A California-style price collapse here? Dream on

SO we pretty much have no chance of anything actually becoming affordable. sigh.

While I agree with the premise that falling prices will probably be as bad here as the will be in California, for exactly the reasons you state, my problem with the theory of only a 5% decline is that looking out I see only negative indicators.

1. The area is still shedding jobs (maybe a few less then last month, but slowing losses are not growth). Even if we were to start adding jobs next month (which is almost impossible), during the downturn in the 90s housing prices continued to fall years after unemployment "turned the corner"

2. Rising interest rates. While we may see sub 5% interest rates again in the near term, going forward federal manipulation of then rate market will fail and rates will have to be allowed to rise a natural level. Thats going to have an impact on affordability. And unless you believe that the current sales are all cash offers, a house that sold in April for X with in interest rate of 4.5 is not going to sell for x at an interest rate of 6.5.

3. Continued difficulty in obtaining loans. While we are still hearing about 3.5% down payment loans. I've seen an awful lot of of houses going from contingent back to active recently. (I certainly don't KNOW that this is because financing is falling through, but it seems the most likely to me). And this is not going to change we are never going back to the days of 80/20 5 balloon mortgages for everyone with a pulse.

So where is the disconnect? For one the market in California hasn't hit bottom yet. For another these a lot of space between our current 20% + 5% and 50%. We could have an additional 20% from here and still end above California. Beyond that I just don't know. But I don't see how you can connect the facts at the beginning of the linked prediction with the conclusion at the end.

Scott- Why did you select California out of the the other 49 possible states for comparison? Why use a fixed percentage drop as the metric for comparing the two states? Those both seem arbitrary to me. I would instead recommend looking at the historical Case-Shiller plots for each region separately, and each region will have its own degree of bubble and projected correction range back to the historical normal inflation-adjusted growth line (say extrapolated from around 1997). The rate of the correction will be different for each region, and the amount of correction will be different for each region.

It's not about how many houses there are, it's about how many buyers there are. When jobs are lost and incomes decline, people have to sell, and drop the price until they do or until the bank takes it. Housing prices in all areas are headed down faster and faster and there is not anything to stop them in place.

forget California, think Japan in terms of the depth and breadth of this correction...

I sure hope it happens. Housing is absurdly over valued. People shouldn't be paying 10X or even 5X their income to buy a place. Here's hoping for a drop of AT LEAST 50%

Why does there have to be a Hendry Street in a suburb-situation for prices to fall 40-50 percent? I can show you endless average properties (ex. 1350 sq ft ranch in Dedham or W. Roxbury) that doubled in value within 7 years, so why can't that "value" fall 50% now?!

Quote "Our foreclosure problems are tied mainly to lower-income neighborhoods that were preyed upon by subprime lenders – not to vast tracts of new suburban housing."

I don't buy this assertion (I don't care that there's no data offered, cause I don;t have time to dig up any either.) I guess the key words there are "mainly" & "new"... you're right, but you're wrong. There are plenty of people who were prime borrowers who bought existing housing stock, or who refinanced one they'd owned for a long while, and now are looking at tough times keeping the house, or managing to move unscathed. I know some of them.

So just because there are CA-size amounts of new housing with lots of low-income people who bought them does not mean the downward pressure on prices is going to stop.

I'm not sure it's so simple to compare our older remodeled homes to those that are new in California and then say we're not having their price declines. My experience has been that consideration is not being given to the cost of many of these remodels that have happened within the last couple of years. Whole house remodels are expensive and not everyone wants an ikea kitchen; yet many house prices are just not reflective of the true COST and (should be) value.

I know buyers want a deal, but I hear from realtors that buyers also asking for "updated and move in ready" at 2003 prices. I've spoken to more than one listing agent that candidly said they discourage the expense of updating to sell given the mindset of many buyers - and herein lies a big problem because sellers can only give so much, with buyers still asking for more; of course that leads to longer DOM and eventually lower prices.

LOL. Like anybody's going to bother to respond to these posts anymore, when boston.com can't be bothered to moderate them. Yeah, that's the best way to avoid getting hit in a layoff: stop doing your job.

The only comments that get through are complaints about slow moderation, so I expect this one to go up right away.

There's a very big flaw in your argument: You say that the difference between CA and the Boston area (which is already a weird comparison, since one is a state and one is a city) is that there was a huge buildout of new housing in CA. That may be true in Sacramento or Fresno, but it's not true in the Bay Area, where you acknowledge that there was a 41% price drop. The Bay Area, like Boston, was already very densely populated, and didn't have much room for new development. If it can happen there, it could happen here.

There is an impending collapse in the pharmaceutical/biotech industry still to come (from patent expiration). The so called "giants" will lose so much in profits they will be a fraction of the size that they are now. This will put a lot of people making six figures out of work, and the work will never return for them.

I wonder whether the large difference in foreclosure rates (and thus the differences in price drops) between CA and the Boston area lies in the ability for CA borrowers to walk away from their mortgage without being liable for the remaining debt (CA is a non-recourse state). Since MA is a recourse state, borrowers are still on the hook for the remaining debt after they foreclose. As a result, MA borrowers are less inclined to walk away and foreclosure rates will never get to the point they are in CA. For the experts out there, does this argument make any sense?

The point Scott is trying to make is that the markets in MA and CA are different. And for a variety of reasons, prices here will probably not get hit as hard as CA. I agree.

But don't overlook a critically important point-- although prices in CA have already fallen 50%, they have not hit bottom. They are still falling fast. And unless the CA market turns on a dime (very unlikely) then prices will continue to fall for some time. In short, CA could easily see peak to trough correction of 70% or more.

So will price declines of this magnitude happen in MA? I doubt we'll see 70% peak to trough, but I expect we will see 50% when all is said and done. Maybe even more. Regardless, prices have a long way to go before they reach sustainable levels. There will be further price declines, and they will be substantial. I see no way around this.

Buyers beware.

Perceptive Listener - I doubt it ever makes sense to update to sell, when most valuations show that you will not recoup 100% of the cost of a renovation. The estimates I've heard are always you can plan on recouping x% on different improvements (60% on a kitchen, 70% on a bathroom ...). I'm sure there are exceptions to this rule, taking a clearly distressed property and getting it into move in condition is probably worth while but updating an ugly kitchen? I'm not so sure.

As far as buyers expecting 2003 prices and move in condition, most of the statistic show that the house that actually sell have reverted to 2003 prices. So assuming that most properties that sold in 2003 move in ready, it seems like the buyers have a reasonable expectation.

wondering (#12): You are correct and your argument makes sense. However, one thing to keep in mind is that lenders usually only come after deadbeat borrowers who have assets that can be recovered. They will generally not come after borrowers who are broke because it's not worth the expense. In short, the fact that MA is a recourse state will do little to stem the tide of legitimate foreclosures (because the borrowers have no money left). But it will certainly make "jingle mail" a less attractive option for otherwise solvent borrowers who are underwater on their homes and looking for an easy out.

W, I'm not talking about major updates to sell now, I'm thinking more along the lines of those that have been completed within the last couple of years for the daily living enjoyment of the current owners. So, if for example you look online to see that a seller purchased their house in 2006 at $300K, but now they're asking $350K, you might think along the lines of "reality check, please, we're in a declining market". In reality the seller may have spent much more than the $50K they are asking and in fact are willing to take the hit, but not entirely, because the buyer is after all getting a renovated home at a portion of true cost.

Re: 2003 houses being in move in ready condition - they were in 'move in condition' for that time period, which is clearly not today's move in condition. I spoke with 3 different brokers today and all of them said that in our area the only properties that are moving quickly are previously updated and move in ready (sometimes generating bidding wars) or deep discount.

There is an impending collapse in the pharmaceutical/biotech industry still to come (from patent expiration). The so called "giants" will lose so much in profits they will be a fraction of the size that they are now. This will put a lot of people making six figures out of work, and the work will never return for them.

Why do we keep having the same discussions over and over again?

The reason home prices are falling more in percentage terms in California is because home prices rose more in percentage terms. This is 5th grade math.

If lack of land drove home prices, Massachusetts would have seen a bigger boom than places like California, Arizona and Nevada where land is more plentiful.

First, spare me the rhetoric that anyone was "preyed upon" by a lender. These are the same folks who whined about red-lining for years...

More to the point, I think it is impossible to have a discussion on home prices without looking at the ratio of average selling price vs. average household income. I believe this ratio remains grossly out of whack in MA which implies that further steep declines are quite possible.

There are many other factors as well - high unemployment, declining population in MA, a demographic shift as boomers retire and sell their homes, higher interest rates (imho we have seen the last of sub 5% fixed rates) and significantly higher tax burdens as federal, state and local taxes have to rise dramatically to fund excessive spending... all of these can lead to continues price declines.

In reality the seller may have spent much more than the $50K they are asking and in fact are willing to take the hit, but not entirely, because the buyer is after all getting a renovated home at a portion of true cost.

No. You may be accurately pricing in the cost of the reno. But you have to remember that the underlying house was overpriced to begin with, even in 2003. Both the reno and the house are components of the asking price. Sellers do not seem to understand that the fall in home prices now more than outweighs the added value of new kitchens and baths in many cases.

Perceptive Listener - I see what your saying. Although I'm not so sure that the 2006 price plays that large a role in a prospective buyers mind. I think a buyer who's paying attention will have a pretty good sense if 350 for a nicely update property is a good value in that location or not. And based on what I've seen if it is it will sell quickly, if it doesn't sell then it was probably overpriced.

And to Marcus's point lets say that your example hose was 300 in 2006 and they put in 100k in renovations.
300k ( 2006 price) + 100k (reno) = 400k
400k - 20% discount from peak = 320k
which leaves our example house 30k overpriced.

As a California Realtor, when I see reporters from different States writing columns about "The Bay Area" or "California" Real Estate prices, I shake my head.

The "Bay Area" is very diverse. Pacific Heights, Russian Hill, Noe Valley, Marin are all 2X or 3X Weston/Lincoln prices. Add in Atherton, Old Palo Alto, Los Gatos, Woodside, Portola Valley, Los Altos Hills and you are minimum 2X, usually 3X or 4X Wellesley/Weston/Lincoln prices. Newport Beach, Corona del Mar, Holmby Hills can be 3X+ prices in your area.

The equation changes if you factor in Oakland, San Leandro,Freemont et al, as they are much lower in price, but can be on par with a Belmont or parts of Newton, for a older home in a not so great neighborhood. Piedmont is a section of Oakland and can be 2X Wellesley prices.

Sacramento, Bakersfield, Fresno, Stockton, or Merced is more like Phoenix, Las Vegas or Florida, where you had unlimited land and unlimited building. Those areas have really tanked! Keep in mind that California has 7X the population of MA. and 16X larger in land size, so you need to be extra careful when making comparisons with real estate prices. Out here, prices are all based upon location, location, location.

In nominal numbers, you will only see about a 25-30% decline (which you have NOT seen the bottom yet). The bout of deflation on the horizon will push on many in your area around October-November; forcing many on the edge into heavier credit card debt. The rollover will between 2010-2011 and inflation will then move up rapidly forcing debt levels to exceed many peoples threshold as they desperately try to refinance. This goes doubly hard for businesses which the 2nd wave of option resets will spread across evenly. You need to remember many did not refinance until 2006-2007.

Until you price in the impact of unemployement, the numbers will appear to not add up; which send ripples up to 18 months after the job reports.

The 25-30% nominal decline that Dave F mentions is a reasonable benchmark. Many of the communities in Maine I work in have already corrected to that price level. Although in a recent "NY Times" article even Robert Shiller is hesitant to put a cap on where price declines will finally settle.

The US Senate is taking another run at a $15,000 tax credit for an expanded group of homebuyers. My take is they aren't satisfied that the $8,000 first-time buyer credit is meeting expectations.

Sen. Isakson from Georgia reports on his website:

“The first-time homebuyer tax credit has made a difference. First-time home buyers used it and the market stabilized, but we don't have a recession in first-time home buyers. We have a recession in the move-up market,” Isakson said. “One of the biggest problems facing the American people today is an illiquid housing market, a decline in their equity, a decline in their net worth and a depression in the housing market that we are obligated to correct if we possibly can.”

The illiquid housing market that Sen. Isakson refers to is clearly a threat to the broader US economy. If a job or retirement opportunity opens for a consumer in Florida, but he or she can't (or won't), sell their home in Boston or New York - we're all stuck deep in a rut.

I think some types of houses will drop more than others. Due to the fact that the most prepared buyers are going to be those who are not yet homeowners, I would think that starter home prices wont fall as much as other homes. If you have to sell your house (which may have lost value) in a declining market to buy a bigger better house then those types of homes are going to see bigger declines. This is all speculation on my part. I just figure having to sell is just another major obstacle in the face of those who would be moving up.

Right on, Mike the Realtor! California is a huge state with many different types of cities/towns/suburbs. Most of you commenters have forgotten that real estate is essentially local. Currently my partner and I are looking for a house to buy in a university town in northern California. We have been told by our realtor that prices have hardly dropped at all, as demand exceeds inventory in that community. There are virtually no foreclosures in the town, she says. In a much larger community only 12 miles away, there has been a huge drop in prices, with many foreclosures and short sales, but we don't want to live in that city. In spite of many comments about declining prices in "The Bay Area," we cannot afford to buy there and must look for a house far outside its boundaries. Prices in the nicer areas of San Francisco and environs make Boston and its suburbs look like shanty towns.
Don't make generalizing comments about things you know little or nothing about!

Like the old Wall Street adage, the market can stay irrational longer than you can stay solvent, the real estate adage could be, prices will not stop falling where you would like them to stop (if you're a current owner that is).

CSF (#26): Why not rent for a few years? Prices are certainly headed lower and you'll get to learn the area thoroughly before you commit. Just a thought...