Friday, May 20, 2005

Group Predicts Boston Price Decline

The Boston.com site is running an article predicting lower home prices. "The gap between income and Massachusetts home prices is the widest since the peak of the 1980s housing bubble, and that gap, intensified by rising interest rates, should cause home prices to dip later this year..declining about 3 percent."

"'It's not going anything like the '80s, but there's going to be a correction,' said Alan Clayton-Matthews, of the University of Massachusetts. 'There has to.'"

Notice the group bases their forecast on the disparity between homes and income, but doesn't see a correction large enough to bring the two measures back into line. One look at the chart that accompanies the piece shows that 3% won't make a dent in affordability.

"Massachusetts' high home prices, nearly double the national median, are a growing concern for economists and policy makers, who worry they are driving young workers and families from the state."

Economist Mark Zandi said, "The housing market is through the roof, way outside anything we've seen historically. The longer it goes on, the more significant a correction we'll see."

52 Comments:

At 8:38 AM, Anonymous Anonymous said...

This is just how accurate these guys are... according to their own chart, home prices during the 80s in the boston were flat to slightly-up... yeah, right!!! like they did in the late 80s and early 90s, boston and other over-heated metro areas are going to drop like a stone... and like it always does, home prices will come back in-line with income...

 
At 8:45 AM, Anonymous Dimitris said...

I think there's a type in that article. They said prices will drop 3%. I think they forgot to put an extra 0 after the 3.

 
At 8:45 AM, Anonymous Dimitris said...

"typo", duh! LOL

 
At 8:50 AM, Blogger tageinn said...

I have e-mailed Ben recently and commented on the amount of homes for sale in my town north of Boston.No matter which direction I walk in, there are for sale signs on every other block it seems.This is not just a spring phenomenon,but has been going on since end of last Summer.Near our local shopping strip mall there are four homes next to each that have been up for over a year now.We
get the same explanation of supply and demand here for the run up in prices.Does anyone realize that Mass. was the only state to lose population last year???Weather stinks,ocean too cold to swim in and ugly vinyl sided pieces of C**p sell here for a half million... no problem!!In the early 90's I got talking to a real estate agent licensed in New Hampshire, he told me he hadn't had a sale in over 6 months.He tried to interest me in what he was doing......Amway!!!! Real estate never goes down.

 
At 8:54 AM, Anonymous nostradamus said...

(predicting 3% drop)

For housing prices to drop, homeowners have to be willing to sell for lower prices. While I believe that housing will depreciate and could underperform other asset classes and inflation for a long time, it could remain surprisingly elevated for a while.

The reason I say this is: housing prices have been rampaging for a few years now. I would guess that the majority of homeowners who want to take advantage of this mania have already done so. The rest will just sit tight. So unless tons of people start selling, prices won't fall. After all, it's the price at the margin that sets the market.

The real problem comes in a few years when the recent rash of I/O and other creative loans start reconfiguring into much higher payments (whether or not rates actually rise). Obviously, if rates rise, it would make things even worse.

Since most of these loans don't re-jigger for five years, you won't see big numbers of folks underwater (or at least pinched hard) for 3-5 years.

Now some of them may see the writing on the wall sooner than that and won't wait until the axe falls to get out. That could put pressure on home prices sooner than 3-5 years out.

With the govt starting to rumble about cracking down on EZ mortgages, I believe that the RE market will slow to a crawl. That should certainly put a lid on price gains but may not necessarily mean a big dump...at least not yet.

The areas which could see a major correction quite soon are those markets which are heavy with speculators (Vegas, SoCal, Fla, AZ, etc). These folks are dependent on EZ finance and rampant price escalation. Without those two crutches, the speculators will bail by not buying more and by selling the ones they own. This could put severe pressure on "hot" markets because these are the "marginal" buyers right now. When they bail, everyone suffers...at least for a while.

So we could see some markets correct very soon, but the less-speculative markets could just rust for a while.

But in a few years, all hell could break loose as the bills start coming due from all this EZ finance. I'm thinking 2008-2012.

 
At 9:00 AM, Anonymous Anonymous said...

Just wanted to share a little realtor hubris about Boston from a October of last year:

"If we're in a bubble then it's a steel bubble, because it's not bursting," said Judy Moore, president of the Massachusetts Association of Realtors and manager of RE/MAX Premier properties in Lexington. - Boston Herald 10/08/04

I have that quote pinned up on the wall in my cube.

 
At 9:07 AM, Blogger desi dude said...

nostradamus
"This could put severe pressure on "hot" markets because these are the "marginal" buyers right now."

why whould you think that these marginal buyers wait till 2008 , only to see that their payments increase double?
if these buyers were betting on appreciation and stretched themselves into buying a home, a simple flattening of the prices would be enough to motivate them to sell, isnt it?
california has more tha 50% IO/ARM. I bet all these people pay more than 40% of their incomes towards mortgage.
How about those who bought for investment. Why do you think they would wait till 2008.

 
At 9:10 AM, Blogger deb said...

"Since most of these loans don't re-jigger for five years, you won't see big numbers of folks underwater (or at least pinched hard) for 3-5 years"

I think I recall that over half of all ARMs last year were "traditional", that is, fixed for LESS THAN 3 years. I am only familiar with loan products that come with defined fixed periods, typically 1, 3, 5, 7 or 10 years. Since the only option that is LESS THAN 3 years is 1 year, I would assume most of them are fixed for 1 year.

Any mortgage brokers out there care to comment.

 
At 9:14 AM, Anonymous Anonymous said...

I would tend to agree that folks won't wait to get out. Panic can cut both ways - and those who are susceptible to it will panic buy and panic sell

 
At 9:19 AM, Blogger deb said...

Found the quote (I hate to posts stats I can't verify):

From- http://www.azcentral.com/news/articles/0517wsj-mort-risk17-ON.html

"More than half of the adjustable-rate loans were "traditional" ARMs, meaning the initial interest rate is fixed for less than three years."

I have to assume that "less than 3 years" is simply a less alarming way of saying "one year".

 
At 9:24 AM, Anonymous boulderbo said...

i think the impending reform to the lending standards will have a dramatic effect on the entire real estate market. we lend in boston and denver and both markets have experienced high levels of default from marginal borrowers over the last two years(with a big difference). in boston the sellers
are being dogged by prospective buyers before the property goes to sale. in denver (with 12,000 foreclosures last year), the properties are being bought from the lending institutions for close to 100 cents on the dollar. in both cases the buyers/borrowers are using highly leveraged (80/20) financing, stated income, etc. the lenders are propping up the market in denver and fueling it further in boston. if and when the lenders stop their madness, it will have a dramatic effect on the entire country. just mho

 
At 9:29 AM, Anonymous Anonymous said...

I agree with Deb. I have a friend who is losing sleep because their ARM just adjusted upward by 2%. And it probably will gain another 2% next year because the intro rate was a very low teaser.
Chip

 
At 9:31 AM, Anonymous Anonymous said...

I think here is CA THIS is the first year that significant numbers of people will see there ARM rebalance.

Lots of 1-year, 3-year and 5-year products and the boom has been going on for quite a while.

A few that bought in the last year will be SHOCKED by their property taxes.

AMT (Alternative Minimum Tax) is in effect for this tax year after being suspended last year (election year, you know).

Year before last I owned and ended up paying an extra 12K in federal taxes because of it (Because of AMT).

For those of you that haven't seen it or been hit with it, this is an extemely arbitrary alternative tax system based on the amount of your deductions......more than 50% of middle class families will be paying it by 2010 (it can happen to you).

This year and next, many newer owners in CA will see exactly how expensive it can be to own!

 
At 9:37 AM, Anonymous Anonymous said...

"why whould you think that these marginal buyers wait till 2008 , only to see that their payments increase double?
if these buyers were betting on appreciation and stretched themselves into buying a home, a simple flattening of the prices would be enough to motivate them to sell, isnt it?
california has more tha 50% IO/ARM. I bet all these people pay more than 40% of their incomes towards mortgage.
How about those who bought for investment. Why do you think they would wait till 2008."

Not that this question was directed at me, but folks do have a remarkable tendency to buy at the top and sell at the bottom. The same person who buys into the hype now and purchases is the same person who will not be rational when prices fall, and will ride the market down 'hoping' that it's a correction, and that prices come back up to what they consider to be logical levels. We saw this in the dot.com mania...many many folks rode their stocks all the way to the bottom, unable to believe that what they paid was not what the stocks were intrisically worth. Only when the pain is so great as to be physically sickening, or when forced to sell by margin, did these people give up their worthless shares. In the case of realestate, a margin call will be the equiv of their rate adjustment. All hope will then be lost.

Assigning a great deal of investment expertise to folks who buy at the top..something we do not do on this blog, kind of begs the question of why assign them a great deal of investment expertise when prices start to fall.

Hope springs eternal for these folks, and hope has been the ruin of many portfolios.

 
At 9:59 AM, Anonymous kailuabruddah said...

I used to think the RE decline was going to be a slow downward spiral - maybe prices drop 3% to 5% per year for 5 to 7 years...

But, there is just way too much emotion involved in this thing now - so I believe a fairly rapid 10% to 15% drop will occur very soon (might happen in as little as 6 months) - which will then be followed by the 3% to 5% annual slow decline (in bubble markets of course - no bubble here in Atlanta)...

The use of I/O mortgages has gotten preposterous! The RE Bubble is running out of buyers - plus in 1 to 2 years these new I/O loans will start to require the paydown of principle...

http://sfgate.com/cgi-bin/article.cgi?file=/c/a/2005/05/20/MNG5CCS82U1.DTL

They accounted for nearly 70 percent of home purchases in the first two months of the year in San Francisco, Marin and San Mateo counties, up from 18 percent in 2002 and 59 percent in 2004.

In San Jose, 61 percent of purchase loans in the first two months of 2005 were interest-only, up from 9 percent three years ago. And 78 percent of home buyers in the Vallejo metropolitan area chose interest-only loans, up from 6 percent.

With a down payment of $100,000, Michael Kelly bought a $1 million home in Foster City last year despite the fact that he was unemployed at the time. Kelly, 42, landed an interest-only loan using stated income only; that is, he was not required to submit written proof of income.

 
At 10:00 AM, Anonymous alex norman said...

Ben, this string raises an important issue: we should find out the composition of ARMs issued in the last three years.

If most are "standard" ARMs that will adjust upward as soon as short rates rise far enough, we may see the market tumble sooner, as one person posted.

However, if most are hybrid 3/1, 5/1 types, as another person posted, we may see "waves" downward several years out.

I agree that the more speculative markets are more likely to fall sooner and faster.

 
At 10:11 AM, Anonymous boulderbo said...

pay option arm, have not heard it mentioned too often on this blog. can't be exact but i recall from previous posts that something like 50-60% of their volume was in this product (locally from insiders, it's what's keeping them alive). works like this: you start with an interest rate of 1.25-1.5%, you have three options; pay at 1.25% (neg am), pay interest only (index + margin= 4.75%), or pay fully amortized. you can guess which option most choose. year two your payment can only go up 7.5%, same year three. year four, that 37th month is a ringer, because at that point you must go to a fully amortizing loan, fully indexed to current rates. on a half million dollar loan, you would see a payment jump from $600-700 to over $4000 if rates were up in the 7% range. no that would hurt.

 
At 10:11 AM, Anonymous Anonymous said...

AMT was NOT suspended last year, the AMT exemption was increased. Next year the AMT exemption will be reduced back to $45k so expect many more people subject to the AMT in 2006 tax year.

 
At 10:20 AM, Anonymous Rob said...

taeginn

"Does anyone realize that Mass. was the only state to lose population last year???"

So THATS who's moving over hear to California.

Sadly, we deserve them.

 
At 10:21 AM, Anonymous Anonymous said...

nostradamus,

no offense... but do you really think that investors or should i say speculators are going to sit on their properties for years to come? in my opinion... not!... they're flippers are they're going to dump as soon as possible... and people who are financially unsound who were counting on greater appreciation will have to punt... they have no choice... all of these changes in lending and bankruptcy laws are designed to specially shakeout the weak hands... and shake they will... this fall and into next spring is going to be a very interesting time in american history...

 
At 10:21 AM, Anonymous Anonymous said...

I have to say, the first time that you get hit with AMT is like a kick in the gut......you end up paying MORE in taxes because your deductible expenses (loan, state taxes, property taxes) are TOO HIGH.

Makes me want to move to Texas or something to avoid it.

By the way, some people call it the blue state tax, because higher cost of living states are impacted....California, New York, Massechusettes, New Jersey.

Bush's tax cut actually pushed a huge amount of people into AMT....tax cuts were one third smaller than they seemed because of increased triggering of AMT in states that were not likely to vote for him in the first place.

 
At 10:43 AM, Anonymous nostradamus said...

(why whould you think that these marginal buyers wait till 2008? if these buyers were betting on appreciation and stretched themselves into buying a home, a simple flattening of the prices would be enough to motivate them to sell, isnt it?)

Yes. If the "marginal" buyer is a market is a speculator, then even a flattening would squeeze them out. So as i wrote, the hot speculative markets are certainly at risk relatively soon. But the less speculative areas may not crack hard until enough newbies start feeling the pinch due to rising mortgage costs. That may take a few years.

So we should see some speculative markets crack shortly while others flatten. But in a few years, when the bills come due, the pressure will be immense across most markets.

 
At 10:46 AM, Anonymous lee said...

(They accounted for nearly 70 percent of home purchases in the first two months of the year in San Francisco, Marin and San Mateo counties, up from 18 percent in 2002 and 59 percent in 2004.)

I live in Marin. These figures astound me. I live in a VERY affluent area. Most of the people here are professionals and usually have two incomes and often family money to boot. The fact that even these folks are having to use "creative finance" to stretch into homes today speaks volumes. A very bad sign.

Either they truly can't afford their own homes or just want to pay lower costs per month. Either way, the debt they took on is the same and must be repaid one way or another.

 
At 10:50 AM, Anonymous nostradamus said...

(no offense... but do you really think that investors or should i say speculators are going to sit on their properties for years to come?)

If you re-read my post, you will note that I said that speculative markets would get hit first and hardest.

But most markets in the US aren't overrun with speculators (though that may change). These markets are less likely to fall hard because most owners will simply not sell. Without lots of marginal sellers, prices can't fall that much. What we will more likely see is a drying up of activity...few sellers, few buyers.

But over time, with the bills from the past few years of "creative finance" coming due, housing could see many years of flat to down performance across all markets.

 
At 11:14 AM, Blogger goleta said...

I live in Santa Barbara and even the local realtors know the bubble is causing some long term economical development and other issues. The following is a article on a local realtor's web site:

"Home costs squeezing out middle class"


""Ten years ago, even seven years ago, being in Santa Barbara was one of our biggest assets," said Sansum-Santa Barbara Medical Foundation Clinic CEO Kurt Ransohoff. "Now it's our greatest liability."
..
Highly trained professionals are increasingly saying "no thanks" to job offers here, raising the question of how hospitals, colleges, and high-tech firms will fare in the future. Most businesses offer a variety of incentives to attract top wage earners, such as housing assistance programs, loans, and in the case of UCSB, faculty housing.

The shortage of professionals could reach crisis proportions, say analysts for UCSB's Economic Forecast Project.

"The demand for land will continue to go up, no matter what the prices, and it won't be the job you have that matters, but the wealth," said analyst Dan Hamilton.

"Eventually the people here will realize that they need to become active in local politics and change things so that the doctors can come back, because medical care is important. But it's often hard to come up with new land-use policies unless there is a crisis."

Dr. Schulman said the crisis is here now. As the county's top medical official, he has a salary of over $150,000. And yet, today he couldn't afford to buy the modest Goleta tract house that he purchased years ago, now worth more than $1 million.
..
"

 
At 11:15 AM, Anonymous Anonymous said...

Lots of speculating when the increased interest costs will put people into a position where they can't make the mortgage payment. The ability to make the mortgage payment is also being squeezed by many other items in the household budget: rapidly increasing energy costs, taxes, health and other insurance costs, tuition, food, you name it...the everyday things you have to have to live all seem to be going up. Inflation at 2 or 3 percent? Hardy. Add in the lack of savings typical of most of these buyers...well, the end result isn't too hard to predict.

 
At 11:27 AM, Anonymous Anonymous said...

I was offered a job in 2002 Santa Barbara paying 96K/year.

I turned it down because of the cost of living there.

I just the same level job posted by the same company.....pay is now 150k/year.

Still wouldn't be able to afford anything with a short drive (although that is almost 30% more than I am now making).

 
At 1:02 PM, Blogger goleta said...

I heard that several nationwide big companies like Kinko's and FedEx started in Santa Barbara, and it's still a small town full of
very creative people. Even now, there are lots of small local companies that are said to be at the top of the fields. Companies that make some key super conductor components, better surgical arms, etc that are mostly realization of UCSB's research results. But they can't get people moving here to help them develop products and are deprived the chance of making it big. Home prices have always been high in SB, but it wasn't this bad 9 years ago when I just moved here.

Now the RE bubble is driving everyone out except the very rich and the people who serve them and are qualified for affordable housing. Families that don't make more than $250K a year and don't already own home here just can't afford a median price home that is more than $1.25M.

 
At 1:03 PM, Anonymous Anonymous said...

i live in the nj/ny area... and just over the past 2-3 years, home prices have nearly doubled... it's been almost a mania... so... my question is... which is very simple... why can't that happen the other way? why in 2-3 years can't home prices go down nearly 50%?

 
At 1:04 PM, Anonymous Anonymous said...

tageinn: I'm also just North of Boston. I agree: it seems like there is suddenly quite a lot of property on the market. A friend of mine just purchased a starter home (for too much). I asked her what kind of mortgage program she's in, and she replied "adjustable rate". Cringe. I suggested that might not be a good idea and she thought I was nuts: "the payment is lower than a fixed rate!!". How do you even begin to explain to people like this?

 
At 1:25 PM, Anonymous Anonymous said...

Stockholders during the tech boom may have waited for the bottom, but (as nostradamus acknowledged) speculators won't, and the huge number of highly leveraged home buyers simply can't. This is a very important distinction between the landscape of the tech bust vs. a potential housing bust--or housing decline.

 
At 1:29 PM, Anonymous Anonymous said...

"Highly trained professionals are increasingly saying "no thanks" to job offers here, raising the question of how hospitals, colleges, and high-tech firms will fare in the future"

Guess they'll just have to start hiring illegal aliens and unemployed HS dropouts, since they're the only ones who can afford the housing now.

 
At 2:22 PM, Blogger cl said...

The New England Economic Partnership as reported in the Globe is far from predicting the future, tho they will probably get the credit for being far sighted!. As I posted a couple days ago the median house price in Mass as of the latest figures is down over 3% from June of last year. It just hasn't shown up in the year over year figures yet becuase of the big jump in prices last spring. Notice this article didn't even reference that and instead reported the 12+% increase from April 04 to 05.

 
At 2:40 PM, Blogger Matteo said...

Back during the 90's stock bubble I was keeping up with the tech stock market (not speculating, though) on a day by day basis just as you folks are with the housing market on this blog. Before everything tanked, there was a widespread feeling of, "Yeah, this market's crazy, and it will correct, but that just means I'll be down 20% temporarily." So today we have RE folks saying, "yes, crazy, but the risk is just a few percent". Well it doesn't work that way. Many tech investors saw something closer to 80-90% losses when the market finally turned. RE will see a hell of a lot more than 5 or 10 percent! And I can see no reason why a market that has forces of positive feedback causing it to double in 3 or 5 years is just going to sit at the peak level when the music stops. Easy come, easy go. Leverage is just as powerful in reverse...

 
At 4:25 PM, Blogger Thomas said...

Matteo, that strikes a chord. I remember riding in a jeep with my lifeguard supervisor in 1999. He was telling me how he'd poured tons of his money into techs, saying that he figured even if the market declined by 25%, as he expected, he'd still be substantially ahead.

I wonder how he made out.

 
At 6:25 PM, Anonymous Anonymous said...

Many folks have pointed out how Boston has a higher "p/e" ratio than other areas, where p=house Prices and e=incomE. By analogy with stock valuations, they argue that Boston housing is overvalued.

However, taking the analogy a little further, there is a distinction between value stocks and growth stocks with investors willing to pay a valuation premium (higher p/e ratio) for stocks whose earnings consistently grow more rapidly than average.

Based on the graphs shown in the quoted article, incomEs in Boston are growing much faster than the rest of the country (this is an established long-term trend), and so it is not surprising that Boston housing has a much higher p/e ratio than the rest of the country.

 
At 10:14 PM, Anonymous RealEstateCafe said...

That's the second front page housing story in the Boston Globe in less than three weeks, but quite a turn around on the real estate bubble. We challenged their sources on the first story, but Paul Krugman's assessment of China's potential impact on the housing market is even more challenging.

Click our RealEstateCafe above and you'll see both stories.

 
At 10:43 PM, Anonymous jl said...

Anon 6:25pm,

Actually a better analogy is house price over rental income ratio. Not just income in general.

But even considering income in general, according to the PMI newsletter the Boston area is about 16% less "affordable" than in 1995. Look at page 6 column AI.

This suggest that incomes in the Boston area haven't kept pace with house prices. Unlike Texas, or more surpringly Rochester or Buffalo, NY.

That's one of the reasons the PMI report lists Boston as the metropolitan area the most likely to see house prices decline in the next two years.

 
At 4:10 AM, Anonymous Anonymous said...

Ben,

Until now I have assumed that the aftermath of the bubble would be the same in the US as here in Australia A lot of people getting squeezed, but only the insanely leveraged getting killed, so a gradual decline or a long period without rises.

Now I'm not so sure; if Boulderbo has his facts straight in his 10:11 post then there is going to be serious social trouble at some point in the next 3 years or so.

AJH

 
At 4:20 AM, Anonymous Anonymous said...


jl said...
Anon 6:25pm,

Actually a better analogy is house price over rental income ratio. Not just income in general.

But even considering income in general, according to the PMI newsletter the Boston area is about 16% less "affordable" than in 1995. Look at page 6 column AI.


Rental income strongly correlates with household income, but household income is the fundamental determinant and is less volatile.

My point is that if rental income is growing at 5% a year in some areas (e.g. Boston) and a 2% a year in other places (e.g. Houston), not only should house prices be growing much faster in Boston than Houston (as they have), but the housing p/e ratio should also be much higher in Boston than in Houston.

Back in the early 90s, Boston was recovering from a severe local recession and Boston housing was likely undervalued on a p/e basis. Today, it is more likely overvalued.

 
At 6:20 AM, Blogger cl said...

jl-
where are you getting your rental growth stats from? I live in the Boston area and have 2 investor friends who own lots of rental property in and around the city. They say the've not seen the market this soft since the last downturn in real estate and it started turning at least 2 years ago. Rents have come down. Vacancies are up around 10% and maybe more. When my husband and I first put our house on the market we went out to see what we could find to rent. Landlords were offering all kinds of incentives in addition to lowered rent. For the last year big complexes are giving away 1- 3 months rent on new leases just to fill their vacancies.

 
At 6:24 AM, Blogger cl said...

oops-that comment was actually for anon 6:25 - not jl!

 
At 7:22 AM, Blogger deb said...

Boulder Bo (or others who may care to comment)-

A recent WSJ article stated that over half of all ARMs made last year were "traditional" which they defined as being fixed for "less than 3 years". The only term which fits this description would be a fixed term of 1 year as there really isn't anything in between 1 and 3 years.

Doesn't this mean that over half of all ARMs made last year will be adjusting beginning this year?

 
At 9:44 AM, Anonymous Anonymous said...

We live in the Boston metro currently but are moving in the next couple of months.

Our lease just expired and we discovered that market rents in our apartments complex had shot up by 30% and it is 100% occupied.

While the leasing agent tried to explain this away as a normal seasonal variation, we were suspicious.

Searching on the web, it is clear that market rents have indeed shot up 25%+ for complexes with similar faclities and location to ours.

So much for the quaint notion of a soft rental market in the Boston metro .....

 
At 9:57 AM, Blogger Ben Jones said...

9:44 anon,
Thanks for the update on Boston rentals. Please check back and let us know how it turns out.

 
At 10:29 AM, Blogger desi dude said...

in lakewood/cerritos our apt has increased rents by more than 10 percent.

THis happens to be one of the very good school districts(ca is 49 in the nation and I guess there are very few of there here) and that could be the reason. Also for the first time I've seen in the past 7 years that I have been renting here, the apt has ads outside/rental signs, those ladies with waving the board with apt name standing at the street corners to attact the drive by renters.

 
At 11:34 AM, Anonymous Anonymous said...

cl said...
jl-
where are you getting your rental growth stats from? I live in the Boston area and have 2 investor friends who own lots of rental property in and around the city. They say the've not seen the market this soft since the last downturn in real estate and it started turning at least 2 years ago. Rents have come down. Vacancies are up around 10% and maybe more. When my husband and I first put our house on the market we went out to see what we could find to rent. Landlords were offering all kinds of incentives in addition to lowered rent. For the last year big complexes are giving away 1- 3 months rent on new leases just to fill their vacancies.

6:20 AM


cl said...
oops-that comment was actually for anon 6:25 - not jl!


I agree that rental rates in the Boston metro are quite volatile - much more volatile than household income - which is I was using household income rather than rental income as the "e" in the housing p/e.

Whatever the actual rates of growth of rental income (e.g. whether it averages 4% or 6% in Boston, and whether it's 1% or 3% in Houston), the fact remains that assets with faster growing yields justify richer valuations on a p/e basis. I was just pointing out that this is not normally mentioned in comparative analysis of RE markets and yet it is sufficient to explain some of the difference in housing p/e ratios between markets like Boston and markets like Houston.

 
At 8:18 PM, Anonymous Anonymous said...

I closely studied the real estate market in Boston in the late 80s. Alarm bells were going off everywhere, and the state economy tanked just after Dukakis lost the election. It was there for anybody to predict. This real estate market is far more likely to result in a disasterous drop off in value, around 30-40 percent. Mass. is loosing pop., has stagnant wages (no wage growth as claimed by other person, has lost several major industries in the past year alone, has an ongoing massive state budget funding problem, borderline bankrupt local cities and towns, and only one growth industry: real estate. Prices have more than doubled in many areas over the past 5 years. Speculation is out of control and unsold properties rapidly increasing.

The very high commercial real estate vacancy rate and inability to raise rents in Boston is only indicative of a new and frightfully distorted economy. Rentals go begging and houses remain unsold. This is very ominous.

 
At 8:23 PM, Anonymous Anonymous said...

Prediction of small "corrections" are from the Land of Oz, basically CYA time, the required lingo to avoid upsetting certain clients with some kind of doom and gloom forecast.

However the reality in the Boston region is very troubling. I know of one case (in a small city 45 miles s/sw of Boston) where the widow of a man - who owned a building and business - is building new condos on that same land - and this person (w/o any prior experience) is acting as a direct developer to build 15 to 20 new condos, in a price of range of about 400k, apparently because they are adjacent to a golf course

The price history in this city is in 1996 after tha last Boston region crash/downturn, you could buy a basic 3 bedroom for around 150k, today around 320k, with many houses selling 300 to 600k and higher.

Yet here she is doing "luxury" condos at the height of the bubble, in a city that rarely had any luxury condos before 2004, nor really had that many condos period, as single family were far more common.

Of course now the same city has about 100 new luxury condos coming on line in the next 6 to 12 months

Classic bubble situation developing

 
At 8:32 PM, Anonymous Anonymous said...

in ref to the AMT "Makes me want to move to Texas or something to avoid it."

keep in mind that property taxes in HOUSTON are horrendous

 
At 12:04 AM, Anonymous Anonymous said...

this blog and the posts within it are fascinating. right now, this feels like the "last gasp", so to speak. 10-yr treasurys have dropped from 4.60% to 4.10%, yet we're not seeing a commensurate increase in demand. we're also seeing the yield curve flattening dramatically.

i think there are enough "things that can go wrong" balls in the air that one of them gets dropped. could be the yuan, could be fannie or freddie blowing up, could be gm or ford blowing up (debt downgrade makes it expensive for them to borrow, doesn't blow either up...yet), could be the fed inverting the yield curve (there's only 60 basis points between the 2 and the 10 year treasurys), could be the bankruptcy reform bill, could be the airline pension blowups...all of these things are big problems and as a betting man, i bet one of them gets dropped and that more than a few of them are too big for the fed to deal with.

as it stands now, i don't think anything is ready to happen yet to the real estate market unless sellers show up. rates haven't moved that much and it costs the same to borrow now as it did a few months ago. we need something big to happen to make the marginal buyers puke. i don't think we're there yet, but i think the groundwork is layed.

one interesting thing i've noticed is that the subprime mortgage stocks have gotten annihilated. one big difference now versus the late 80s is the amount of subprime buyers in the market place. seems to me as though buyers of subprime stocks have gotten annihilated and new money to the group is probably cut off for a while.

anyway, these are a few of my random thoughts. when this thing bursts, it ain't gonna be pretty.

 
At 4:51 AM, Anonymous Anonymous said...


Anonymous 8:32 PM said...
in ref to the AMT "Makes me want to move to Texas or something to avoid it."

keep in mind that property taxes in HOUSTON are horrendous


In fact, Houston property taxes are only slightly higher than the average for US cities (the biggest cities in each state plus DC):

http://money.cnn.com/pf/features/lists/taxesbycity2005/property.html#table

and the overall tax burden in Houston is the 6th lowest of the 51 cities surveyed.

You are right that property taxes as a percentage of home prices are very high in Houston but remember that your $200K home in Houston would cost $700K in NJ or CT.

Modest single family homes in NJ or CT often have annual property taxes in the $10-15K range.

 

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