Spring has sprung

This spring will be a crushing bust...

You mentioned avoiding "sites of frenzy", could you give some examples? Is this a per-neighborhood thing or a per-property thing?

It seems to be a per property thing, so far. I saw some really awful, underpriced homes that were swarmed this weekend. I saw a few really nice (and not awfully overpriced) ones that were quiet. Same town. I am hearing rumors of wars and seeing properties fly off the market throughout the area. I AM NOT happy to report this to you all.
If you are a prospective home buyer, you will know it when you see it. There will be swarms of people at an open house. Your job: see the house, ignore the other people. Some of the time there are lots of lookers and no buyers. In that case, you can buy it intelligently in a week or two or three.

Merely as a spectator...we are not looking to buy or sell...we have seen a lot of foot traffic at open-houses and so have our friends. Friends of our were recently out bid (above asking price) for a house in Winchester. They also were at an open house in Arlington where (as they describe it) they couldn't move due to all the people there.

I think these are signs of spring. Whether or not they are signs of a "good" spring ("good" being in the eye of the beholder) is yet to be seen. My prediction, by the way, is that however the spring goes, the bears will call it a "crushing bust" (see Hung above) and the non-bears (as there are very few real bulls these days) will call it a "moderate success". So in a sense, we don't need to wait to see what happens. We could write the spring post-mortem blog already! :)

about to close the sale of our condo - there was a bidding war - we got well above asking price - we then purchased a house for about 100,000$ off original asking price with many extras (like hardwood floors throughout ) (new construction )

"You mentioned avoiding "sites of frenzy", could you give some examples"

Wasn't Newton, sales this week....

305 Winchester Sold for - 512,000

Last sale - 570,000 in 2007

129 Chestnut sold for - 1,850,000

Asking Price - 2.2 million

Assessment - 2,334,300

28 Ober sold for - 278,500

Last sale - 280,000 in 2005

Assessment - 288,200

asking price - 315,000

40 Miller sold for -575,000

Asking price - 740,000

Assessment -675,600

Re Hard Rain/#6:
305 Winchester: Ouch, losing 58k+fees+taxes in 2 years. That's around $2400/month.
28 Ober: Haha, good luck asking for more than 2005 prices.

Hard Rain, you can find and name the short sales 'til the cows come home.
It doesn't help buyers deal with properties that are being pushed to offer before the buyer gets a chance to think straight.
In the past 2 weeks, 256 properties have come on the market in my towns. 80 are under agreement. I hate this. I want buyers to avoid the split-second decision making. I wonder if the sellers at Winchester and Ober bought them in a bidding war. Maybe I'll look it up...

Rona,
I'm confused, what makes you think these are "short sales" ? none of the realtors listing these properties make mention of a short sale.

"I want buyers to avoid the split-second decision making"

Funny, one might think frequent mention of "bidding wars" , Quick sales and tales of inventory being "snapped up" - would by design, encourage just that...

Hard Rain,

305 U:305D (the only unit in the complex on the market) Winchester, Newton has not sold yet. It is under agreement. Closing set for 3/26.

40 Miller, Newton hasn't sold either. It is under agreement. Closing set for 3/23.

So, what are you talking about?

This below article was reported in New York and it should be the same in Boston. As everyone in sales knows, traffic and activity, though nice, does not necessarily translate into a completed escrow. A lot happens between an initial offers, purchase and sales agreements and actual closings. Nationwide, about 20 to 25% of all sales are falling out before escrow and especially in the higher end of the market.

The articles states: Many brokers and developers at new developments across the city report that the number of visitors at weekend open houses has nearly doubled in recent weeks, and that many of them appear to be serious buyers swept back into the market by the scent of bargains. Some attribute the spike to the imminent arrival of spring, while others note that talk of prices declining by 20% and more is finally piquing potential buyers’ interest.

For all the talk of an increase in interest and a looming spring thaw in the market, the vast bulk of buyers are still keeping their checkbooks in their pockets. According to Mike Katz, a broker at RP Miller Associates who markets The Prime, there haven’t been any offers yet. People aren’t jumping in, but they are coming back for the second or third time.

On Tuesday, the Commerce Department said housing construction nationwide jumped 22% in February from the previous month. Despite the surge, construction activity remains down 47.3% from a year ago this time.

How I read this is that there are a lot of buyers who want to see if the sellers and developers have finally faced facts and now realize that the stock market, everyone’s pension plan, consumer confidence and worries about employment, job creation and how the economy will shape up by next year are real and much different that in the prior years. Nearly all buyers are looking for bargains and seeing if homes, which should be between 15 – 20% less expensive this year than last, are finally a reality.

of course the NAR loves to keep the perception of "bidding wars" around so buyers
don't actually 'think" about waht they are doing. Not thinking is how the economy got into the situation is in. My advice is to be be patient, no house is worth stressing out over and over-paying for, because some realtor says
it won't last, or there's another offer. Have a price you are willing to pay and stick with it, always be willing to walk away, don't make it an emotional decision.

We Realtors need to drill down before making superficial claims and have full disclosure with informaton. I've had open houses where over 100 people walked in the door and it finally sold after a 42% price reduction. The odds of selling an open house is statistically less than 3% according to the NAR and most people who attend are just killing time on a Sunday. There was an article in the L.A. news on the numbers of people who go to open houses as their free weekend entertainment.

Hi Everyone! Miss me? LOL

I have to side with Rona here. I've been FLAT OUT these past few weeks. I'm seeing huge bidding wars, properties whizzing off the market in under a week, mobbed open houses, frustrated buyers, *extremely* elated sellers.

Things are going gangbusters here in my home of downtown Boston Proper. It's absolutely EN FUEGO down here!!! Recession? What recession? If this is the Great Depression 2.0, then bring it on. I'm guessing people are realizing that real estate is the last safe investment in these so-called "troubled times" and are bidding accordingly.

Spring 2009 is shaping up to be bigger than ever!!! If you see smiling faces walking down Commonwealth Avenue, it might just be a realtor... or a seller!!

Many happy returns and best of luck out there folks. HAPPY SPRING!!! WHOO HOOOOOO!!!

Regardless of whether these so called sales were short sales, or bidding wars, what they sold for were the market clearing price, and that is what matters. Since it appears that they are still under agreement after all these months, well that is even worse.

I have been watching the Newton market patiently for over 3 years, and under agreement does not necessarily make a sale ( After 90 days, forget about it). Obviously, I have avoided split decision thinking. There will always be another house that comes on the market that meets my criteria that is bigger, better, nicer, and more realistically priced. In the meantime, I am enjoying the open houses, and yes, I am a serious buyer.

Spring is the time when NAR and MAR discover that more people bought houses during the first nice week in March than during the week between Christmas and New Year's, and proclaim a rebound in the housing market. Spring is the time when sales plummet by a quarter or a third from the year before, and the Globe's headline writers busily scribble month-to-month data in 72-point type.

Get busy, people. It's a feeding frenzy out there. Multiple offers, bidding wars, Arlington's immune, and the market is hot, hot, hot. Buy now, or be priced out forever. You'll want to redo the kitchens and baths, of course.

Rona, the problem is not finding suckers who will overpay. The problem is getting banks to finance the suckers. Let's see how many of the 80 deals that went under agreement in the past 2 weeks actually close.

As for the spring selling season... The events that will unfold as the bubble bursts are clear. The timing is less clear. Boston area house prices are still 30-40% too high based on fundamentals. Smart sellers know this and will do whatever it takes to sell quickly. (The really smart sellers have already sold.) Sooner or later there will be a tipping point where panic selling and capitulation take hold. That's when things will get really ugly. Whether this happens this year or next year is anybody's guess. But as far as price reductions are concerned, we ain't seen nothin' yet...

Lance: "Boston area house prices are still 30-40% too high based on fundamentals."

Can you support this? Which fundamentals? Monthly expenditures as a percent of mean monthly income? Mean annual income to price? Rent vs buy? Which fundamental is yours of choice?

Please, I am not saying you are not correct, but I am curious if any or all of the above are correct? People keep saying that 3.5 x salary is the magic HIGH water mark. However, I have yet to see any compelling data that it has been at that level for any sustained period for the last 30 years. Please, and I mean this, enlighten me! With apologies to Jerry McGuire...show me the data! :)

How does one trust a RE Agent informing verbally that there is a bidding war? How does one know whether the RE Agent is really informing the truth or really fabricating the information?

We went through the sub-prime downturn, we're in the middle of a period where many 3 year adjustables are relocking at much higher rates and due to many different circumstances, can not be renegotiated. For instance, the home was purchased in 2005 or 2006 and it lost a great deal of value since then. The seller can't make up the difference - with cash - to make up this difference to get them to having at least 20% equity to satisfy the bank in order to do a refinance.
We are about to enter the period with all of the sellers (who again, overpaid these past 5 years at the height of the market) and those loans are going to relock.
We are also entering a period where foreclosures are going to rise. All of this spells a lot of trouble for people buying this Spring. They should at least wait until the Summer to see how some or all of this shakes out.
This is the wise, prudent and sensible thing to do. There is no rush to buy, as the market has not returned to the hot market it once was. There will always be another home and another seller who will need to sell in the immediate future.
Why rush into the largest investment of your life when all indications (from the White House to every leading economist) that the economy will get worse before it gets better.

Markel is filling in for Sunshine and Lollipops this week while he's on vacation :-)

You are missing my point. I do not want my clients participating in bidding wars. I am saying it is a bad way to buy a house and it should be avoided. To buy, you need to have a clear head. This buying under pressure is folly in any market.
Why can’t you read? I wrote:

What I hate is the hurry-up. It works against you as a buyer, so avoid it as much as possible. Here’s the advice:
Avoid stress by avoiding sites of frenzy and by being financially prepared.

It is a disservice to the buying public to read here, over and over, about how nothing is selling and there are houses sitting around begging for buyers. It is not true. Anyone who is house hunting near Boston knows it isn't true. If you are farther away from Boston, things change. There are also houses that are selling for a loss in every town. In those cases, the current owner paid peak price and is experiencing the decline.
(Hard rain, I said "short sale" when I should have said, "selling at a loss.")

BV: Let me start with an obvious caveat. Real estate is a local business. Every town is different, every neighborhood is different, and every deal is different. The numbers below are not Gospel. They are rules of thumb dictated by common sense and historical precedent. There will be exceptions. I would very much like to include links in this post which contain further detail. But the moderators on this site censor links to external content. Look around yourself. There is plenty of info available from objective and reputable sources to support my logic.

All that said, here are my basic arguments for why the Boston market is still overvalued:

1)Access to credit: In the past 10 years, inflation-adjusted home prices doubled. Population stayed flat, and inflation-adjusted household incomes dropped slightly. All the while, nothing really changed all that much in Boston that made it a better or worse place to live (more on this point below). The only variable that did change in the past 10 years was access to credit. Financing was ridiculously easy to get and this led to bidding wars, speculative mania, delusion, media attention, and all the other hallmarks of a “bubble” market. But the credit party is now over and price levels will return to where they were before the bubble. This is how markets work-- a correction is inevitable. Even adjusting for 10 years of inflation, we need to see around a 50% fall from the peak to get back to “normal”.

2)Median home price to median household income: This varies town by town and has been discussed in detail elsewhere. Very generally, a typical ratio in the Boston area is still in the 5-6x range. Historically the numbers have been in the 2.5-3.5x range. Again this implies over valuation in the neighborhood of 40-60%.

3)Price to rent: This is more useful for valuing certain property types than others. I'll let you crunch the numbers yourself for your particular neighborhood or property type. But I will say this, price to rent multiple still ludicrously high compared with historic levels. And practically speaking, it's still very hard to find deals where a landlord can earn what has been historically considered a fair (8-10%) cash on cash return without factoring some absurd assumption for capital gain on sale. As for the numbers, last I checked Boston area Price to Rent was still more than 20x, compared with 24x at the peak, and a “normal” ratio of around 14x. You can read what you like into this, but to me prices are still way too high relative to rents. How high? From peak (24x) back to normal (14x) we would need to see a 41% decline in prices.

4)General economy/reverse wealth effect: The stock market is down. Employment is down. Consumer spending is down. We are in a severe recession (possibly a depression). All this will continue putting downward pressure on home prices. We will probably see prices dip below historic levels as markets tend to “over correct”. This implies even bigger short term price drops than described above.

5)There is no engine for economic growth: What economic forces exist for driving growth in the short term, other than inflation? Government “support” is equivalent to printing money, which is the same thing as inflation. So forget that one. I'm talking about real growth in jobs and productivity that will lead to a sustainable growth in household earnings, population, or standards of living (thus desirability of living here). I'm not saying Boston isn't a great place to live now. I'm simply saying that it isn't materially better now than it was 10 years ago, and it isn't materially worse now than it will be in 10 years. Boston is Boston. I invite people to challenge me on this point. Show me anything-- except “smoke and mirrors” government plans to inflate our way out of this mess-- that is putting upward pressure on house prices in the short term. I'm listening.

Again, let me restate my calculations above are not exact figures. But they are based on common sense, and are in the right ballpark. People who claim prices will stabilize soon (after a 15-20% peak to trough correction) are delusional. We still have a LONG way down to go. Caveat emptor.

Lance: Agree with much of what you say, especailly with the health of the overall economy. What I am lookking for is data to suggest that 3-3.5 x median salary is historically relevant in Boston. Over the past 30 years (lets got back to 1979), how many years have seen median prices in that magic spot? I don't know, but I would like to know. Are we saying the economy needs to revert to the 1950's?

My other question is what are the current ratios? YOu say it is 5-6, but that seems high. What rare the actual numbers.

If everything is as you suggest, then I agree with you.

Lance: I agree with most of what you said. And since I am looking to buy a place in Cambridge/Somerville area I hope to see those drops sooner than later. However, you asked about upward pressure and I think there are some in the area.
1) There's not a lot of great supply here. That is there are a lot of old fixer uppers on the market but very few new or gut renovated places. So I can see prices on the fixer uppers go down but because there are few "good" places I think there is and will continue to be a lot of demand for those.
2)Steady supply of college students (which may increase as college try admit more students at full tuition to get more money) will keep rent demand high.
3)Low interest rates. As long as they remain in the 4.5 to 5% area, prices won't fall as fast.
4) Government printing money. They just put 1 trillion into the economy. What's to stop them from printing another trillion? Of course they'll fear massive inflation, but right now they think they are fighting massive deflation (instead of viewing it as as a market correction).

Also, I've noticed that there seems to be less foreclosures/short sales in the area than most everywhere else in the country. Not sure what that says but probably part of the reason prices are holding as they are. It could also be that many have not hit the market yet.

BV: Here's a summary. Sources are: 1) The S&P/Case-Shiller Index for Boston, and 2) the U.S. Census Bureau's table of median household income for Massachusetts.

1975-83: Ratio was steady at around 2.6x
1984-87: Ratio climbed steadily with real estate bubble. High of 4.4x reached in 1987.
1988-98: Ratio fell to 3.3x in 1990, and remained flat through 1998.
1999-05: Ratio climbed from 3.3x to 6.5x at the peak in 2005.
2006-08: Ratio has since fallen to 5.2x (current based on late 2008 sales numbers)

I personally think the “right” number is probably around 3.0x. Whether it's 2.6x or 3.4x is a subject for academic debate. But it's definitely not 5x or 6x.

Another interesting exercise you can do yourself... Take a hypothetical household that earns say $100k per year, and see how much house they can afford at prevailing rates with a conforming loan and traditional 28/36 affordability tests. With reasonable interest rate assumptions (note: I do not consider the current heavily government subsidized rates “reasonable” or sustainable) you will see that household can afford a house that is around 3x-4x their income. Not more.

Lance, if as you say the government plans to inflate our way out of this mess, wouldn't buying a property as a primary residence with these historically low interest rates be a good move? Rather then watching inflation drive up the cost of renting?

One thing people miss is that buying a home for the long term is an insurance policy against inflation and gives you a cheap place to live at retirement when you pay off the mortgage in 30 years. Rents more or less go up with the rate of inflation whereas a 30-year fixed rate mortgage payment stays the same. Of course you never want to overpay for a place and a prolonged period of deflation will leave you in a hole. But inflation is a real risk that many people consider when buying and one of the main reasons people are willing to pay more a month for buying then renting.

CambridgeLandlord: Great points. Over the long term, real estate is an excellent inflation hedge. I do however disagree with you on timing. Prices will drop further in the next few years (see post #23). So why pay full price today when you can wait a year or two and purchase an equivalent property for 50-60 cents on the dollar? What's the rush? The government incentives for buying homes (interest subsidies, favorable tax treatment, etc.) will only get better as prices fall more. When cap rates on rental properties hit 10%, that's when it's time to get serious. Until then, cash is king.

Sally,
"305 U:305D (the only unit in the complex on the market) Winchester, Newton has not sold yet. It is under agreement. Closing set for 3/26.

40 Miller, Newton hasn't sold either. It is under agreement. Closing set for 3/23.

So, what are you talking about?"

Both deeds were executed on 3/17

, so what are you talking about?