Monday, April 17, 2006

Metrics of market direction

The Wall Street Journal's Real Estate Journal recently addressed the metrics to evaluate when sizing up a market's near-term direction. Let's see how MA stacks up:

As a rule of thumb, assume that most home shoppers won't want to take on a mortgage that's more than three times their annual income.
Creative financing and record-low mortgage rates made this rule of thumb temporarily obsolete, but rising rates will bring it back into play. While I don't know the average mortgage to income ratios in MA, the current ratio of median SFH price (2005) to median (2004) income is ~6.5, for condos it is ~5 in MA.

Among the local factors you should check are inventory levels, which measure how long it takes for houses to sell, assuming no other houses were listed. (Equilibrium is between five and six months -- anything shorter indicates tight supply, which tends to lead to higher prices).
No need to add to recent posts covering the surge of inventory levels that continues unabated.

Also check out housing starts and permits -- rising numbers could mean that a market is becoming overbuilt, which can cause prices to drop.
This is not typically a problem in MA, but I've made the case (here and here) that even the relatively modest increases in new construction currently underway will glut the market as outmigration and demographic changes play out (see here).

Also, take a look at time on the market -- if this number is rising, it can be an early warning sign that a market is cooling.
Check out this recent Boston Herald article that points out the growing inventory and days on market in MA.

Of course, you'll want to find out if prices are being cut in your target neighborhood.
Statewide median prices have already peaked and look poised to turn down as the year progresses. According to ZIP Realty, of the 46,500 houses for sale in the greater Boston area, >33% (15,700 houses) have reduced list prices. For a closer look at individual homes, towns, and zip codes, including historical value plots, check out the wealth of info available at


bostonbubble said...

Just curious... what's your source for the median income in Massachusetts? I'm interested in comparing the current ratio to what is historically typical for Massachusetts. The Census Bureau has data from 1974 - 2004, but I couldn't find 2005 on their site yet.

DT said...

I haven't seen the 2005 numbers yet either. I should have been more clear - I based the numbers off the median MA family income for 2004. I also made a small math error which is now corrected.

willydog66 said...

Yes, the inventory dump has already started in the markets that I watch. Loving the runnup in the stock market with the hooyah about the Fed supposidly not moving. It wouldn't surprise me to see them skip an increase in June, but then be right back at it. Simple facts are inflationary pressures are everywhere, and China threatened to pull out of their investments if they don't get a big fat return. Do the math said... integrates how much homes SOLD for nationwide using the google mapping technology. Simply select city and state from the city menu and click search. If you don't see data for your area simply email with your zipcode and or address and they'll update the site with your info and email you within a few days.

mitchjam44 said...

Went to several open houses today in Boston suburbs. The first one was a condo at 48 Quimby Street in Watertown (MLS#70369381). A flipper/renovator purchased a two family in March 2004 for 510k, spent a year plus rehabbing it, and then put it on the mkt as 2 condos in Aug 2005. He wanted 479k for EACH condo, A TOTAL SALE PRICE OF 958k for both combined!! This means he was looking for a 448k profit (less rehabbing costs of course) for rehabbing two condos! There was obviously minimal interest because the properties sat and sat, and then were reduced from 479k to 459k. Then in Feb 2006 it was taken off the mkt. Big surprise - it reappeared in April 2006, a re-list at 459k. Both condos are for sale now. I asked the realtor how long it had been on the mkt. He said "Only 1 week". Yeah right! Try 8 months for a real answer. The condo was nice and I am glad that these flippers are rehabbing the neighborhood, but they should not expect make 400k or whatever for just rehabbing a place, expecially when it is right down the street from some slum apt buildings. The open house was empty except for us. I kind of felt sorry for the realtor to be honest. All work and no pay these days for them. We'll see what happens next....

We also some starter houses in suburbs north of boston. One was for 420k and was conveniently located right next to a railroad track. It was kind of small and old, basically a starter house. We also looked at another similar small old house for 439k, conveniently located right next to a cemetery. I would describe them both as small undesirable starter houses that are worth (actual worth) about 250k in my opinion. If we bought one of those crap cemetery/train track starter houses, we would more than double our current monthly housing cost compared to our rent. Hmmmm, I can rent a really nice apt or pay double the amount for a crappy house with a view of a cemetery?
Frustration anyone??

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