Boston, epicenter for the next housing bubble?

is anyone really suprised by this? A whole gaggle of us here have been calling for this for over a year now. Most of the bearish arguments here have been based on factual data and common sense, apparently something govt. and the media do not have access to.

Hung, it clearly could not have been common sense . . . ;-)

I am slowly moving my housing bear viewpoint to agnostic . I expect significant future inflation and housing is an OK store of value after the market prices in expectations.

However, any asset class produces better returns when you buy after the recovery starts rather than buying incrementally on the way down.

Why does the fact that there are higher prices here mean it's a bubble. It's based on demand. Boston is a very desirable area. Just because someone cant afford to buy here doesn't mean that the market should bend to their level of affordability.

5 year Option ARMS and Neg AM loans that were written being between 04 and 07 are now just starting to come due..and it will make the sub prime collapse look small. $750B in these loans are coming due over the next 3 years. These are the white collar guys who bit off more than they can chew. Wait until the next wave of foreclosures hit...TIMBER!!!!!

The Boston housing market needs to crash. I sold my 1-bedroom, 700 sq ft condo in a Boston suburb for $150,500 in 2002, and it sold again for $190,000 a few years later. That is ridiculous! How can young professionals in their 20s and 30s afford to live anywhere near town at these rates? The high price of real estate is driving away talented young professionals to parts of the nation with strong job markets and lower cost of living. Even with our great universities churning out new talent each year, we will never be able to retain that talent if they can't afford to live here. Time for real estate values to readjust!

How many people are going to notice that at the end of the article the guy says what is actually most likely to happen is more years of tough times in our housing market? This is presented a bit oddly.

Hung, you've been calling for another bubble for a year now? You do realize, that a few things need to happen before we get into another bubble, not the least of which is a recovery? These things will take a minimum of 10 years to occur.

Martin, a 25% gain over a few years is "ridiculous"? Lets assume that by "a few years" you mean 3 years, for sake of argument. That's a 7% annual gain. Hardly ridiculous. However, it is atypical. Housing tends to track the inflation rate, unless you look at an area where there is a supply/demand imbalance because the are is already built up. Say an area like Boston.
I actually agree that home prices in metro Boston are likely to price out a lot of first time buyers, but not at 200k. Try 800k before people get priced out. Culture is likely to adapt before economics does. So we'll all stay in apartments until marriage, and some of us will live outside 495. Wages aren't likely to compensate us for the increased desireability of our preferred locale. However, people who can afford to live in eastern Mass will ensure local prices never suffer a Florida or Nevada.

Things look good right now because the Bank are curtailing the supply of foreclosures, but.......

Lets get real about this;

The housing bubble in Boston is on advanced life support by the government. Interest rate will rise , unemployment is growing, and the $8000 tax break will end at some point.

Once the plug is pulled, the party is over. Housing needs to align with what people can afford.

Megan, people have said the same thing about San Francisco, Las Vegas, San Diego, New York, London, the list goes on. All markets will revert to the mean,
demand was artifically induced via stupid lending polices. Easy credit is long gone, the job market is in the tank, and very few people have the ability to qualify for financing. Low home prices are the solution, not the problem...

"Low home prices are the solution, not the problem..." Hung Wang

You must be a renter.

No. It's not the epicenter for the next housing bubble and here is why...

People who buy condos and houses in Boston (not the suburbs but BOSTON) are not using their own money; they are using Mommy and Daddy's money. Wealth through inheritance in Massachusetts is a pastime. And there simply is not enough supply in Boston for all the people who grew up in the burbs and are looking to purchase in the city.

They didn't make any more land during the housing boom .... and they sure as hell aren't making any more right now.

Gloom and doom = eyeballs. And everyone is right about half the time, anyway.

Hmm... Years of stagnation... Shiller is a smart guy but I would read the last lane as more realistic then the rest of this article. If you can/need to buy now and can support it knowing that In all likely hood economy will stagnate for years at the best and may go down again under the weight of the Obama spending then do it. The rest keep your money dry until the dust settles... which will be a few years down the road.

This is getting tiresome. Home prices in Boston did not go up as much as Phoenix, Las Vegas, etc. so they have not fallen as much.

Bubbles don't re-inflate. There has never been a bubble that has re-inflated. Dutch tulip? Nope. South Seas? Nope. Nifty Fifty? Nope. NASDAQ? Nope. Nikkei? Nope. That's just how bubbles work. Too many people get burned and they don't want to get burned again. Shiller is smarter than this. I'm shocked to hear him talk about a new bubble in real estate

I agree that we might see nominal price gains in housing as politicians and central bankers around the world race to see who can debase their currency quicker, but real prices will continue to fall.

Please take the "their not making any more land" nonsense to one of the other boards.

1. Since when should one have to be a pair of yuppies to aford a house (or condo)in Boston? Ridiculous proposition. Housing is a necessity. THe folly of recent years is turning it inot an "investment". Housing costs should be such that ALL the people who work in Boston should be abel to afford to live there.

The idea that everything in life should be a cmmodified "investment opportunity" is completely ridiculous, and THAT is what has caused housing, healthcare and education to become so unafordable for so many.

2. Tax the h3ll out of short term "real estate investments". Put mortgage sellers in jail if the bait and switch, or concela the true costs of a mortgage. That kind of shenanigans was a big part of the financial crisis. Make second houses very expensive by taxation.

3. TO bring down the cost of houseing, tax wealth accumulation like we did when we had a truly soundish economy in the '40s, '50s, and '60s.

4. RENT CONTROL. It's called "real estate" for a reason. THat means it belongs to the king, not to you. Land is NOT personal property. In this country, the King is We the people.

Megan (#3),

I think you bought into the "myth" that Boston is a desirable area to live in.

Go anywhere in the country and ask them their top ten cities to live, and I doubt you'll hear much of Boston on that list.

It's just a myth that is propped up by people saying that we have great universities and hospitals. Well, that's great, but for most of us that are out of college and do not have cancer, it doesn't really matter to us. Additionally, there are good schools and hospitals everywhere.

Another "myth" is that salaries are somehow much higher here than other areas. Also not true. Sure, the "average" might be higher, but that's also probably because there are more "white collar" jobs and higher paying specialty professional jobs. But I know with my job, I could take it and go anywhere in the country and make the same amount if not more.

I am 29 and I certainly don't want to purchase some crap condo in an "up and coming" (meaning a seedy, crime infested) area around here, so the plan is to move out of state by next summer. It's either that, or move to a far out suburb like Westborough and then join the rat race and sit in traffic for two hours per day, which is not my ideal lifestyle.

I don't understand why people keep saying that Boston is "desirable". I'm here because I was born in Massachusetts, but now I finally see that it's really a mediocre place. Heck, how many people do you guys know that are in their 20's or even early 30's and still live at home to "save money"? Yea, saving up to buy an overpriced condo in a mediocre city with good sports teams and bad weather? Come on! Unless you go to college, what's the point? It's just like any other mid-sized city if you take away the colleges.

Nobody said that condos, houses, etc. should be turned into investments. But prices are driven by demand and housing inside of the city is in high demand. If the wealthy want properties they will outbid others and drive up prices. Why is this not fair? People can buy and live outside of the city and commute.

Fredbob:
You're getting close. One of the most underreported contributors to the housing bubble and its "commodification" was the revised tax treatment passed in 1997 for housing which permitted tax exemption for a married couple of the first $500,000 in profits if the house was owned for a minimum of two years. So this was the perfect storm of tax exemption plus lax lending standards compounding the problem. We will never let all the gas out of the bubble until this exemption is eliminated. What other "investment" enjoys this kind of special exemption.

John,
You are right about bubbles historically never reinflating. However, there is an unprecedented effort to try and reflate this bubble. I think it will be inflationary. Imagine if, in 2000, congress passed a bill that said NASDAQ will be free of short- and long- term capital gains and the US government will give you $8000 tax-free loan to buy NASDAQ securities.

sorry Bobby Jones, I own nine properties, all unencumbered.

wow, some of the stuff up above has me banging my head on the table. Impressive. Someone actually said "They aren't making any more land". Of course, (bar the dutch) that's been true for all human history... doesn't seem to have mattered so far. Perhaps it doesn't matter?

As to support of rent control, that requires an awesome amount of ignorance to support. (and yes, I live in a rental apartment) Read Paul Krugman's great piece on it. (He's not exactly known for being a right-winger).

#20. I agree that we will see massive price inflation at some point in the not too distant future. The monetary inflation of the past 12 months has been unprecedented. Where that price inflation manifests itself is yet to be seen. My guess is foreign stocks, commodities and precious metals. I just don't see the inflation manifesting itself in real estate to a degree where we get real gains. A 5% yearly rise in real estate prices will be insignificant if the price inflation level for everything else is 10%.

I'm starting to think someone got to Shiller. I just saw an article where he is calling for a second stimulus and he says that concerns of government debt are premature. Come on Robert, there's no free lunch. The road to prosperity is not debt and consumption, it is savings and production. Not sure how Shiller can say that a $55+ trillion deficit that we can never pay back (without inflating it away) is of little concern.

"Someone actually said "They aren't making any more land". Of course, (bar the dutch) that's been true for all human history... doesn't seem to have mattered so far"

Not true Charles, how about Dubai, Hong Kong, Singapore? A number of places are creating more land. There's talk about a floating "city" being built off the coast of San Francisco. Oh, and let's not forget about a little neighborhood here in Boston called the Back Bay - man made if I recall.

Hung (#21) - Wow! You own 9 properties free and clear, very impressive. I will assume that you don't actually live in all nine and therefore consider 8 of them as "investments". No wonder you seem so testy lately, taking what I suspect is at least a six figure hit on their real value over the past year or two. Cheer up, as you so often say, values may come back......in ten years or so.

Max, excellent point! And as Hung is so fond of saying, no place is immune from this downturn - not even the most affluent cities/regions in the world. So I suppose he can't come back and tell you that somehow he's miraculously dodged massive losses on all these so called properties.

Max, that is a very important point. When you are unleveraged, and your properties are generating income (and you intend to hold onto those properties), you don't care what happens to the values. When leverage is involved it changes the whole dynamic. That is what's making this correction such a big deal. Not only have people paid top dollar over the last several years (fyi, my last acquistion was in Turks & Caicos in 2003, the majority of others were pre 1997), but they have levered up more than ever before.

Hung, I do agree with your statement that if you intend to hold on to properties for an indefinite period of time, you are not as concerned about the interim loss of property value considering History's trend of up's and down's. Just like the young family who just plopped down $300K for their dream home with the intent to stay put until the kiddies are off on their own (in 20 or 30 years). But I am sure it still hurts just a bit to loose that much money, even if it is just on paper. And I am also sure, in the long run, you will make out just fine.....now, I have this beautiful little atoll off the coast of Venezuela near Margarita Island if you’re interested. Cash only.

I am tired of people dumping on Boston. If you are so miserable, move somewhere else. An earlier article this month challenged folks to come up with their perfect day. Someone's perfect day was packing up a Uhaul and moving away. Move already. If it is too expensive, go somewhere else. I would be curious to get the list of top 10-20 cities in the US that don't include Boston.

As soon as people remember houses are to live in with a mortgage payment they can afford for the duration of the mortgage period rather than a speculative investment, perhaps the bubble bs will end. A number of houses are well overpriced, but renting isn't that cheap either so after some period of time the loss in value is matched by the loss in rent paid. With the transient nature of a college town, I would think there will always be a strong rental market which would in turn support the real estate market as well.

Hung Wang, excellent point. Massive leverage, coupled with massive debt levels are the problem and the reason why price declines negatively affect so many people.

It's the same way with stocks. If you own dividend paying stocks, you really don't care what happens to the value of the stock. What matters is that the company continues to pay a dividend (which increases to at least pace price inflation). If you are buying stocks on margin, well then you can quickly get wiped out when prices fall.

everyone seems sort of morbidly happy that we are in this awful recession and that maybe it could get worse, or they just want to maybe sound smart and say i told you so....

#31. No, not happy. We just understand that an awful recession which will get worse is the only way to correct the imbalances in the economy. The sooner we let the correction run its course, the sooner we will be back on the road to recovery. The longer the government attempts to re-inflate the economy, the more painful the future crash will be.

#15. For those that can't understand the whole price increase versus price decline, Google "Housing Happiness" and watch the video.

Exactly, people who purchased in Boston the last several years canot generate income (rent) to cover their expenses, that is why people are in trouble if they can't cover the costs from the earnings.

I looked at two 2 bedroom properties in the North End/Waterfront areas in the last year, in the $700 & $800Ks respectively. The PITI for both would have been $5K+ but the rents would have been in the mid $3K's. So I'm asking the Real Estate bulls why would someone put down a six figure downpayment (when that could be invested in other areas) and buy a condo when their carrying costs would be $1,500 - $2k more than if they rented?

sher

C'mon Ken it is human nature to enjoy this. Everyone loves a good train wreck...

For me, and I guess a number of others around here, analysing things is what I do, and how I make money, and its actually lots of fun.

Ironically, people used to get on my case in the mid 90s for constantly telling everyone I met they should buy Boston real estate. Now I get guff for telling people not to buy. I don't actually care if the market is up or down - I'm happy to take a position either way. I just care how accurately priced the market is.

Seems Mr. Shiller's firm recently introduced two derivative investments, Major Metro Up (UMM) and Major Metro Down (DMM) that essentially work like real estate market index ETF's. Might he just be pitching these two investments under the guise of market analysis?

1st – The Bad News: The next bubble won’t be in housing, Boston, or/ and in America, PERIOD. The Good News: It will be in commodities, Middle East, and in Brazil.
2nd – The Bad News: Economists are lunatics. The Good News: Economists don’t build bridges, Power Plants, and they didn’t build your home… hopefully.
3rd – The Bad News: This nation and Boston economies are down the toilet. The Good News: You know it now.
4th – The Bad News: The life standards in America are in decline and for good. The Good News: There is noting that you can do (Unless you invade Canada and Mexico to steal from them)

Good Luck Investing (but please, not in housing and definitely not in America) and improving yourself for a very tough life and business environment.