Finally, some good housing news, especially for Boston

Scott,

Honestly, with housing prices in Boston still out of reach for so many people that live here, how is a price increase good?

Oh, right. Good for existing homeowners.

High Housing Prices are BAD! Why is it a good thing to pay upwards of 40% - 50% of your income on housing? Its madness. If everyone just stuck to the old rules of 25%-30% of their incomes to pay for all housing needs including Property Taxes and Insurance along with the Mortgage we would have more disposable income so if you do lose your job you were able to save some money for that rainy day fund or retirement or college so your children don't have to take out a fortune in debt when they are 18 years old.

Now I am going to sit back and relish the comments from all the gloom and doomers out there for sounding modestly upbeat.

It’s similar, though, to the reaction I use to get from the Realtor types back in the waning days of the boom when I questioned their silly spin that everything was fine.

A pretty smug tone from somebody who doesn't realize he just reported the Not Seasonally Adjusted Case Shiller index without knowing it. The Seasonally-Adjusted Index, released separately, showed a continuing decline.

Spend less time "sitting back," and more time researching.

short of extraordinary circumstances, inflation and income increases drive housing appreciation. i can see an argument for inflation. can't see one for wages. an increasingly large shadow market, tightened lending standards and the inevitable rise in interest rates make it extremely unlikely that property is going to appreciate in the short term. as witnessed by the near record levels of default notices filed last month, lenders systematically lent to borrowers who's income did not support the debt.

i have yet to find a single economist give a single valid reason as to why real estate is a more valuable commodity in comparison to income today than it was for the 100 years prior to 2000. the difference between the doom and gloom set and what you heard from realtors at the end of the bubble is readily apparent. one group analyzes data and applies economic principles. the other goes on what happened last month and hunches. i am betting hundreds of thousands of dollars on my analysis. i am not married to my position. ego and failure to recognize the situation for what it is will cost me a lot of money.

The mainstream media--forever dependent on attention-grabbing headlines and ad revenue from Realtors--continues to cheerlead a suckers rally in real estate. This reminds me of 2004-2006... The endless cacophony of nonsense we heard from morons... “Buy now or you'll be priced out forever!!! Now is a great time to buy!!! Houses never lose value!!!” Blah, blah, blah... Well, we all know how that turned out. Don't believe the hype. Here's what's really going on:

1) Prices are still falling, but are starting to fall less quickly. Pay attention to seasonally adjusted CS monthly numbers or year-over-year figures. Ignore non-seasonally adjusted month-over-month numbers. They are garbage. Keep in mind, if price declines are indeed slowing, this implies we are only half way through the correction. Furthermore, it is very difficult to generalize since certain market segments (defined by geography, price, type, etc.) are much further along than others. For example, we've probably worked through a lot of the subprime mess... But the trouble is only beginning in the higher-end markets. (Note: Boston is heavily skewed toward the higher-end because incomes and home prices are relatively high here.) There is much more I could say here, but I'll move on...

2) The US can't subsidize housing with borrowed money forever. At some point, there will almost certainly be another big leg down as interest rates rise. The current market for jumbo loans provides and excellent snapshot of how lending would look if government subsidies were absent... Much higher rates, much higher collateral requirements, much more stringent credit requirements, etc. (Note: jumbo rates would probably be even higher if banks--jumbo lenders included--couldn't borrow from the Fed at 0 percent to finance these loans).

3) Buyers in aggregate still cannot afford homes. This is especially true in the more expensive areas. There is no way to prop up prices without enabling buyers to make purchases. Long term, prices will continue to fall until homes are affordable based on traditional lending standards. There is no way around this.

4) The foreclosure pipeline is large and growing. At some point the backlog will hit the market dragging prices down like a boat anchor.

5) Unemployment is high and climbing. This means the number of qualified home buyers is shrinking. Supply and demand says this will hurt prices.

6) Inventory is still very high. Again, too many houses for sale and too few buyers will inevitably lead to lower prices.

7) Sales volume (as reported by Warren Group yesterday) in Boston is at the lowest levels since the group began keeping records in 1987. This implies a continued showdown between buyers and sellers over price. As I've discussed before, buyers will prevail because they are no longer able to overextend themselves. Yes, there are a lot of unsophisticated buyers who would happily pay today's prices. The problem is, they can't get financing because banks are much more conservative... So they aren't really buyers at all. This problem is particularly acute in the higher-end market. Ask any Realtor... This a very common scenario these days.

8) Rarely do markets plunge straight down. Look at pretty much every major correction in history and you will see one or more small upticks, followed by additional major declines. We are seeing one of those short-lived upticks now... It will be followed inevitably by further substantial declines.

Calling people who see the other side of the coin "gloom and doomers" and calling YOUR outlook "upbeat" probably plays well to the homeowner/seller crowd. Buyers and renters who didn't jump into the cheap credit frenzy that drove prices up earlier this decade would argue that further significant price declines are a very positive development and that an end to the slump represents gloom and doom for affordability. After all, we are all looking out for our own interests, right?

Your negative reaction to those who read beyond the headline numbers is contemptuous. Repeatedly, regular commenters on your blog laid out why your evaluation of apparently good news is flawed. You refused to take their constructive criticisms and continued to present slanted - some might contend misleading - post. To rebut your overly rosy forecasts, rational commenters posted thoughtful and deep evaluations of the housing market based on dispassionate fact and data. Your juxtaposition of so-called 'gloom and doomers' to "Realtor types . . . silly spin" is an insult to the posters that made your blog relevant.

Your last three flaccid analysis of housing prices ignores:
+ seasonality in the numbers that, when removed, reveals continued decline in national housing prices and extended. You sort of touched on it by suggesting that Fall will be different - although you appear to suggest that Y-o-Y Fall numbers will look great.
+ the number of transactions - especially condos - is off dramatically.
+ the macroeconomic situation is not improving. There is continued job loss, corporate profits were realized primarily by cutting expenses, no one is making durable or ordering durable goods, etc . . . .

We are watching both supply and demand curves shift coincidentally. Perturbations and price anomalies in the face of this volatility are to be expected until a true bottom is found.

Can this newspaper get any more pro-real estate? Every article has a positive spin, when a little sound reporting and due diligence would show, there is little or no substance behind many of these headlines...

I almost hate to dignify your taunting Scott, but why do I get the feeling that all you are trying to do is stir things up? I get that we live in a world of buyers and sellers, bears and bulls, owners and renters, singles and families, condos and houses. On this blog, we encounter landlords and tenants, strategists and desperates. Declarations of 'good news' in a lop-sided, volatile marketplace are not very useful, since readers then have to interpret good for whom? The system is more intricate than a trite 'good news' can declare. I would hope that the housing market not be considered news at all. You know, the kind of market where buyer and seller are both satisfied with the deal. Perhaps pitting buyers and sellers against each other is one of the sources of our current woes: Everyone wants a chance to be a seller after 100% appreciation.

The way I see it, compared to local rentals, there is something fundamentally wrong with paying more money per month to carry more burden of risk for lower quality housing. It's a bad deal all around. Apparently I'm in the minority, as enough transactions are taking place to support the ridiculous trends. Apparently there have been enough "greater fools" relocating to the Boston area, or enough inherited money, or enough duel incomes, or enough folks willing to be house-poor, or enough [fill in your favorite purchase justification] to propagate a bloated marketplace.

I think the subtext of your piece says alot. Basically it sound like you have those that spin one way or the other. I think it is more important for a commenter to offer the source and analysis to support their perspectives. This is what separates a rational market from an irrational market.

I almost hate to dignify your taunting Scott, but why do I get the feeling that all you are trying to do is stir things up? I get that we live in a world of buyers and sellers, bears and bulls, owners and renters, singles and families, condos and houses. On this blog, we encounter landlords and tenants, strategists and desperates. Declarations of 'good news' in a lop-sided, volatile marketplace are not very useful, since readers then have to interpret good for whom? The system is more intricate than a trite 'good news' can declare. I would hope that the housing market not be considered news at all. You know, the kind of market where buyer and seller are both satisfied with the deal. Perhaps pitting buyers and sellers against each other is one of the sources of our current woes: Everyone wants a chance to be a seller after 100% appreciation.

The way I see it, compared to local rentals, there is something fundamentally wrong with paying more money per month to carry more burden of risk for lower quality housing. It's a bad deal all around. Apparently I'm in the minority, as enough transactions are taking place to support the ridiculous trends. Apparently there have been enough "greater fools" relocating to the Boston area, or enough inherited money, or enough duel incomes, or enough folks willing to be house-poor, or enough [fill in your favorite purchase justification] to propagate a bloated marketplace.

I'll follow-up on a model that Charles suggested recently. Let's say there are 100 homes for sale at a particular price, but only 70 prospective buyers who can afford the purchase. Perhaps 20 of those 70 buyers are waiting to see what the market's floor will be, prior to taking any action.

I don't live and work in a pricey, highly competitive market like Boston or New York. In my market almost all properties correct to an affordable level. Those that don't are simply ignored by the marketplace. I'd be interested in hearing views on how this scene plays out. Will sellers wait another five years in the hope of finding a qualified buyer?

Remember back during the housing boom, when all of the Realtors, Mortgage Brokers and Real Estate Appraisers were busy pumping up local comparables and helping to drive prices higher?

Of course!

Do you recall how the National Association of Realtors swung into action, and being in the vanguard of responsible behavior: 1) Were the first to spot these problems; 2) Demanded their membership identify these corrupt Realtors, appraisers and mortgage brokers; 3) Proposed fixes for this widespread corruption and presented them to Congress

Me neither.

What has been happening in the case of the public manipulation of home sales data is no different from the way jobless numbers are dealt with, or unemployment claims, or just about any statistical data you can think of. They are all bent in such a fashion that a picture emerges that is anywhere from less bad to much sunnier than objective analysis would warrant. Realtors do it with housing numbers, the government with unemployment figures, and the press, until now, has been only too glad to play along.

Many investors celebrated Monday after June's "surge" in U.S. new-home sales. Alas, it was largely wishful thinking. True, the Census Bureau reported sales up 11% from May. That's a big number, at first glance justifying Monday's 4.5% leap in the Dow Jones U.S. Home Construction Index. But it fails a close inspection.

First, home sales quite often jump in June, the height of the spring selling season. When trying to gauge the strength of home sales, then, it makes more sense to compare them to the same month a year ago. That comparison is less kind -- sales were down 21.3% from June of 2008. Seasonally unadjusted data show a total of 36,000 new homes were sold last month, the lowest June total since 1982, notes Richard Moody, chief economist at Forward Capital.

And the Census Bureau warns against assuming too much precision in these numbers, which are based on a sample survey. Accounting for a 13.2% margin of error -- at a 90% confidence level, suggesting the actual error could be higher -- new-home sales enjoyed somewhere between a 24.2% gain or a 2.2% decline from May. New-home inventories are falling, an encouraging development. But inventories are still higher than their historical norm, and there remains an avalanche of distressed sales.

Little wonder, then, that June's "surging" sales were driven by heavy discounting. The median new-home price -- not seasonally adjusted -- fell 12% in June from a year ago to $206,200, the lowest June sales price since 2003. And it was down 5.8% month on month. To paraphrase Pyrrhus, if sales keep soaring like this, then homebuilders will be utterly undone.

To put the much ballyhooed new data point in perspective, I plotted the Case-Shiller Index price values for Boston back through September 2005 ("bubble peak"), which I've made available at http://img200.imageshack.us/img200/4027/csibostoncorrectionmay2.jpg

The new data point for May 2009 fits the continuing downward trend nicely, maintaining a high correlation with the downward trendline. Also, throughout the entire downward slide, every Spring there have been bumps consisting of three or more consecutive month-to-month increases, so the implication that "the Hub as one of only five major metro markets to post two straight, month-over-month increases in home prices" indicates a bottom doesn't seem to be supported by the historical evidence.

The real estate market is at the mercy of the economy and financial markets. Since our fearless leaders have done nothing to address the root cause of this crisis: too much debt, too much credit and too much leverage, there can be no meaningful recovery in the economy. With no meaningful recovery in the economy there will be no recovery in housing.

Can nominal home prices rise in the next couple of years? Sure they can, but it will be at the expense of the dollar. A 5% rise in home prices will bring little comfort to people when gas is $6 a gallon.

And no, I am not a doom and gloomer. I'm a realist.

There's not a lot of point in arguing over the numbers. They are what they are, and we've all already put our money where our mouths are. And to be fair to scott, the readers of this blog are fairly self-selected: we're the ones who are obsessing over the housing market, the ones saying, "Is now the right time? 6 months? A year? 2012?" And really, the only people thinking like that these days are prospective buyers. Sure, there may be homeowners here and there, but a) they're more interested in their specific homes than in the market in general, and b) if the house is already on the market, they don't need statistics to tell them that it's still a tough market to sell in.

Anyway, these numbers got me wondering: why the heck are prices so seasonal?

Why does anyone buy in June if prices usually fall for the next 6-8 months? Why does anyone sell January-March if prices rise from March to June? Has anyone here sold in March or bought in June? Why?

#15: It's probable that a given listing in the Winter was posted in the Summer, but didn't sell for whatever reason. Since then, the seller would have (hopefully) lowered the price in order to move the property. In other words, houses that sell in the Summer could be the first pick of the housing stock, while those that sell in the Winter are the leftovers which are by that point being priced at a slight discount.

Another simpler reasoning would be that buyers bring the money to the market, and fewer buyers in the winter means there's less money to go around.

I'm just guessing, though.

#15 - sold in Feb/Mar 08. Reason - get a jump before everyone put their house on. Less competition and those that were on were fall leftovers mostly. Buyers out then tended to actually buy and not browse. To be honest, if we waited until after March, there were more comp houses and prices were set lower than ours by $15K - $40K less.

This weeks $115 billion Treasury auction has been less than stellar. Said another way, the market wants a higher rate of return to fund the US governments exploding deficit. That means higher interest rates. What do you think will happen to home prices as mortgage rates go up? (Hint: The answer is not up)

John & Bobby (#14 & #18): You hit the nail on the head.

James (#15): Conventional wisdom is that people (especially families with children) move to coincide with the start of the school year. As for justifying consumer behavior based on rationality and price, forget it... It's just not the way most people make decisions. Sad but true.

Note: I find it very interesting that almost nobody disagrees anymore that the Boston market is tanking... If Scott made this post last year, there would have been heated debate from both sides. But now the comments are very one-sided... What happened to all the housing bulls? Where is Sunshine and Lollipops? Have people finally come to their senses?

Other reasons for increase in the market in spring: During the winter weather may be too bad for open houses, people are distracted by the holidays, and then the football fans want to stay home and watch the playoffs & the Superbowl.

"Note: I find it very interesting that almost nobody disagrees anymore that the Boston market is tanking... If Scott made this post last year, there would have been heated debate from both sides. But now the comments are very one-sided... What happened to all the housing bulls? Where is Sunshine and Lollipops? Have people finally come to their senses?"

I doubt the masses have come to their senses. If so, that would mean that we are close to the bottom. We haven't seen the price declines (in Mass anyway) needed to restore fundamentals. Until we reach that point, we can't find a bottom. When people I know that scoffed at me six years ago when I told them housing was a bubble start complaining how much the value of their home has dropped and that I'm a moron for buying, then I'll know we are at the bottom.

Lance, maybe the housing bulls put their money where their mouths were, and have since experienced disappointment and conversion to a more bearish stance. And maybe some of the agents have had to take day-jobs since sales volumes are so low, driving the optimistic "buy now" commentary even farther down.

Two of my friends have recently bought houses. One is in love with the house, but the price is a painful stretch, and the other isn't very pleased with the house, but it's all they could afford in the town they wanted. I recognize that most advisors recommend limiting emotion from such weighty decisions, because even partially blind decisions can lead to remorse. Barring emotion, it seems like there is little else to motivate a purchase. I can rent a place with a yard, upgrades, a great neighborhood, save a bundle, and not feel like a millstone is hung around my neck. Perhaps that's just a fact of home ownership here: you ARE going to regret something about the deal. Then again, maybe it's the "misery loves company" thing, but homeowners get all defensive about the merits of a home purchase, which largely include falsehoods or misrepresentations of fact (tax benefits, equity gains, quality of life, flexibility). The only people I have known to really be happy about their ownership situation IN THIS AREA are those who are selling and moving to the midwest. Am I just disillusioned?

The reason people are happier when they move to the midwest is probably because they do not have to spend an arm and a leg on housing. Unfortunately, in highly dense areas such as Boston, New York and San Francisco, people simply need to spend more on housing, even now that prices already came down somewhat. In other parts of the world, some people spend even higher percentages of the their income on smaller housing units. The often-cited "golden" rule that housing price should be 3-times of income is not the norm in the rest of the world.

In theory, housing should be viewed as consumption, and the utility from such consumption is independent of the way to finance it. It would be a misconception that you do not pay property tax, maintenance costs, etc. if you rent the property. All those items are taken into account in the determination of its rent.

In reality, rental and for-sale properties are like apples and oranges. If you can find a rental property with a yard, upgrades, and in a great neighborhood for less than you pay in mortgage and tax payments, then by all means rent it. In some neighborhoods you may have better luck than in others. However, do not expect that an average seller is equally open to leasing (vs. selling) the house. And it goes the other way too: the average landlord usually do not entertain an offer to buy a property.