. Even if we wanted to pay we simply don't have the money in our bank account to fork over $20K, $30K, or more just to close out the mortgage upon sale.

I've got to admit I'm with "John" on this one.

We will not buy until the home we want falls nicely into the rule of 25-30% our monthly income. My husband holds an advanced scientific degree from a prestigious university and has a fantastic job, but since I've chosen to stay at home with my children, we are living (comfortably) off one income. What bothers me most is that homes in this area (we live in Middlesex County) are priced for dual-income families. We're HAPPY to rent for the time-being.

First, existing owners are not precisely in great shape to move up. Most will find they have much less equity in their houses than they think. The current estimate is that 10% of this country is underwater - meaning less than no equity in their house. Meaning they'd have to pay the bank to leave. This will not happen much.

So the predominant driver is credit. Loans are hard to get now. They reflect incomes.

The usual income ratios actually assume a fair amount of down payment, which most accumulate through equity in a previous house.

Assuming those numbers apply only to first time buyers is an error. As is assuming everybody who doesn't make much money out of median income. In order to have these metrics make sense, you have to calculate them as they have always been calculated.

And I don't think I've been in a real estate market in the last few years where I didn't get a carefully reasoned analysis of why it's special, and the usual math doesn't apply. Hear that about people's houses as opposed to their neighbors to.

And I heard it a lot during the bubble whenever I tried to explain to people why it was a bubble.

I agree that home prices in MA have a good ways more to fall. But unfortunately for those of us currently sitting on the sidelines I think it will take another 10-15 years and mostly come as prices don't keep up with inflation, rather than as steep price drops. This is because people are stubborn and /or irrational about homes. In particular, everyone involved in a housing transaction has the incentive to value the home as high as possible. The agents want a higher value on the particular sale so as to earn a larger commission, and more broadly to perpetuate the notion that the market is improving which is a selling point to other buyers ("now is a great time to buy!"). The lenders obviously earn more interest on a larger loan (assuming a credit-worthy buyer), and as we know banks have a million other reasons to hope for a housing recovery. The sellers are in denial that a house worth 600k in 2005 might actually be worth closer to the 350k it was worth in 1999. And the buyers themselves, by the time they have progressed to the point of purchasing, have acquired a horse in the race: they want to feel good about their purchase and therefore are likely to be more optimistic about the long-term value of their soon-to-be largest asset than reason would dictate. Though they may not express this optimism during negotiations, it certainly plays a role in their internal calculus of the price they are willing to pay, and renders them susceptible to the other parties' suggestions that they are getting a great deal. This irrationality means that the market value of a home -- what someone is willing to pay -- is higher than is justified by a reasonable estimate of its long-term value to the buyer. After all, many people have to buy homes now because now is when they have children: it is not a purely economic transaction. Its human nature to want to think we're doing the right thing, and so its easy in that situation to be convinced that the market has already hit its low-point, and so the seller, agent, and lender have found a willing partner who will pay too much for a home. The end result is that prices take less time to return to an equilibrium than they would in other types of markets. At some point this should accelerate as baby boomers reach the point where its necessary to sell their homes and cannot wait it out any longer.

This is kind of funny, but I read a pretty good article on the phenomenon of over-exuberant market "experts" who tried to steal headlines by overcalling each other as the market was on its way up. One of the books that was written during the late 90s tech bubble was actually called "The Dow at 36,000". Pretty funny stuff.

Anyway, they also talked about how all these market "experts" are now trying to grab headlines by trying to "outgloom" each other. Everyone is trying to call a lower bottom than everyone else in an effort to separate themselves because the only way you get any attention is by saying absurd things like you expect the Dow to plummet below 1,000.

The housing and stock markets are awful, there's no question about that. But will the median home price in Mass drop another $100K?? I seriously, seriously doubt it. The bottom line is that Massachusetts housing tends to be more expensive relative to the fundamentals than other areas of the country - as does NYC, San Fran and San Diego. You can live in places like Indy and Dallas for incredibly cheap and their salaries are not too different from what you find in this area. My wife has family in Indianapolis and housing costs next to nothing out there, which is fine, but then the problem is that you live in Indy.

I think things will get a little worse before they get better here, and I do expect further declines. But some people on here are going a little overboard. You can get a great bargain right now in Medford, Somerville, Everett, Revere, etc. But I still believe that you'll end up paying quite a bit to live in a nicer town. The market will impact wealthy towns too at some point (and I'm sure it has to some extent), but the impact will be IMO significantly less.

All that is being said here is probably true, except for one key issue. Unlike other areas of the country, supply is very limited. Within 128 there is very little room for additional houses. As a result I would expect the "fall" to be somewhat less than it is in other areas of the country where a contractor can come in and build to excess. Of course you can buy far from Boston, but if you work in Boston, that kind of defeats the purpose.

We bought in 2005 close to the top. We waited a long time to buy because everyone said the housing prices would crash and they never did and finally we needed a place to live. From that experience I've learned to be skeptical of anyone who "knows" which way housing prices (or the stock market) will go. Even now, when it seems obvious that prices will go down, without a crystal ball it is hard to say what will happen.

Also, people keep quoting the golden rule of median income to house prices being 2.5 to 3. Is this supposed to apply only to first time home buyers or to all people? My parents are long retired and have little or no income but sit on a fairly sizable house with no mortgage. How do people like that fit in to the golden rule? With an aging population, should we expect to see higher price / income ratios for just that reason?

Sorry, but I fail to see how the high prices in MA were created solely by greedy people. We who sold houses, could not have sold them if there were not buyers willing and able to pay the prices asked at the time.

This is what happens when the federal government demands that banks make bad loans that will default. This Democrat subprime policy has created 10s of thousands of forclosures on poor families, it has ruined the credit of 100s of thousands of low-income familes, it has destroyed the world's trust in our financial system, it has cost taxpayers $3.4 TRILLION in loan guarantees and bailout funds.

The Democrat Party subprime toxic mortgage program has also lowered real estate values across the board and shut down our credit industry as well.

What happened to the Democrats responsible for this financial fiasco? They're in charge now. Heading the committees who will prevent an investigation (cover up). Others lied to get re-elected (Barney Frank).

So you see... not only do we have a toxic subprime meltdown... the guilty party gets away with it... and get to laugh at the rest of us for the next 4 years. History will point to Chris Dodd, Barney Frank, Andrew Cuomo, Franklin Raines, Jim Johnson and other Democrats as the people responsible for triggering all that we are dealing with today.

So as your home values fall... and the credit markets freeze... and global commerce stalls.... you know who to thank.... Barney Frank.

Robert, who is going to buy your home when you decide you want to upgrade? A real estate transaction requires a buyer and a seller (or someone to rent the property). Otherwise, the home will sit, adding to inventories, which puts further downward pressure on prices. So, you either need a current homeowner to buy your property (which results in a net zero change to housing inventory) or you need a first time homebuyer.

Other than low interest rates and lax lending standards, the reason we had a bubble is because everyone was convinced that they were going to get rich buying and selling homes to and from one another. In the real world, that's called a Ponzie Scheme.

JP, the so called "experts" you refer to just follow the trend. They don't understand the fundamentals. That's why you had a company like Goldman Sachs predicting $200 a barrel oil back in the spring and now they are predicting $25 a barrel oil. All they do is follow the trend. Same goes for most of the pundits, be they on CNBC, Fox Business, etc. In fact, if what you say is true, all the pundits on CNBC would be predicting DOW 1,000. For the most part, they still take the Goldilocks view.

The people I follow, the "doom and gloomers" have been essentially spot on in their analysis. None of them thought the DOW was going to 36,000. They all knew the NASDAQ was a bubble and was going to pop. None of them are predicting DOW 1,000, although many are predicting DOW 5,000 (and that's probably where the DOW is headed after we get the likely Bear Market bounce to around 11,000 over the next few months). I haven't read a single article or seen a single video with anyone predicting DOW 1,000, (be it in the MSM or other media outlests) so I don't know where you get your information.

Anyway, they also talked about how all these market "experts" are now trying to grab headlines by trying to "outgloom" each other

I'm sorry, but CR, Tanta, Roubini, Shiller, Krugman and all the rest of the housing bears never talked up the housing market. Never. You are trying to avoid facing a frightening fact: the people who are making the most pessimistic predictions today also made the most accurate predictions during the bubble. It's the Cramers, the NARcasters, Greenspan and Wall Street--all the bubble boosters--who are now running around waving their arms in the air and saying, "hoocoodanode?"

The bottom line is that Massachusetts housing tends to be more expensive relative to the fundamentals than other areas of the country - as does NYC, San Fran and San Diego.

Oops. San Diego prices exploded downwards in a fiery vaporization of home equity, and now San Francisco is falling, too.

But the larger point that too many people on this thread miss: We are talking about the historical ratio of Massachusetts median prices to Massachusetts incomes and Massachusetts rentals. So it doesn't help to exclaim "it's different here." Nobody is comparing Massachusetts to Indianapolis. We're comparing Massachusetts today to Massachusetts over the entire past century.

You know, during the bubble, housing bulls looked at different things than the bears did. The bulls looked at granite countertops and school systems and the latest comps. The bears looked past those trailing and frankly trivial indicators at larger economic issues, such as lending standards, leverage, derivatives, and so on. Well, the same is true today. The bulls are looking at well-heeled neighbors and nice shiny new hospitals. The bears are now reading the bigger economic picture: deflation, zero interest rates, a bubble in Treasuries, credit default swaps, a massive and worldwide collapse in demand, and perhaps most important of all, the complete derailment of the global economic conveyor belt that ships jobs and debt investments to China and cheap manufactured garbage and debt obligations to American consumers. This is serious, and I don't know how to get the bulls to understand that.

Really BV, you're actually going to make the "they're not making any more land argument"? Apparently you are not aware of what has been going on in Japan - a country with roughly 127 million people and a land area of about 4% of the US; A country that has seen real estate price deflation for about the last 20 years. They truly are not "making anymore land in Japan" but that has not prevented perpetual price deflation in real estate.

In response to BV (#24), I'm sorry you bought at the top of the housing bubble. It doesn't change the fact that housing (rents and house prices) track incomes and incomes are heading down. Bubble prices were inflated based on easy lending criteria from banks, low interest rates and the perception of higher future asset values (greater fool theory). Easy credit is gone, interest rates have no where to go but up despite the FED's attempts to the contrary (the market sets rates, not the FED and the lower bound is 0% regardless), and all the "Fools" have bought and are now stuck, overleveraged in depreciating asset. Everyone knows asset prices are heading down now, you're just on the wrong side of the housing trade. I know plenty of people who got crushed financially by the Tech Bubble when stocks dropped in 2001/2002. What makes you think this is any different? An asset bubble is an asset bubble. Housing has popped. So have Commodities. Next up? Treasuries...

Yes, it was the Democrats who were solely responsible, despite the fact that until 2007, they hadn't had control of Congress for most of the past 16 years. It had nothing to do with the Republicans wanting to deregulate the banking industry (along with every other industry under the Sun). Wake up man - neither party is solely responsible for this fiasco.

What stops prices from falling further is people refusing to sell their homes for the current market price. As the prices fall, more and more people's
mortgages are 'under water". Those people will not sell unless they absolutely have to 9i.e. they are being relcoated for a job or they lose thier job, or have a divorce or some other makor life event), so the supply of homes on the market will eventually decline, thus putting upward pressure on prices. As people "sit on the sidelines" and rent instead of buy, there is upward pressure on rents and the cost of renting will rise. The costs of owning versus renting will intersect at some dollar value for a given geographic area. I would guess that's approximately where the bottom will be. So I would look at local rents, project out a healthy annual increase due to the demand increase for rental property, and then translate that to the cost of PITI on a 30 year fixed rate mortgage, and that's what the low point will be.

This is what happens when the federal government demands that banks make bad loans that will default. This Democrat subprime policy

I'm sorry, I've quite lost my patience with this talking point. You don't know your facts. Allow me to educate you.

One part of this nonsense argument relies on the Community Reinvestment Act (CRA), the 1977 law designed to stop redlining by requiring depository institutions to invest or lend in areas where they also accept deposits. Unfortunately for the con artists, most of the subprime lenders--Ameriquest, National City, Countrywide--were not depository institutions and were not covered by the CRA. In fact, only one of the top 25 subprime lenders in 2006 was subject to the law.

Plus, only a fraction of CRA loans had interest rates high enough to be called subprime, and these loans did not default at high rates. From the current US Comptroller of the Currency:

"CRA is not the culprit behind the subprime mortgage lending abuses, or the
broader credit quality issues in the marketplace," Mr. Dugan said in a speech
to the Enterprise Annual Network Conference.

"Indeed, the lenders most prominently associated with subprime mortgage
lending abuses and high rates of foreclosure are lenders not subject to CRA,"
he added. "A recent study of 2006 Home Mortgage Disclosure Act data showed
that banks subject to CRA and their affiliates originated or purchased only
six percent of the reported high cost loans made to lower-income borrowers
within their CRA assessment areas."

The propaganda also relies on Freddie and Fannie. True, these organizations have messes for balance sheets (kind of like Lehman Brothers and Bear Stearns). However, the idea that they were responsible for subprime lending is pure tinfoil. Between 2004 and 2006, F&F lost half their market share to the subprime lenders that are now bankrupt because they simply could not legally approve the kinds of toxic loans their competitors were selling. OFHEO then imposed even stricter standards that caused them to lose even more subprime loans.

So who was responsible for this huge catastophe? Private lending institutions. Good old fashioned capitalists. While Freddie and Fannie were disappearing from the subprime market, investment banks securitized about two-thirds of US mortgages.

I was kind to call this a "talking point." It's a con job. It was cooked up by the same frauds that cooked up these ridiculous securitization schemes to begin with, in order to fight off the regulation they know they need. It's not just "another viewpoint," it's a malicious lie with the conscious intent of doing damage and destruction to the American public.

Be careful what you swallow. It may be poisonous.

People seem to forget that these transactions are 2-sided and that the housing stock isn't evaporating. One persons loss is another persons gain. (This is true on the way up as well.)

I do want to point out that price/income ratios are not an indicator of affordability per se. It is an co-incident indicator of what is historically defined as a healthy real estate market. This is important because the metric does not explain the housing market pricing dynamics and should not be used to make housing forecasts. However, it can be used to indicate that something is "different" in the market compared to historical norms. Identify what is different and then evaluate what the future expectations are for those differences and build your expectations of housing prices off of that.

The irrefutable facts are declining aggregate incomes in a deflationary economy that will persist with significantly less leverage than recent economies. Those are three very powerful economic events that rarely come together with such force as they have now. Historically, declining aggregate income and deflation should correct to more healthy levels. However, even if they snap back tomorrow to historical averages, there will be less money for banks and mortgage brokers to loan because of deleveraging. One reason is more closely managed risk controls on banks and capital adequacy ratios. Another is that a large chunk of money for the mortgage market came from Wall Street and their investors.

I have yet to read a credible response to the long term effect of banks deleveraging or where the money to replace wall street is going to come from. It may come in the form of a Fannie & Freddie rebirth; back to their original charter of stepping in where the market gets sticky. Until then, prices have to come down further. There just isn't enough money going around.

before housing prices plummet in Massachusetts (as suggested by Economic factors mentioned in the blog), the true Economic value of (building/remodelling/replacing) a home must be significantly lowered....Does anyone know what the labor costs are for carpenters, plumbers, electricians etc...in Mass??? try double to 3 times some other US areas...I find it hard to beleive that a house in MA can be built for below $250K. given those costs..maybe a small 2 br ranch on swamp land...also we must remember when comparing historic home prices, that house sizes have almost doubled in the last 30 years...not to mention higher end finishes (HW Floors, granite etc...)hellow McMansions...so using averages (or median) prices over time is misleading in a sense...shouldn't we be looking at houses that were built 30 years ago and see what they are worth today (given routine updates/modernization)...isn't that a better gauge for inflation and house price comparisons? there are certainly a lot of houses that are overpriced that need work/updates....

So I would look at local rents, project out a healthy annual increase due to the demand increase for rental property

Economic demand is not the same as want or desire. Rents are constrained by current income, because they cannot be financed. In serious recessions, incomes fall, and rents fall, too. Household formation slows, the birthrate falls, immigration fades, and the number of people per housing unit increases.

Those people will not sell unless they absolutely have to 9i.e. they are being relcoated for a job or they lose thier job, or have a divorce or some other makor life event)

First, as time passes, the number of life-event sellers increases and the distressed inventory piles up. In a deep recession or depression, many more people will find themselves in this category as they lose jobs.

Second, as sellers begin to realize we are in an asset deflationary environment, you will see a rush to the exits as sellers understand the price they can get today will always be better than the price they can get tomorrow. This is when total capitulation will occur.

Bubbles burst. Deal with it. If you are happy with the home you are in and your mortgage payment then stay there for 5 or 6 years and then see what happens.

I'm not sure if you people are aware of this but the government has almost doubled the monetary base in this country. Although you may think we are headed for years of deflation and sinking wages the reality is that when this stimulus gets traction there is a good chance we will be looking at some pretty serious inflation and another commodity bubble. Government intervention almost always causes an over correction and it's going to be tough to get the genie back in the bottle after throwing around that kind of cash deleveraging or not. New housing is essentially stopped. There will be increased demand in the long and short term. I'm not saying that everything will be rosy in 6 months but the fact that everyone on here is arguing that the housing market has no where to go but down makes me think that it will probably be heading the other way in a year to 18 months.

Bobby -

I was comparing Boston to Colorado, Indiana, etc where there is lots of land. There are essentially zero build-able lots in my town, unless you tear down. You can poo poo this, but it is true and it has to affect the house prices. What it will mean in the end is anyone's guess. Again, those with crystal balls can tell me what will happen in 2, 3 or 4 years.

Don't care if housing prices go down...love our house for the long term and we are actually looking to put on an addition. However, as I wrote in past blogs, prices for comparables on our street continue to climb, contrary to what I would expect and what everyone says is happening. Strange, but true. Will they fall? Sure, if what everyone says is true is in fact true.

The rough math for a 30 year - 6% mortgage (33% max GMI)...

- working class single will pull in about $30k / yr = $110000
- working class couple will pull in about $60k / yr = $220,000
- professional single will pull in about $60k / yr = $220,000
- professional couple will pull in about $120k / yr = $440,000
- mix and match and that's about $90k/yr = $325000

I think Mass sits at about average income $60k. Of course it's more complicated than this but roughly I'm expecting to see median home price at $200k - 240k ... then I'll buy. (hopefully my calcs are right)

WOW. Statistical comparisons, historical data, fundamentals x and y etc. etc. I have never seen so much negativity. Truth be told all of this you are seeing was obvious two years ago. I saw it and reacted to it. Truth be told you can see the turning tide now. Two years from now you will all be looking back at today and will understand the impact of the current fed policies on the housing market. Don't be silly and assume the mess is going to continue to get worse. To much money is now chasing assets. Supply will come down, demand will increase and we will be back to a normalized real estate market soon which unfortunately in MA means ratios that many of you will never be able to rationalize.

A lot of the same points over and over again....

Let's say you can rent in Houseville for $2000 or buy the same kind of home in a simliar location in Houseville for $2000 a month on a fixed mortgage--isn't it better to buy in this example?

I am seeing instances where the rent payment is about the same as a mortgage payment in towns like Brookline, Newton....

It makes sense to me if you can rent a home for $2000 a month, but can't buy it for that price with a fixed year mortgage, then by all means....stay and rent! Take the difference and save. But if its the same price per month and its a non-exotic mortgage, why SHOULDN'T someone buy? Rents go up every year and there's certainly more demand in the rental market.

What if you are currently seeing homes in desirable towns at 2.5x your income? Does that mean the slow slide towards 1998 is over? Or does it mean that different rules apply at different times in different locations. If you're ready to buy now- have the down payment, have the pre-approval and don't want to wait 3-5 years before enrolling your children in good school systems, why should you continue to sit on the sidelines? Life doesn't wait around for you. Biological clocks tick, children get older (and bigger) and people in their mid to early 30s who sat on the sidelines as prices shot up are probably not going to stay there waiting for them to hit bottom.

Marcus,

What is "household formation"? Doesn't everyone form a household in one way or another, unless one is homeless? How could some thing so basic, "slow"?

People keep talking about these wonderful buying opportunities in towns where they can snag a home for 3 times income. If that's the case, then why are you not out buying instead of spending your time posting?

" To much money is now chasing assets. Supply will come down, demand will increase and we will be back to a normalized real estate market soon which unfortunately in MA means ratios that many of you will never be able to rationalize."

We'll see. This post has as much credence as any other. Bubbles are all about too much money chasing this commodity or that. But in the end it comes back to earth. I mean look at oil. It was $145 a barrell just a few months ago. Oil is a finite product and yet look at it now. The point is there is not "too much money chasing assets" in the housing market anymore. Money has dried up and no one is chasing houses anymore. We'll see.

Marcus brings up a good point. A realization of years of price declines may indeed be the incentive that sellers need to lower prices. Higher unemployment means far less students in the Boston area, which is one of the greatest contributors to high prices here, as a total dump can still yield 1500 per month rent, due to the student scramble. The market is more delicate here than most due to our enormous seasonal renters with high turnover. Given the current economic environment, It is not unwise to think prices are higher now than they will be ten years from now. Once that sinks in, people might just realize selling now means cutting their losses.

Alex,

You are only partially correct when you bring up the monetary base. The monetary base means very little unless the velocity of money increases the effective monetary base to historic levels. The velocity of money has not budged because banks need capital. They sock it away on the balance sheet. Velocity of money is also dependent on how much and often consumers spend money. The dramatic increase in personal savings rates coupled with the shoring up of balance sheets takes the monetary base out of circulation and is net deflationary.

When this is all said and done, there will not be monetary inflation the likes of which drove the tech and re bubbles because we *hopefully* have learned our lesson. Bernanke is already planning for managed inflationary growth.

Lastly, you say the housing market "will probably be heading the other way in a year to 18 months." Thank you for making my point for this being a bad time to purchase.

Sally, please Google it. As I noted, posting links here often gets a post rejected by the spam filters.

It is simply axiomatic that household formation slows in a recession; it always happens. In a downturn, singles room together out of necessity, fewer young people in the major household formation cohort (ages 18-34) leave home, more young people return to live with their parents, immigration slows dramatically (there was essentially no immigration during the Depression) and even reverses, and so on. The demand for housing is driven by households, not raw population numbers.

Unrelated thought: these threads always play out the same. Bulls always argue from what they "feel" and "believe" and "think," and then turn around and deride the bears for relying on "statistical comparisons, historical data, fundamentals x and y etc. etc." Too funny.

Interesting,

I sold my sf house and a sf rental in 2006. Not because I was some sort of sage or genius. I could not for the life of me figure out why the market fundamentals changed. When you don't understand a market, you get out and stay out.

I think your mistake is assuming that the liquidity will flood back into real estate. Some might, but it will be nowhere near the levels we saw recently. Deleveraging of banks, mortgage brokers, & Wall Street shrinks the available money for loans irrespective of your liquidity argument.

If it flows into, say green technology, then it will be a while for the newly hot sector to get and then distribute cash to employees in the form of competitive salaries & bonuses. Remember the tech bubble?

Alex, you are correct that there is massive inflation heading our way. You are wrong in thinking that the inflation is going to re-inflate the housing bubble. No, all that money will find it's way into a new and different bubble. That's how bubbles work. People are not going to throw money back into the same bubble that burned them so badly. That's why all the inflation that was created in the early 2000's flowed into housing and not back into the NASDAQ. Too many bad memories for investors who lost their shirt. That's why banks don't want to lend to heavily indebted Americans. They've gotten burned. How many banks are going to want to extend no down payment ARMS to people with $50K incomes that want to buy $400K homes? Hopefully none (that's how we got into this mess in the first place).

The next benefit of this latest inflationary tsunami will be commodities and probably the alternative energy industry. Despite what so many people believe, commodities have not been in a bubble, but rather a sustained bull market, which typically lasts 15 to 20 years. Did commodities get ahead of themselves? Most certainly. And they have been beaten down badly. But a bubble requires three basic things in order to form and ultimately collapse: 1. An expansion in the money supply/credit (inflation); 2. Speculation; and 3. An increase in supply in response to the demand which eventually overwhelms the demand and causes prices to crash. The crash in commodities was not due to an increase in supply, it was due to massive deleveraging. Those that argue demand destruction have apparently not been on the roads lately: traffic is as bad as ever. And the fact that many of the same people that were screaming "bubble" in commodities were the same people that could not spot the real estate bubble, further proves the point.

Six months ago everyone was screaming inflation. Now those same people are screaming deflation. It gets back to my earlier post that people spot the trend and follow it. They don't anticipate the trend. Are we experiencing asset price deflation now? Yes. Aside from asset classes who's fundamentals are imparied (e.g. real estate and financials) I argue it is due primarily to deleveraging and due less to a contraction in credit (i.e. deflation). Prices just don't react that quickly to changes in the money supply.

Will we continue to see asset price deflation? Probably. How long will it last? I don't know and don't care. All I care about is spotting the next trend. And the fact that our government has pledged to throw $8.5 trillion and counting at the credit crisis means that the next trend is massive inflation. Whether we see the effects in 6 months or 2 years is meaningless to me. What is important is positioning myself for the trend change. If I'm to early, so be it. I'd rather be too early and leave too early than be too late and exit too late.

Go on Youtube and search "Peter Schiff was right". Sort by view count and watch 10 minutes of a doom and gloomer who has been dead on and laughed at for years.

And the fact that our government has pledged to throw $8.5 trillion and counting at the credit crisis means that the next trend is massive inflation.

John, I wouldn't be so certain. Sure, it's true that the economy is now so insane that it's hard to completely rule out inflation in the future. But please note that the money supply increased by a factor of five from the start to the end of the Depression. Prices still fell. That's because velocity collapsed. Money sitting in mattresses and bank vaults doesn't chase goods and doesn't cause prices to rise. And that's precisely what's happening now. Economic activity is in free-fall. And as of today, many money market funds are paying less in interest than you pay in expenses--meaning, people are paying banks to take their money.

This is where your strategy gets tricky. If you really expect massive inflation soon, your best bet is to go into massive debt, and leverage into whatever you think will get more expensive. A pretty risky move right now, because if in fact we have sustained deflation, you'd be toast.

Marcus,

I see. Household formation is an economics term. It seems the term is referring mostly to household formation as it pertains to sales. I'm not very well read in economics, though I did take Economics 101 back in the day at UMass. My professor was a Marxist, in fact the TA even dressed like Castro. I am more of an arts and humanities person, which is not to say I shouldn't read some economics.

Thanks for the information.

The bursting of the housing bubble has, at least, brought some rationale to the buy/rent quandary. When I was immediately out of college, having moved from the Midwest to Boston, everyone thought I was crazy for not buying a condo. Maybe I was - if I could have timed the market. However, whenever I priced a home, it was much more expensive than the rent I was paying. Additionally, it would have set my feet firmly in cement.

I am so grateful I didn't buy into the craze and purchase a condo; it would have married me to the Boston area. Instead, I moved to the west coast and upped my income bracket. When I moved *back* to Boston, the property values were even more out of whack with the monthly cashflow calc on a rental.

The fact is, we're better off with a stable (not increasing) population of homeowners. We need a mobile workforce, not people who are stuck and unable to migrate to better jobs - just ask the people in Detroit (my hometown). We don't want people to walk away from their homes in desperation or gamble on the future of home prices; we want them to invest in their hometowns. There is a happy medium here.

Sara has a very good point about how life marches on. This is a challenging time for young families wanting to buy a house. Low rates make buying attractive but what if the home prices fall even more? Everyone want a good deal. But when is the right time to make a move? A big part of the decision is where you are in life. Can you wait? Should you wait? What are your plans for your life?

I have to wonder what happens to people's money as they wait it out.
In fact, I have clients, a young unmarried couple, who saved for a down payment by investing. They lost half of the down payment recently and cannot move forward buying a house as they had planned, before their wedding. They are hoping to receive money gifts at their wedding they can use instead. Yikes.

Buyers who are waiting, where do you keep your savings?

On the massive inflation front, people are a bit blinded by the money the Fed is pumping into the system. Its happening, and sure I spend a lot of time wondering about future inflation.

But in addition to the loss of velocity, we're also watching a whole lot of the money supply go up in leveraged smoke. And that has to be balanced against the stimulus events. Looking just at money created and thinking inflation misses a lot of the puzzle.

On another note, as many have already responded, those of us who look at the actual math, and analysis, etc, are not quite the same thing as trend followers. A bunch of us here used to be involved in various professional and investment ways in real estate. We bought going up, and were sellers at the peak of the bubble, ie going counter the trend. Math actually worked pretty well with that, seems unlikely that it will stop all of a sudden. To say the least.

A home around the corner from me, is being sold for 50% of it's 2005 purchase price.

J. P., so you are telling the board that the Democrats started subprime mortgages during the Carter adminstration, turned them into mandatory lending demands, Democrats took banks to court who refused to write bad loans, Democrats then started the zero down, no job, no credit lending to meet the new Democrat 50% quota, then Democrats refused to reform Fannie and Freddie to avoid the crisis and now you say Democrats had nothing to do with the high-risk subprime meltdown?

High risk subprime mortgages was conceived, expanded and protected by DEMOCRATS. It was their claim to fame... their pet project...and it was off limits. Do you know what happened to any Republican who tried to force reform? You were called a racist. Yes.. the ole Democrat race-baiting playbook.

It would appear that your brainwashing only required a light rinse.

“Soledad, a rural California town known for its wineries and the nearby prisons where many of the residents work, experienced explosive growth during the boom. Four different builders had projects under way, each with long buyer waiting lists, seven real estate offices were open to accommodate frenzied buyers, mortgage fraud was rampant, and people stretched to purchase properties they couldn’t afford, said Gloria Ledesma, broker in Soledad.” (California)

“It crashed hard. ‘You can now get a house that originally sold for $610,000 for $275,000,’ Ledesma said. ‘Now people can really afford them.’”

hhun

sounds lik e many of the "buy now" pumpers on this blog are realtors and mortgage brokers. No real analysis behind their arguments other than silly stuff,
like "everyone wants to be here", "there's a land shortage" "the boomers will buy everything" "it's different here" etc. Makes for good entertainment though.

Based on historic price appreciation trends, that is year over year appreciation over the last 30 years, the recent real estate bubble in the Boston metro area were overpriced by approximately 20%. I would say that within the next 6 to 9 months prices will stabilize and remain flat until the economy starts to pick back up. Even then, I doubt that we will see much more than a 1.5% to 3% annual rise in home prices for the next several years. Mortgage rates continue to fall based on the actions of the Fed so we should expect to see an uptick in the number of home sales which should help to clear out some of the well priced foreclosure properties and bring inventory levels back to a more normal level. Real estate was never meant to be an investment that earns a quick buck....it's meant to be a home and over time an asset.

Bobby,

We are out there buying- that's why home sales have started to increase. Our closing is at the end of January on a home in a desirable town that costs 2.57x our income. And costs less than than the sellers paid for it in 2003.

It's very very very tough to time any market perfectly and anyone who speaks as if things are facts just shows how much they don't know.

"Bulls always argue from what they 'feel' and 'believe' and 'think,' and then turn around and deride the bears for relying on 'statistical comparisons, historical data, fundamentals x and y etc. etc.'"

In an economy like our where so much depends on consumer spending -- hence consumer confidence -- what people feel, believe and think really does have the ability to create certain economic outcomes.

Here's my prediction, for what it's worth: I think we'll have another year or two of modest decline in house prices, followed by another climb upwards. We can argue that market fundamentals indicate that the price of a house should be X, but why wasn't that true for most of the past 20 years? The consumers may be irrationally exuberant, but they're the ones who make the market.

Depend on it: they'll get tired of being gloomy.

Let's get one thing out in the open--I'm a housing bear. Have been for years. I actually thought things were out of control even in 2001... thought 9.11 and the NASDAQ crash would have an adverse effect on housing. Silly me, i didn't realize that the biggest asset bubble in history was yet to come. I think prices are still coming down, though i don't know how much. I agree we'll probably see something Japan-like rather than more precipitous drops.

That said, i think waiting for the historic 2-3x income is a mistake. People do not buy houses on total value of the house... the buy on the monthly payment. Which means that, while the interest rates are low, the "fundamental" has actually changed. (I know people will slam me for that. But there is nothing MAGICAL about 2-3x income. It's just that it’s historic. And historically, rates have been much higher. And you can claim that people should buy on the total amount of the home rather than monthly payment... but they're not going to, so it won't affect the market.)
And i don't see the interest rates going up anytime soon. I believe that the new "fundamental" for around here will remain at 4-5x income until rates rise again.
Again, a million other things could happen to affect the market. But I believe the 2-3x income matrix is irrelevant for now.

I make over 100K (w/o any kind of job security) and yet all I can afford is 600 sq feet, disgusting 1-2 bedroom condos in Boston area w/o parking. Most condos still start from $300K and houses from $400 in towns adjacent to Boston. And I wonder how I will pay for it if I lose my job (which is very likely nowadays)?

For the past 10 years media promoted home buying to make some people even richer. Those days no one ever mentioned the "3 times your income" rule. I am just glad to see that people are coming to their senses.

Hun,

This sounds like US!! When you get a minute, read the article, and especially the comments. Good INFO.

Stephen

Marcus,

I agree that Freddie/Fannie had little to do with the _subprime_ problem, but I think we now know that subprime loans were only one cause of the housing bubble. The GSEs should have been far more cautious about backing even prime loans after prices got so above their historic norms. Both political parties contributed to this lack of oversight.

To EdSox, Matt, John and others,

Thanks for writing and kicking around your thoughts on Mr. Van Vooron's article on changes and adjustments in the Real Estate market (ie. buyers watching homeowners trying to sell vs competition from foreclosure sales, and wondering how much further prices will adjust) in the past couple of years, and I and everyone else who reads your letters get a good cross-section of the comments I hear as a 35-year Broker in the business who saw prices adjust approx. 38% on single family homes and around 50% on condos in the recession years from 1989-1990 to 1996-1998, in the Merrimack Valley. My own thoughts today are of the strong benefit that actions now being taken by the Federal Reserve to strengthen the ability of financial institutions and secondary markets to support the financing of home sales, auto sales, and other personal credit needs, as well as the needs of both large and small businesses in their financing of ongoing operations, will all have.......
Best wishes for the holidays!
1960PatsFan

I just want to second stive's description of the inflation of housing prices as a ponzi scheme. The big picture as it appears to me, is that middle class families in america were duped into taking out massive mortgages, and after their debt helped to create a massive amount of wealth for those at the top of the pyramid, the market is correcting leaving those poor folks at the bottom once again holding the bag.

My fiance and I have been in the market to buy since 2004, but have watched the fundamentals with horror. No matter how many people decided that they wanted to pay a bank twice the value of their home over 30 years to own it, that math never made sense to us. I would like to buy now, we are frustrated at having had to delay our goals for years because of the market, but unfortunately I do believe that crucial ratio of wages to home value has a way to go before it returns to a healthy level.

Potential homebuyers such as myself are not "sitting on the fence." We are not buying because houses are too expensive. I make good money, have good credit, etc.

Why should I be so stupid as to take that New England weather-beaten house off the hands of someone who can't make their mortgage. Why should I inherit their problems?

No, I'll buy when prices become affordable.

...some people just can't seem to realize that the housing bubble was a suckers game and seemed to think potential homebuyers are "playing chicken." For now, I too will stay in my rented four bedroom home near the ocean and bide my time.

I've got all the time in the world. Home sellers, who preach about investment, might be wise to sell low, real low, so as not to ride this decades old correction into bankrupcy.

Okay, Bobby, I'll bite....

I have found what I think is a good deal in Brookline and am jumping on it. For now, we are dealing with a few inspectors (I want some more info before we sign P&S) but the sale's basically going through. Lucky for me, bidding on a property isn't a full time occupation (although has lately been taking a chunk out of my spare time) and I am still able to visit the blog here and there.

In doing a cursory look at rental classifieds, the place I am buying will cost at least $2,800 to rent and more like $3,300-3,500 to rent depending on amenities and utilities/parking included. My monthly payment is going to be $3,000 a month including P&I. taxes, PMI, condo fees (which include heat and hot water), and parking. Its a 30 year 5.12% mortgage (we qualify for the best rates which I actually think are now 5.00% for us at Wells Fargo--so that payment might be a tad high now). Mind you, I am not getting the residental exemption for taxes this first year because the property is currently vacant, but my taxes will likely drop by another $1600 in 2010 (of course the exemption amount can change). Unfortunately, I can't file for exemption in 2009 since I"m moving in February, after town deadlines. That means I'll be paying something like $2,800 a month in 2010. And I'll be paying $2,550 to $2,600 a month when PMI drops off and I have 20% equity.

The string of comments isn't really illuminating anything different that hasn't been said before. I totally get that people historically have bought at 3 or 3.5 times their annual income when purchasing a home and that's been a historically proven indicator of ability to pay the mortgage comfortably. I totally agree with that (our purchase is 3.5 times our annual income and we work in well paying extremely stable industries with scheduled regular pay increases.) This blog has talked repeatedly about median salaries and what that would translate into for a median priced house. Okay, point made....repeatedly.

But I think some more interesting points that would develop the conversation a bit further are questions like:

1) What is a "median" town? Boston? Quincy? Salem? Woburn?
2) Would anyone think that Weston, WInchester, Newton, Lexington, Arlington, Belmont, Brookline, Concord, Newton are "median" towns?
3) What if you are a prospective buyer who makes over or well-over the median income in stable jobs and can afford today's prices and you don't want to buy in a "median town?" Maybe you want to stay close to downtown, or need good schools? Then what's the "bottom" median price for a top-tier town? $350K? $300K? $330K? Is it a typical two bed, 1 bath condo or a house? Or a townhouse? (I'm paying $365K, after I get closing costs back from the seller for a large condo, 3beds, 2 baths.)

So let's say that median prices in Dorchester (for example) are $200K or $250K. Does that mean the market's bottomed out? Or if prices in Quincy are a median of $200K or $250K? Brockton? Everett? Salem? Worcester? What kind of condition should these properties be in? Old condos that need work? New luxury condos? A single family home?

Or is the market not bottomed out until prices are a median $250K in Belmont, Brookline, Newton? What does this median house look like? A condo, a house? New, old?

So the questions I am asking for the prognosticators (I do not consider it gloom and doom--it is going to get worse at least until mid next year for a lot of homes, especially in pioneering communities that saw growth right at the end of the bubble) what specific signs/home prices/communities should a prospective buyer be looking at if you want to try and time the bottom?

As someone who has remotely no interest in buying anywhere that isn't top-tier community in THIS market (especially this market), median prices in Mass or even Boston feel like they have a very limited usefulness in trying to determine this. I don't live in the Berkshires and I have no intention of living to somewhere with crime issues (Roxbury, Brockton, etc.) since I want to raise a family. I think other towns without good schools and community amenities are a bad bargain right now. You might save nothing to maybe $30K by buying in a "pioneer" neighborhood.

I think Boston and greater Boston's status as a place of neighborhoods makes determining median very, very problematic for the non real-estate investor. So for those of us who don't do it for a living, what are some specific benchmarks, people? Its not easy to predict, but take a crack at it.

For my money, I think Quincy might be a good example of a median community.

Marcus, I completely understand your point and I actually don't disagree with it. I fully expect that we could very well have devastating price deflation in the near term (again, I still think it has more to do with deleveraging than actual changes in the money supply), but I truly believe that the long term outcome is massive inflation if for no other reason that the dollar is a doomed currency. I foresee two possible outcomes:

1. The rest of the world wakes up, realizes we can never pay our debts and starts dumping their dollars.

2. The rest of the world plays along with our game and devalues their own currencies, flooding the world with massive amounts of fiat currency, causing long term interest rates to skyrocket along with skyrocketing asset prices.
Governments love inflation. Inflation gives the illusion of economic growth because it causes asset prices to rise, even if there is no economic fundamental basis behind the rise in prices. Inflation reduces debt burden and since we owe the rest of the world trillions of dollars, why wouldn't our government want inflation? Deflation has such a negative connotation, that I just can’t believe that governments around the world will not do everything they can to keep the inflation train going.
Maybe I need to refresh myself on Great Depression history, but didn’t the FED contract the money supply between 1929 and 1933 and then in 1933 they embarked on the monetary expansion you mention? At that point, the effects of the deflation had already taken hold. That’s different then today where we are increasing the money supply as the crisis unfolds. They also imposed tarrifs, etc. that accelerated the depression.

And yes, the best thing you can do during a highly inflationary period is accumulate assets via debt. BUT, since we just had the largest global real estate bubble in history, you don’t want to put your money in real estate. Banks won’t lend money to buy stocks, so that option is out. Buying some gold on your credit card is an option.

Marcus and John,
I agree with your assessments. It is funny how "doom and gloom" people can back up their statement with facts. While the "realistic" Homerenter, goes with a general statement.
I think we are wasting our time explaining. The Home renter cannot accept the fact that home prices can drop lower. They just can't, mentally, they will breakdown. They will loose their marriage.
One more fact,, unemployment is going to skyrocket after Christmas. How will that affect the "High income Massachusetts"?.

There's not much to support a prediction of massive inflation - at least in the near term. Credit has tightened and unemployment is rising. Money isn't moving. And any interest rate increase will only serve to discourage borrowing and even give those who are able more incentive to save.

But beyond all that, the economy is in no small way based on public perception. If you did a sampling of not only this thread but also what your friends, family and associates believe, most seem to think that prices will continue to drop. Does perception become reality? I don't know. Hard to argue against.

To me, this bubble bursting is really troubling. It's more than just a cyclical thing. More than just people losing their homes to foreclosure - which is awful enough - derivatives torpedoed 401k's and retirement plans. What long term affect does that have on prices and recovery? Does anyone know?

And Peter Schiff may have been proved correct in his predictions, but I can understand why he had detractors. He's in the business of trading foreign currencies. It was almost in his best interest for the dollar to tank. That automatically invites a certain amount of cynicism.

I find it interesting to hear folks say they are waiting on the sidelines for house prices to pummet. How long to do you wait? Let us not forget, that houses are a place to live, not a 401K. If you chose to sit and wait on the sidelines (I assume you must paying rent and paying something) and can afford to buy a home, why wouldn't you buy? it is really all about cash flow and how you want to live. If you prefer to live in a dump (although I have seen many nice rentals) by all means, do so. If you want a better quality of life, then buy. Mortgage rates are 1.5/2.0 points below historical averages. That is equivalent on a cash flow basis of about $75K principle. If you are paying $1500 in rent an month, you can easily buy something for $350K and be better off. The tax savings after the first year more than subsidizes the cash flow differences between rent and PMIT. You be actually shelling out less per month on cash flow basis then the $1500 thrown out the window. In 7 years, the balance of the loan will be between $280-$300K depending on your down payment. If you assume in 7 years, the value of the home stays the same (unlikely really, it should go up) you would have $50K-$70K equity. More likely a 100K equity. If you sit on the sidelines and pay out rent each month, you'd be lucky to have that much in 7 years time. Plus you wasted 7 years of your life that you can never get back complaining abuot house prices and the crappy rental you are in! Your choice.

At some point, you start to wonder...does everyone who thinks the market will fall 40% rent an apartment and hopes that will happen so that they can buy a house for a low price? Be interesting to see if there are many "sky is falling" people who own.

I think that the last sentence of every post should state: "I own / rent (and I bought in XXXX year)". Then we will know the true bias either way...and I am sure there is bias both ways. Too big an expenditure to think that you will then ignore it when expressing an opinion.

I have no idea where prices will be at any point in the future, I _hope_ they trade sideways for a while until the markets stabilize. Bought our house as a home not an investment. And yes, I own and bought in 2005.

ABG-

A very well written post with great questions. Unfortunately none of the prognosticators will respond because they only speak in general terms, never in specifics.

I think your approach is a good one, and can't agree with you more that buying in a "better, well established community" is they way to go in this environment. Even though these communities will suffer during this downturn, I believe the upside is akin to buying a quality stock that has suffered due to the pressures of all equities. In times like these things are painted with a broad brush, but if you can get passed the broad brush and into the details of certain transactions, you have put yourself in a better position to realize value.

Nice little post by John Rubino as a follow up to post #75:

Today the Fed announced another rate cut, which is both a foregone conclusion and a big yawn. Short term interest rates are already at zero or thereabouts, so that policy tool is pretty much a spent force. The real excitement came when Ben Bernanke explained that short term interest rates are just one of the levers he can pull, and nowhere near the most powerful one. Going forward, the Fed will engage in what is known as “quantitative easing,” an obscure term for something both simple and terrifying: The Fed will create dollars–maybe trillions of them–and buy up other assets.

At first it will buy mostly longer-dated Treasuries, in order to push down rates at the distant end of the yield curve. But because long-term Treasury rates are already at record lows, that strategy has a limited value. Pushing the 30-year yield from today’s 2.93% to, say, 2% won’t have a noticeable impact on the world’s frozen credit markets. Because the problems are with corporate bonds and asset backed securities, the Fed will have to buy increasing amounts of them.

This will have the desired effect of reliquefying the banking system–for a while. But the global financial markets aren’t stupid (okay, they are. But they do learn eventually, after being smacked in the face with enough monetary two-by-fours). This flood of dollars will send the value of the dollar down versus other currencies, and push up interest rates on the very long-term bonds that the Fed is buying with newly printed currency.

The result? The mother of all currency crises, in which a falling dollar causes other countries to devalue their own currencies in order to keep their export industries from imploding, which causes everyone to avoid bonds (which pay interest in depreciating currencies), which causes long-term rates to rise world-wide, which causes central banks to print even more currency in a futile attempt to repeal the law of supply and demand.

It’s going to get very, very ugly, and–after a series of failed experiments with capital-and-price controls–will lead to the realization that the whole concept of fiat (i.e. government controlled) currency is fatally-flawed. Along the way, older forms of money like gold and silver, which can’t be created in infinite quantities by panicked governments, will soar in value. I’ll go out on a limb and predict $5,000 gold and $100 silver by 2015.

John Rubino

There is more to a house than the price. The problem with Mass. is that there are MANY houses that are cheap and MANY houses that are expensive. It is tough to find something good in the middle approx (250K-325K).

ABG, congrats for finding what you believe to be a good deal. And based on the cost to rent versus the cost to buy it appears that way. But I pose the following question: Are rents overvalued? Honestly, I could not image spending $3000+ plus a month to rent, unless I was renting a multi-million dollar home in some swanky neighborhood. In my book spending that kind of money on rent truly is "throwing money away".

I don't know what is a "median town". Median income to median price is only ONE metric you can use. Affordability as a percentage of income, historical appreciation rates, etc. are others. Whether you are buying a home, a stock, a TV, whatever, the important question is - is the item in question fairly valued? Just because the DOW went to 7500 and financial stocks got hammered, I wouldn't touch the financials with someone else's money (unless you are skilled at trading in a highly volatile market). I did however back the truck up to pick up some select resource and precious metal stocks. Again, it's about value, not because you have hit some price point or timeline. That is really the heart of this whole debate. Many of us here feel that homes in general are still grossly overvalued and regardless of area, most will continue to see downward price pressure.

A.B-G, I've read your questions three times and I still can't understand what you're asking.

What is a "median town?" Do you mean a town where the median home price just happens to equal the state median average? Why would anyone be interested in that, unless they were hoping to buy there? A single town makes a poor bellwether for the entire state, and an even worse indicator for some other specific town where you really want to buy. Any given town can head south when a factory or office closes; its median price can also rise when a single large expensive development begins to sell. You can untangle all that when you're really interested in that town, but why would you bother when you're not?

I think you misunderstand the historical ratios. They are rules of thumb that help gauge whether a market on the whole is over- or under-priced. The median home price is simply that price at which half the sales are higher and half are lower; the same is true of median incomes. The ratio between these two was remarkably stable for a very, very long time until this bubble started. Until this ratio returns to normal, there is a significant risk that the market remains over priced.

If you wanted to zero in on a particular town, or worse, a neighborhood, you'd probably have a tougher time getting updated data, especially for income, which is most widely accessible through the Census. But you could--although you have to remember median prices for a single town can be volatile due to the small number of transactions.

At the end of the day, though, you want to buy a house, not a town. So how do you know whether a given house is overpriced? Check its rental potential. If you could buy the house today, and it would be cash-flow positive as a rental with all expenses included, you're safe. If you believe houses will eventually return to normal appreciation of just over the rate of inflation, you could include that in your calculations, too, so you don't really quite need to see a current profit from collecting rent. Other rules of thumb: Note that some real estate investors say a house should cost 120 times monthly rent, while others claim the multiplier in Boston is more like 180. But those are just quick guesstimates; you have to really understand the expenses.

By the way, the mere fact that you're paying a third of your income doesn't mean your house isn't overpriced. It could be that a third of your income should be buying twice the house, so what you've bought will decline in value. It does mean that you're more likely living within your means, though, so that's a good thing.

You will notice, I didn't tell you anything about timing at all. It's a point we keep repeating over and over and over. The real estate bulls are the only ones who talk about timing the market. The bears only talk about value.

One key point that I keep failing to mention is that there is this widespread notion that the world is reliant on 300 million Americans in order for the global economy to function. That is just not the case. It is because 300 million American borrowed money from the rest of the world to buy flat screen TVs, SUVs, homes, etc. that we are facing this financial crisis. Once the rest of the world wakes up to that fact, they will be better off. The US is not the cure. The US is the disease.

Once the Chinese realize that if they allow the remnibi to appreciate, it will lift the country out of poverty giving them access to 1 billion consumers, they will not care what happens to 300 million Americans. And once those 1 billion Chinese start demanding a piece of the natural resource pie equal to the US slice, we'll see massive inflation as more dollars chase fewer goods.

That Peter Schiff video is hilarious.

"The United States economy has never been in better shape"

"(Home) Prices are going to go up about 10% (in 2007)"

"The credit crunch is way overblown"

"The subprime problem is a tiny problem"

"Stocks will be a heck of alot higher next year"

"The financials are just super bargains"

Timing the market is next to impossible, even for professionals I would guess (not being one myself). Timing when you and your family need to settle down is very quantifiable and seems to be lost by a great many posters here. If you buy your house for $400,000 now or $350,000 in 2 years many be a big savings (or may not actually spread out over 30 years...), but the social cost of moving kids from schools, leaving neighborhoods, etc is harder to quantify, but extraordinarily valuable. I think that is why a great many of the so called "bulls" here are recommending people buy when they need to. This is not the same as timing the market, but rather timing themselves. If you don't need to, by all means try to time the market, but waiting a year or two or three and you will still almost certainly miss the market low or whatever it is you are looking for.

The next bubble is already here. It's in US Treasuries and it's getting ready to pop.

BV, how many times do we have to say, it's not about timing, it's about fundamentals. Fundamentals. Fundamentals. Fundamentals.

WARNING: I'm about to go off on a philosophical reverie.

Fundamentals.

That makes me consider: What is value? Nothing is worth only the cost of materials and labor. There will always be an element of perceived value, based on personal taste, trends and availability of the product.

Other important factors are emotion and desire. Look at diamonds. Just rocks, really. Pretty, sparkling rocks. Somehow they are valuable and some are more valuable than others, especially if they are more sparkly. Some may see the purchase of said diamonds as foolish because of the perceived value. But for the people who *value* them for the way the diamonds make them *feel*, it's all about happiness. It's interesting, isn't it?

Look at art. I have sold pieces of my artwork. It is always a challenge to put a price on the work. I first figure in the cost of materials. Then I charge so much per hour for labor. Then I add onto that, double and more. I've had people willing to pay lots and others willing to pay very little, for the same work. It's a perceived value, with factors other than just the basics, that come in to play. If those people willing to pay so little really understood the fundamentals behind that work of art they *should* be willing to pay more. But the artwork does not really speak to them, so they don't see the *value*, no matter how much materials and labor cost or what someone else is willing to pay.

What does this mean in the world of real estate? From the work I've done as an agent, I see people on both sides of the transaction struggling with the concept of value, especially in the current market.

I really do think that personal desire and timing of life events, are enormously important factors in buyer's decision making. Accordingly, not all buyers will wait for prices to fall further, whether is make logical sense or not.

Morally, as an agent, do I discourage buyers from buying? It's a dilemma. Sometimes I do. If they are just barely qualifying for a mortgage, I'll advise them to wait or look at less expensive properties. However, if a well qualified buyer has made up their mind to buy, then that is what I will help them to do.

Bobby- Understood! You are saying that market "fundamentals" should decide the "timing" of your purchase of a house. All I said was that there are other pressures (i.e. personal, family, etc.) that also should influence the "timing" of your purchase. Market "fundamentals" are only 1/2 of the equation, and on a weighted basis, they may be worth even less if you need a place to settle down now or have kids ready for school now. Knowing that you may get a better price on a house a few years down the road is interesting, but not extraordinarily helpful. Kind of like knowing that the expensive prescription drug you take will go generic (a fundamental of the pharmaceutical industry) so maybe you should wait it out!

So, what is your point, Sally?

Knowing that you may get a better price on a house a few years down the road is interesting, but not extraordinarily helpful.

One in five homeowners is now underwater on his mortgage, and that number is expected to reach one in four very shortly. Going underwater is an excellent predictor of going into foreclosure, according to a study by the Boston Fed.

So homebuyers might also want to consider the "timing" of a foreclosure in the middle of the school year, a trash-out crew that throws most of their children's toys and clothing into the local dump, and the pluses and minuses of the school district where their parents' basements are located.

I would consider all of that information to be extraordinarily helpful.

Marcus - You made me laugh! :)

In all seriousness, please don't buy a house if you cannot afford it. Period!

BV, and some others, you really need to read an economics textbook. I'm not saying that as an attack, but it would help understand what a bunch of us are talking about. We actually didn't invent any of it for this blog, we are just talking about a field which though not perfect, does have a lot of insight to offer.

The state of general economic and financial knowledge in this country is dreadful. And it matters, to anyone who spends money on things. BV, for example, would probably not enjoy being broke. But she is advocating a course of action that could well lead there. Is a bankrupt family really happier than one that rents?

ABG - I agree with a lot of the things you say, but disagree with the implications you draw. I think Marcus did a pretty good job of giving you concrete guidelines. I couldn't do any better. The typing required to really explain this stuff is way beyond what this blog has room for.

Economics for Dummies, by a prof at Vassar, is really surprisingly good.

And BV, you wanted to know current information etc? I currently rent, a nice luxury apartment in Back Bay. Its not too traumatic. I was a real estate developer and owned lots of real estate until 2005, when I sold it all, because the numbers made no sense, and I'm not convinced that losing money is the road to happiness. I love real estate, and when it gets back to reasonable prices I will back the truck up and buy again. Funnily, I'd guess that what I just said isn't far off Marcus, though I don't know anything about him but what he's posted.

Charles - I reiterate, again, don't buy a house if you can't afford it. I agree with you. Really! Truly! Nothing more need be said! Period! You are right!

I am sure your place is wonderful, and I meant no slight on renters. We rented for years and loved it. By the way, where do you send your kids to school? Many that I know that live in Boston pay for expensive private schools. With two kids, that can run $40,000 / year or more. Makes my mortgage, taxes, insurance, and general maintenance pale in comparison! Isn't this something that has to be brought up along with the other fundamentals? That is all I am saying. There are two sides to the equation. And many here acknowledge that, but some seem to see a home purchase in the same light as buying pork futures. I suppose if you owned lots of real estate then it really was just an investment much like pork futures.

Mr Meoff,

My point is that value is determined by many factors and that it is interesting, to me anyway, to consider.

BV,

If Charles will buy a condo he currently rents, what you and others suggest to do as a cheaper option, he will still have a school problem he might face now. This is not an argument. We can not compare renting in downtown and buying in Lexington.

To answer some of the repsonses to my epic post, I'll break my thoughts down a bit more (okay, a lot more) and hopefully make myself clearer:

In my following of the blog, a large number of posters on the blog are bearish about the market and believe that because the historical ratios (median income x 3.5 = median home price, I get 3.5 by dividing 100 by 28 and getting 3.57142) are still out of whack, purchasing a home at this time is foolish because historically the ratio of income to median price has been a very reliable indicator of housing affordability. Because the current median price in Massachusetts is (last I heard) $287,500 (single family) and $265,000 (condo), while the current median household income is $64,000. Hence, either incomes must rise (unlikely in this economy) OR the median housing price should drop. When the historical ratios are back, with median prices 3.5 x the annual median income we will have hit bottom of the housing market and it is safe to buy. Yes?

Ergo, the bears say--buying now is foolish because prices are bound to fall. Buyers who do move forward with the purchase of a home at this time are derided as "knife catchers" (I'm looking at you, Hung) or "suckers" (to quote Charles in another post) because the “fundamentals” are out of whack.

And I’m not dissing the “fundamentals.”

I have generally summed up the comments from the gallery, no? So, let's assume someone or a couple makes $64,000, today's median income in Mass.

If I take this income and take it times 3.5 I get a starting home price of $224,000 for a starter home of some kind, somewhere in Mass. and that's 40K less than where condos are right now and 60K less than where single family home are right now.

So, that would suggest an additional drop of 16% ( 224K divided by 265K) for the condos state-wide and 22% for single family homes (224K divided by 287.5K).

And by the way, there are homes on sale RIGHT now in this state that are within this price range. I’m happy to pull up examples. Of course, again, many are foreclosures, many are smallish condos, many have longer commutes.

There’s a ton of missing info. We don't know which median price has to come down (condos or single families) and in what areas of Mass and if they'll fall at the same rate, or if some areas have already bottomed because they've already been in decline for 2 years. I doubt all areas have the same amount to fall. We also don't know if the household incomes we're talking about are dual income people without kids, people with kids with one stay at home parent, or what and what other debts they might carry, what other household expenses (childcare, tuition, etc.) and what kind of transportation costs they have to get to and from work.

Our individual or couple with the median income isn’t going to necessarily get to buy a single family house for their first home, they aren't going to necessarily get to buy a condo in Boston, they might be living in a cabin out in the Berkshires for all we know or a cape in Framingham. They probably won't start in Newton, but may start out in Dorchester or Quincy, etc. This was part of the point I was trying to make earlier with my million questions. Its not a popular point; it certainly wasn’t during the housing bubble.

So we can only use this information for state figures "on the whole" as Marcus said. The state figures are of limited usefulness to someone like myself who is a potential home buyer. The Boston figures are maybe better, but still limited, because the neighborhoods vary tremendously.

Now, I consider myself in the exact same boat (often eerily alike) like a ton of twenty-somethings who post here, making $100-120K annually, sat out the bubble or were priced out of the bubble, but getting to that critical point where you want to start a family and just put down some roots in their first home. There’s impatience or there’s contentment to wait until everything shakes out.

So here are where my thoughts are...I'm buying just one home in one town that suits my needs and expenses and that’s the purchase I need to get right. And I only want to buy in a top-tier town with good schools and T access. That narrows things considerably. Yet, if I wait for that single family or condo in move-in condition in one of these top-tier communities close to Boston to hit $265K or $287K I feel I best not hold my breath because its obvious to me that Newton or Brookline are not “median” communities. So, how can I attempt to determine the correct price for a home in these towns in a falling market?

And if I can get my home today at tomorrow's prices (or where I think tomorrow’s prices are headed) why not?

To try and get at the “right price” I tried to look at median income in Brookline (but the most recent figure I could fine was from the 2000 census). There is a luxury market (selling now at $6M plus) which skews things. So, knowing what I can afford, what my job situation is, what other expenses I have, what it would cost to rent the same kind of place, the condition of the home, and the median income of the communities I want, I can search for homes $50-100K above my limit, keep an eye on the listings that fit the bill, visit open houses when possible, and prepare to bargain the seller down to the price I believe is closer to the “fundamentals.” That’s exactly what I did. I waited a few months and kept an eye on the properties I wanted and made my move during the holiday season to drive the price as low as possible.

"I agree" got my point that its really a little more useful when making the decision to buy or not to look at the details of the home, the town, the rental income of similiar units, individual circumstances, etc. then to talk endlessly about the market trend and the fundamentals and base the decision 100% on those facts. Certainly, the market is part of the thought process but there are other factors that must come into play--like the individual deal, and obviously, personal circumstances (which a lot of other people point out its hard to place a monetary value on).

Of course, we’re ALL talking about timing, even if we don’t say it explicitly. The bears are basically telling everyone when buying makes sense again—when the fundamentals match up again.

I’ve already taken my household income, which coincidentally is pretty close to the median income in Brookline (I’ve seen figures ranging from 90K to 110K yearly) and am buying a house 3.17 times my household income. (But of course, if I’m wrong, I could have gotten more house for my money if I was waiting longer as Marcus mentions.) The appreciation rate is a 3% every year since 2002 (last sale) to this sale. And, to use the guesstimates Marcus mentions the home in question is worth (searching Boston.com today for an apt. 3 bed, 2 bath, 1650+ square feet, with utilities, dishwasher, laundry, patio in Brookline I get a range of $2,800-3,500 monthly):

2,800 x 120= $336,000
3,500 x 120= $420,000

2,800 x 180= $504,000
3,500 x 180= $630,000

I’m paying $370K ($365K after seller pays the closing costs). So, if I’m the bottom of the rental range and multiplying by the lower figures, I’m overpaying by 8% or 9% or, to use the other figures, I’m underpaying by 12-13%, 16-17%, or 41-42%. I personally think the last two figures are bubble prices and way out of whack.

Renting an apartment at these prices to me is a waste of money, even more so when you see that the houses that fit the same bill (3 beds, 2 baths) will rent out from $3400-4000 monthly and DON’T include utilities. However, there are only 2 SFR on Boston.com for rent. Surely, if it is not a good idea for people to buy, they must live somewhere, which as I understand is going to increase the demands of rental units. Which means, rents should go up if people aren’t buying.

To John--Yes, I would never rent at this price, but I don’t have kids...yet. So I could rent a larger apartment in Boston for $1750-2000 in a safe neighborhood that would fit a family, but then I’d also be paying for private or parochial school. And if you want 2 or 3 kids, that is more expensive then paying the higher rental price in a town with good schools. Not to mention that a rental search of “Brighton” (I picked a neighborhood randomly) yielded results as high as $3500 a month as well.

And if you think the rental prices are scary, the single families on sale that have at least 3 beds and 2 baths and are at least 1650 square feet start at around $800K. If I assume a 30% drop is coming, that means that this starter single family in Brookline would run $560 and that is still waaaay too rich for my blood.

So, based upon all this info that I’ve given putting myself and my finances under a microscope for the discussion, does this make me a sucker knife catcher? Or am I merely seeing a good deal, crunching the numbers, and going for it? And if I should hold out, what price should I have held out for? Also throw out the interest rate you expect I would have gotten—I just locked in today at 4.75% with Wells Fargo.

By the way, where do you send your kids to school? Many that I know that live in Boston pay for expensive private schools. With two kids, that can run $40,000 / year or more. Makes my mortgage, taxes, insurance, and general maintenance pale in comparison! Isn't this something that has to be brought up along with the other fundamentals?

Oh, so if you rent in Boston, you have to pay for private schools, but if you own, they're free? Who knew.

Shorter bulls' argument: La la la la la la I can't hear you la la la la la.

BV,
If Charles buys a condo what he currently rents, what you and others suggest as a cheaper option, he will still deal with the same school problem he has (or not) now. This is not an argument. You cannot compare renting in downtown and buying in Lexington.

I'm with BV. And i took Economics at an Ivy League School, so thanks! Getting the best price on a stock unilaterally makes sense. Getting the best price on a house, frankly, doesn't always. I have four kids. I stopped renting last March, after the list price on the home we wanted dropped 20%. We were able to do a 20% downpayment and are very comfortable with our monthly payments. We have a 30-year fixed. We aren't in danger of foreclosing anytime soon. Our house may drop in value, but we DON'T CARE. At all. We can go completely underwater, we don't care. Stability for the family, in an area where the public schools are good (which, as BV points out, saves us like 60K/year in private school tuition)--all worth it to us. A home is not simply a financial transaction. It is a lifestyle one too.

As I said before, I am a housing bear. I was renting because i thought the fundamentals were completely wacked and i refused to buy into the bubble. I love renting. It's great, and superb if you don't have kids. But waiting for the exact bottom? Not worth it.

Also, re: the schooling question: it is easier to rent in downtown Boston than it is in a suburb with good schools. Many places that have good schools have limited rental stock. I took that to be what BV was saying. That was definitely our experience, anyway.

rws,
Your argument is very reasonable. Unfortunately (for all of us) I have to add another one pointing to other direction. My wife and I are trying to buy a house/condo during the last three or four years. We didn't buy for the same reason you didn't. However, if happened that we didn't buy until October 2008, I simply want to see what's going on in incoming 6-8 months. It might be a (or very likely will be) VERY BAD situation with jobs, etc. Not exact bottom, but rather caution and common sense.

rws,
We currently rent in Winchester. I've recently renewed a contract, so I've studied the market. A lot of apartments, THs, houses are avaliable. No doubt, there are much more in Boston, which is much bigger than 20k town. But there you also have much more demand.

Terry, Marcus, others...

No. I am saying that in my situation (and EVERY situation is different) renting is not a great option. As RWS correctly pointed out, there is not a huge rental market in suburbs with good schools. I could rent in a town with poorer schools, or even Boston, but then I would want to pay for private schools. So FOR ME, this would be a bad option.

Everyone is different. Maybe Bobby has no kids. Maybe Bobby is happy with Boston Public Schools. Maybe Bobby is rich and doesn't mind paying for private schools. I presume his choice was correct for him. However, telling people they are crazy for factoring in personal decisions on the timing of a house purchase just seems rather narrow minded.

But waiting for the exact bottom? Not worth it.

telling people they are crazy for factoring in personal decisions on the timing of a house purchase just seems rather narrow minded

There is so much straw in this thread it is threatening to produce a brick shortage. Or something.

Not one bear, not a single one on this blog, has ever once even brought up the idea of waiting for "the exact bottom." And not one has said personal considerations are never a factor.

Terry has it right. rws doesn't care whether his house drops in value. He'd better. Because the economic outlook is potentially catastrophic. There is a non-negligible chance that rws will lose his job in a matter of months, or even weeks. And a non-negligible chance he will not find another one for months. Or longer. (I'm sure many of the medical professionals recently laid off thought their jobs were recession-proof, too.) In such a situation, an underwater house leaves no room to sell and move. Foreclosure is the only way out. And if you've spent your nut on your mortgage, instead of saving with a rental, you have a much thinner cushion to fall back on, if any.

If that doesn't matter to you, fine.

first, i applaud marcus for comment 34. i don't believe it's the whole story but it's a good introduction if you're one that feels the need to point fingers and dole out responsibility for the subprime debacle.

second, i thought the pinnacle of entertainment was watching 4 "experts" on fox business explain how deregulation and the free market system was the only way out of this financial mess. never has al gore's creation been more validated than witnessing larouche debate a stay-at-home mom on bretton woods and monetary policy. i apologize if i offend anyone but the dichotomy in the discussion is comical. i'm certainly no economist. my general opinion is if you ask 5 economists a question you'll get 10 different answers and they'll all be wrong.

for better or worse here's a handful of my observations. i've yet to spot a behaviorist among commenters although real estate to me would seem to be a logical market to employ the theories. this blog illustrates that there's a spectrum of opinion on the fungibility of housing units. in a drastic generalization, urban rent/buy analysis would appear to be more apples to apples. whether right or wrong many view renting as a more transient option. the pure econ proponents stick the rent/buy decision squarely in the rational economic desicion box every time which i believe is fine for government and industry but an oversight for a small investor. perception is reality. rationally or irrationally the market sets price, granted depedent on availability of capital.

probably further exposing my economic ignorance, i have a difficult time taking a metric seriously that does not account for the cost of capital at each data point. specifically to 3x and 28%, in my opinion affordability is determined by homebuyers on a current monthly cash flow basis. i'm not a historian either but to me a constant 3x over a 100 year period is greatly manipulated. sources of income have changed (shift from 1 to 2 family incomes), technology and efficiency have drastically altered economic priorities (shift from food, clothing, etc to education, healthcare, transportation, etc) and government has been a pervasive and manipulating force (hud, tax incentives, zoning laws, income and property tax, etc) but i'm to believe that housing is the one constant cost and that it's comparative value is perpetual?

a.b-g you make me wish i did not subvocalize, but for whatever it's worth my wife and i analyze our options in a similar manner. homebuyers and investors alike must examine each opportunity independently. to rely on the efficient market hypo in today's volatile world and summarily sit out would be foolhardy. if you derive your estimate on bottom and can finish a deal that is discounted at the same rate from the intrinsic current market value and it falls within your comfort zone financially than by all means feel comfortable going through with it. also understand that any time you purchase in a depreciating market there's more inherent risk if life should unexpectedly force a change upon you but you can reduce that risk if you were correct about the discount. i wish you the best.

RWS, Funny, my Ivy League School and the various grad school equivalents I attended taught economics differently it appears... or something. For example, you say in 101 you don't care if prices drop. That isn't precisely traditional economic analysis.

I do care if prices drop. 10% on a 400k house pays the tuition you were talking about there. 15% drop overshoots. And 15% remains the conservative drop prediction - google it.

ABG - a minor point - 3.5 is the top of the affordabilitly range. Appropriate for great places in great times. 2-3.5 is more of an accurate range, 3.5 is maxing out traditionally.

Ironically, we were having almost the exact same discussions a year ago. Be nice if the the archives here were easier to pull up - we could see just how the bear's predictions panned out over the year.

"And not one has said personal considerations are never a factor." - Marcus

Not explicitly, however by insinuating things (response # 92) like that we should be "timing" our foreclosure and calling the clean out crew to trash our children's toys, you certainly showed your true thoughts. A better response (or at least a more reasonable and pleasant one) from you might have been "Gee, in your situation it might work, but for many people it wouldn't. Really depends on a number of issues including both personal and financial. Lets discuss them and dismiss none of them out of hand (including personal issues)." This type of vitriolic response from you seemed unnecessary in what was otherwise a very civil topic.

But charles, that's exactly my point. You're making the point that Marcus says no one is making. Of course i understand traditional economic analysis. _But economics are not the only factor going into buying a house._ Believing all the same things you all believe, believing we were not at the bottom, i bought last March. Because it was better for my family, my 4 kids, than renting any longer, and we were, for my taste, comfortably enough past peak. Which is what i mean about not waiting for exact bottom. I was happy enough to be back at 2002/2003. We got a good price on a terrific house. I will refer you again to the lead paint discussion for just how FUN it is to try to find a place to rent when you have kids. It is really hard, and I was facing the possibility of pulling my kids out of their schools.

To Marcus’ point—sure. I could be foreclosed upon. The house could go down another 29% (from the 20% it already went down before I bought it) and wipe out all my equity. I could use up my 8 months of emergency fund. I could lose my job, and my spouse, who is full-time with the kids, could not be able to find a job either. My support system, family who could help us in such a crisis, could be so strapped that they, too, can do nothing. Those things could happen. But I would be curious as to the percentage of foreclosures that have taken place thus far fit my profile at all. I’d be surprised if it were very many. There are risks to everything—that was one I was willing to take. I said these same things to people buying in 2005, so I do completely understand where you’re coming from.

And, man. Say I were to have waited this thing out. That would be already almost 2 years more of trying to find a good rental situation in this town. And I believe we are in for a long, Japan-like decline, myself. Which would be, like 10 years of declines. My kids would be in college! Egad! Except that, my money would have been in my 529, which lost 45%? 

Anyway, I’m sure this discussion is getting buried under the ones about decks and Christmas lights, etc. Again, I don’t disagree with most of what Marcus and Charles etc say. I AM a bear. But if money was all this life was about, I certainly wouldn’t have had kids in the first place!

Wait a minute! Waiting for the exact bottom is worth it. Why wouldn't it be? If home values are dropping say 3k per month (preatty realistic in the Boston area for a 500k house). The bottom when we reach it, will be with us for several years, there won't be a v shape recovery. It will be more like an L for the next 10 years with virtually no appreciation, and clearly a losing "investment" when adjusted for inflation.

So, everything appeared to be in line until 2000. 3 times median income until then. Avg Salary was about $50K and avg house prices was $155K. That is pretty much the arguement I gather from this blog. So, what happened since 2000? How about interest rates have gone down from 9% in November 1999 to about 5% in Nov 2003. In the late 90's interest rate where from 7-9%. Since 2000 they have been 5-7%. Each % point equals about 8% Fair Market Value. That is somewhere around 24-32% Fair Market Value. Normal inflation from 2000 to 2008 would get us to $196K average. at current interest rates hovering near 5%, 32% increase in market value would get us to $260K. I beleive that is where we are at now???

I hope folks are still reading this blog...I have some interesting calculations to share regarding how worst off folks are in 2008 vs. 1999 regarding housing prices...Median home in MA was 155K in 1999. Assume 10% down payment and 8.5% interest, monthly principle and interest would be $1075. PMI would almost be assured in 1999 for less than 20% down payment. Add another $100/mo so about $1175 total. Today's median home is $280K (most homes are bigger and have significant upgrades, granite, HW etc...by the way). 10% down at 5.5% gets you a $1430/mo payment. Most likely no PMI with today's loans. at $55K income in 1999 that is 26% of gross income. At $65K income in 2008 that is also 26% of gross income. ThThat seems the same to me. So the primary driver of house prices ins the cost of the mortgage.

#112 - what happened since 2000? No down payment no questions asked loans, that's what. If it was just the reduction in interest rates then why is there a foreclosure crisis? Lower interest rates by themselves do not account for the bubble and do not explain the sudden skyrocketing demand from 2000 to 2005. That's why people are so against 20% down payments. Even if you make the interest rate 0.25%, but require 20% down the values will not skyrocket because there is not enough people who can fork over that kind of money. Hence, interest rates alone do not explain affordability.

I wouldn’t do a thing until RTC Redux is back in action, and even then I would wait.

This is an epic bust. Don’t be a knife-catcher.

Bulls make money, bears make money; pigs get slaughtered.

bill, a 10% down payment in 2008? An 8.5% interest in 1999? Rates were as low as 6.9% and only went up to 8% in the later part of the year.

There's such a thing as the affordability index that takes care of all these calculations for you, and it doesn't rely on cherry-picking years and months and assuming counterfactual downpayment assumptions. It demonstrates, quite conclusively, that a fall in interest rates does not explain the rise in home prices.

prices are crashing hard, and we're not even 1/3 of the way through this correction yet....

"The November median home price slumped 16.7 percent to $275,000 from $330,000 during the same month in 2007," said the Warren Group, a Boston firm that tracks local real estate activity and that publishes Banker & Tradesman.
I think it's great!

#117 - "I think it is great!"

I am thrilled for the crash of the stock market. Really looking forward to higher unemployment, and maybe a bad flu season. With any luck, a new war is on the horizon! Everything's coming up roses!

#118 - your irony is wasted on most of the people here, including myself. I am not looking forward to any of the things listed in your post, however, I am thrilled at the thought that my family may be able to afford a home. I don't see any value in a situation where one part of the population sits on overpriced houses while the other part is not able to afford anything anymore. Why? What purpose does it serve? So some people may use all that leverage as an ATM to buy stuff? While new graduates, nurses, blue collar workers are forced to pay 50% of their incomes on housing? People are absolutely right to express their satisfaction.

#119: All sarcasm aside, the stock market crash is actually good for me. Have thirty years until retirement so I would rather buy stocks cheap now. Sure I lost a little money. It is bad for those near retirement, but too bad for them, why do they need to sit on all that money. Unemployment is good for me as long as I have a job. What do I care if you have a job. Bad flu season is fine as long as I got a flu shot...and so it goes on...

So a bad housing market is good for you? Great! Gets back to my point a long time ago...everyone's opinion is colored by if they own or rent. You rent so you are happy and will find every argument to bolster your opinion and are happy to see it come true. I certainly hope that you and your family find a nice home that you like, but to revel in the decay of the market (bubble or not) serves little purpose.

#119: More affordable housing is not "bad housing." It is a good housing. It is what the government policies have been trying to achieve all along through mortgage tax breaks, loan guarantees, tinkering with interest rates, bankruptcy policies that prohibit mortgage modification on your primary residence, etc. The government did not want a free market in the housing area so it manipulated it. The result, however, is completely the opposite. The housing became all but out of reach for many middle class families. And on top of that now we have to pay huge costs in a form of bailouts to everybody, from mortgage lenders, to mortgage borrowers to secondary mortgage investors to insurance companies. It was never and it is not now a free market. If that's the case then at least I want the government policy to achieve its stated purpose: affordable housing. I am all for it just like I am for national healthcare and affordable colleges. You call what's going on "a bad housing." I disagree.

low fuel costs - good

low clothing costs - good

low food costs - good

low house values - a national disaster

#122...your A, B, and C would be national disasters if people typically purchased _30 year quantities_ as they do for houses with 30 year mortgages. Picture buying your next 30 years of oil at $5 / gallon and then finding the price at $2 / gallon. This is a silly example you made.

Alex is right, and it is good for people who are new grads...but that is it. Any one else, the nurses, teachers, etc it is bad for because they bough and now see the value of their asset decreasing fast. Of course, take a look at the numbers. There are huge disparities between towns. Would like to see some analysis of that! Prices in my town continue and surrounding towns continue to rise. Sure they will fall, but not every town will fall the same.

Merry Christmas!

#123 you miss the point completely. Low housing prices are the solution not the problem. The credit bubble caused the housing bubble. A bum with a 590 fico and no money down could effectively compete on buying a house with a buyer who had 30% to put down with a 750 fico. The bum, with no skin in the game effectively purchased an option. If the property went up in value he can sell or cash-out refi his "profit", if values plummet (as they are now), he walks away completely unscathed. Housing is an expense, just like any other, the lower the expense the better off the consumer is. Are you also a realtor??????

#124 - There you go again!??!?!?!? Anyone not 100% in agreement with 100% of what you think must be a "realtor"!!! Nope. Sorry to disappoint you.

You post in #122 compared costs which are not really comparable because of the way you pay for them. Lower housing costs are generally good. I agree. As with lower heating costs.

However, do you think that every person who bought in the last 10 years was a speculator? A bum? Because if you do, I see where you are coming from. However, most of the people were teachers, nurses, firefighters fighting to have homes for their families. If prices plunge, which they may, who knows for sure, it will be bad for them, I promise. But hey, they were all just bums and speculators so that is why you hope for their ill. Really kind of sad.

#125, please think about this for a while and you will understand. LOW HOUSE
PRICES ARE THE SOLUTION, NOT THE PROBLEM.

Marcus, if you are still here....I didn't cherry pick any years and the data I provided was from US Census data and Freddie MAC...Anyway, as you suggested, I looked into the Housing Affordability Index...From 1979 until 1987 the HAI was below 100 (which is benchmark number)...HAI peeked in 1994 at 143.5...as of Jan 08, it was 141.8..I assume it is much higher in Dec 08...so my point was valid...historically these are good times for affordability...these are not good times for flipping houses...but for liveability, we are not worst off than previous generations

#126. Lets just agree to have slightly differing views. Prices will go wherever they intend to go regardless of our opinions, no matter how vehemently we express them. All you get to decide is if/when you buy a house and what color to paint the walls.