Soft-Landing, or Meltdown?

The recent housing numbers out of Massachusetts confirm that a decisive downshift in the market is in progress. Some observers, especially those in the real estate business, continue to argue for a leveling of prices at a new plateau, and a soft-landing for house prices and sales. I'd like to present several recent news pieces that paint a decidedly bleaker picture - one that points to sustained weakness that will wrench the speculative excess from current prices.

Let's start with demand. We first reported on the stagnant/declining population in MA back in January. This recent story from the Boston Herald emphasizes that the exodus from Boston proper continues unabated.

People are leaving Boston at a stunning rate of about 27 a day - with nearly 10,000 bolting Suffolk County last year alone, according to new U.S. Census Data. That’s more than 1 person bailing out on life in the Hub every hour... The county’s population was about 654,428 in 2005 - off 5.3 percent, or 36,795, from a recent peak in 2001 of 691,223, according to census estimates.

Later we find out where the escapees may be going, if they're not leaving the state altogether:

Many people are moving to smaller cities such as Brockton and Lawrence or moving to the outer suburbs in the Route 495 area to find cheaper housing...

But not to worry says Seth Gitell, spokesman for Mayor Menino, who noted:

Boston is currently undergoing a historic housing-construction boom, proving people want to live and work in the city.

Guess what Seth, increasing supply does not guarantee demand. Moreover, the people moving to Brockton and Lawrence aren't candidates for the major trend in Boston housing, the million dollar (and up) condo.

But surely the wealthy people of Boston will provide an endless stream of demand for uber-chic city living, right? Maybe not for long, according to this recent report from the Boston Globe:

With a wave of new condominium units now available in Greater Boston, real estate developers are offering incentives to boost sales and move hard-to-market units. Developers are often willing to pay closing costs, forgive monthly maintenance fees for a year, or throw in amenities such as free hardwood floors. These incentives are rarely advertised, but buyers, sensing that the leverage in negotiations is shifting in their favor, are bargaining harder for extras.

''All of a sudden, in the last year, there are so many projects that we haven't really been facing this kind of surge of units and projects in the city before," said Lili Banani, a Back Bay agent for Coldwell Banker Residential Brokerage. ''There's a lot of competition, and that's why you see more of these incentives."

The market for single-family homes in the suburbs slowed considerably in 2005, but Boston's condo market remains strong as aging baby boomers downsize their lives and first-time homebuyers find condos more affordable than houses. Yet there are currently about 1,350 downtown condos for sale, up from 880 a year ago, according to Listing Information Network, which tracks that market.

And the pipeline is full of new construction and apartment-to-condo conversions. The Boston Redevelopment Authority recently estimated that 14,000 residential units are under way or approved, and, over the next five years, an estimated 1,000 new units will come on the market annually. That's on top of existing units that would come on the market due to normal turnover in the real estate market. (emphasis added)

So let's summarize: we've got a shrinking population and growing supplies. But surely those who've already bought have nothing to fear, secure in the equity gains of the preceding bull market? Not so fast, says the Christian Science Monitor:

If the nation's real estate boom collapses, its first victims may well be low-income minorities and immigrants in a big US city like Boston. That is the picture emerging here as foreclosures rise and the housing prices falter. More than one-quarter of Boston's mortgage-holders appear to be stretched thin financially, spending at least half their income on housing, according to an analysis of census figures. That's more than twice the national average and the highest of any major city except Miami.

In Boston, a shift in market forces is now putting many of these vulnerable homeowners into a double bind. Rising interest rates are pushing up the costs for those who have adjustable mortgages. At the same time, these homeowners are finding it harder to sell.

"I would suspect that as home prices soften, you are probably going to see a ramp-up in defaults, delinquencies, and foreclosures," says Nicolas Retsinas of the Joint Center for Housing Studies at Harvard University. "It is not that they were not stretched before, but if you couldn't make the mortgage payments, you would sell. If the market is softer, it is not as easy to do this."

Clearly, at the low end of the economic scale, the situation in Boston housing is tenuous. What could tip the scales? How about jobs, especially for dual income couples. More bad news on this front, from the Boston Globe:

The state's unemployment rate rose from 4.6 percent to 5 percent in February, the first time in more than decade that the state's rate has exceeded the nation's jobless figure. The last time the state's rate was higher than the nation's was March 1995.

The number of jobs in the state has grown by nearly 45,000 since December 2003, but is still about 160,000 jobs below the state's historic peak employment in February 2001.

That last figure is stunning. Between February 2001 and December 2003, Massachusetts lost more than 200,000 jobs, only a quarter of which the state has since regained. During that same time, population in the state was declining. And prices? They kept on going up. Why? In no particular order: momentum, speculation, record-low interest rates, and easy lending. But guess what? These remaining supports are melting away, and there is nothing left in their place but brave talk, blind faith, and over-priced houses.

Let me end with an excerpt from Realty Times, reporting on the New Hampshire market, that I think also sums up the current situation in Massachusetts:

For investors who are grabbing an opportunity to sell (because the market may go lower, or their adjustable rate mortgage may go higher) their motivation to sell at almost any price could be quite strong (waiting won't help.).

For newly-weds who want to buy their first house, there are values if they are patient (waiting will help.).

For move-up buyers, who need another bedroom, or a better school system, there are some great values, but they will probably not get all the money on the resale of their existing house (waiting probably won't help).

For old-time Yankees who heard their farm might be worth a couple of million dollars -- that was last year (waiting didn't help.),"

It's All About Supply and Demand

Back in January (original post here) I explored how the inventory of houses for sale influences appreciation rates. Now that we've had a couple data points in 2006, I thought it was time for an update.

Plotted below is the "Months Inventory" over the past 3+ years. I simply divided the total number of houses and condos for sale in any month by the total number of sales in that month, as reported by the Massachusetts Association of Realtors. As you can see, inventories follow a pattern through the year, typically peaking in February as homes come on the spring market, and sales reach their low. In the fall of 2005 inventories broke out of their typical trend behavior, and in 2006 the deviation from the trend has accelerated.

I've also plotted the average annual inventory for each of the last three years (dashed colored lines). Note that over the last three years, a quite reasonable forecast for annual inventory could be made using data from the first two months - the annual average tended to be ~1 month below January levels, and ~3 months below February. Applying this admittedly simplistic analysis to 2006, we can predict annual average inventories of ~13 months. While plenty can change in the coming months, this should provide a rough estimate, and is likely conservative given the recent trend to the upside.

Now we can look at how appreciation rates for single family homes (SFH) and condos have correlated with annual inventories, using data from MAR over the past 14 years. I've highlighted the inventory levels for 2004 and 2005 (gray dashed lines), and the deceleration in appreciation rates over the same time span (yellow arrows). I've also incorporated the forecast for 2006 inventories (black dashed line).

Given the sparcity of data at these high inventory levels, it's not advisable to be too specific with predictions. But clearly, given the growing imbalance between supply and demand, the peak in median prices is well behind us; YOY declines in prices should accelerate as the year continues.

February Market Wrap

MAR released February market stats today. As in the past, I've plotted the price and inventory numbers for single family homes (SFH) and Condos relative to the last few years.

First up, prices:

These plots graphically emphasize the deceleration in price trends - just look at the jump in prices from February 2004 to 2005, and the flat prices from 2005 to 2006.

Why the flattening prices? How about ballooning (or perhaps bubbling?) inventory:

More analysis over the next few days as time permits. In the meantime, surf on over to the Real Estate Cafe for more discussion of the February numbers (here).

Balloon or Bubble? No matter, it's all hot air.

Today the Boston Globe reported a priceless gem of a quote from David Lereah, chief economist for the National Association of Realtors, who was speaking at the New England Realtors Conference in downtown Boston:

New England "will have negative sales like the rest of the country" in 2006, "but prices will still go up," Lereah said. "There's no bubble bursting," he said. "You can put air in the bubble, and it inflates and now the air is going out of the balloon -- it is not bursting."

I've read this quote a dozen times, and I'm still stunned by its ridiculousness. Does it matter if the balloon is mylar or latex? Filled with air, or helium? Perhaps it is filled with hydrogen like the Hindenburg - we know how well that worked out.

Perhaps the funniest part of the Globe story was the lead in:

Two of the nation's top economists said today...

My condolences to economists everywhere.

Overpriced, but by how much?

As bubble-reality becomes the consensus, everyone wants to get on record predicting price declines. The Real Estate Cafe gave readers the chance to submit predictions (here); the results were impressively bearish (the most popular choice was for >10% price drops this year in Greater Boston). Not sure what this means for real estate prices, but it definitely indicates the bearish inclinations of real estate blog readers (you know who you are).

Others have grander ambitions, and have produced predictions for many cities. In a story covering 30 markets nationwide (available at Yahoo Finance here), Ingo Winzer (president of Local Market Monitor, a Massachusetts-based real estate analysis firm) has this to say for the Boston market:

Until about a year ago, homes would go on sale and be gone in a week," he says. "Now they're sitting on the market for a year." He doesn't see the prices dropping rapidly here -- or in any market, for that matter -- because while real estate prices escalate rapidly, they drop slowly.

"In markets that are well-overpriced, prices don't really fall because people just won't sell," he says. "The adjustment mechanism is skewed by people's emotions getting involved. People will grit their teeth and hang on as long as they can to get the price they want."

They might not be able to hang on for long. Burns ranks Boston fourth on his list of markets likely looking at a bubble; Winzer's analysis indicates the market is 33 percent overvalued.

Over at CNN-Money, National City Corp. checks in with an analysis of 299 markets, including several in MA:

Metro Area (Median Price) %Overvalued

Essex County ($344,900) 26.50%
Pittsfield ($189,100) 11.90%
Barnstable ($352,800) 45.80%
Springfield ($208,400) 19.40%
Cambridge-Framingham ($392,400) 9.70%
Boston-Quincy ($358,800) 16.30%
Worcester ($251,700) 28.90%

I can't make much sense out of these numbers. For instance, given their proximity, how can Cambridge-Framingham be only 10% overpriced, while Essex County is 27% overvalued and Boston-Quincy is 16% overvalued? Wouldn't enough people move if such a gradient in value existed to quickly balance the numbers? Do incomes vary enough across these regions to account for the variation in % overvaluation?

What's even more curious is how these numbers have changed since last August, when the same company published a similar study. Back then Boston was 31% overvalued, Essex County 30%, and Cambridge 24%. What happened - did the methods change, or have we already had half the correction from overpriced levels?!? At least in this earlier study the overvaluation numbers were more reasonably clustered.

So what can we take away from these nubers? Not a whole lot, if you ask me. There is no single magic metric for valuation - a house after all is worth what someone is willing to pay for it. But it is becoming increasingly clear that the same house is likley going to be worth less in the near future than it is today. Under those conditions, who knows when and where the new trend will end.

Predictions anyone?

Rents in Hub still lower than in 2001

On Wednesday the Boston Herald published a story titled "Hub rents going up." Let me humbly submit that the title of this post more accurately captures the news value of the story.

The key points:
M/PF Research, which tracks rental markets nationwide, says in a quarterly study due out later this month that average Hub-area rents rose 1.5 percent in 2005 to $1,300 a month. That’s the first annual gain since 2001, when average apartment costs peaked at $1,379 a month.

A measly 1.5% increase (less than the inflation rate) trumps the fact that rents continue to be lower than they were 4 years ago.

More reasons not to worry:
...Hub landlords report little evidence of higher rents.
“We’re seeing a slight increase in overall occupancy, but not much of an increase in rents,” said Chris Reilly of Equity Residential Properties, which owns 9,000 Massachusetts apartments.
Market watchers add that the large number of apartment projects now in the pipeline should keep rents in check in the future. MP/F says 8,337 Hub-area units are currently under construction - more than all of the apartments built in the 1990s.

1 in 48 Massachusetts Houses For Sale

According to the 2000 US Census, there were ~2.44 million owner-occupied households in MA. In January, the MAR reported an inventory of 51,122 homes for sale. That means that ~2.1%, or about 1 in 48 MA homes were for sale. No wonder "For Sale" signs seem to be everywhere you look.

By comparison, at the peak of the 80's market there were ~30,000 units for sale. By 1991 that number swelled to >44,000.

Playing both sides

While the monthly market stats continue to deteriorate in MA, they are inevitably accompanied by reassuring words like "normalizing" or "soft-landing". These words are surely aimed at buyers hesitant to commit to a housing purchase at what may be a significant market peak. But the market doesn't function, and realtors don't get paid, if sales don't happen. So what are sellers hearing from realtors? In the latest release of "Bay State Realtor" available at the MAR website, you can get a glimpse. Some highlights:

Pricing in Massachusetts has enjoyed an explosive decade-plus run. The result is not only vastly higher prices, but high expectations embedded in sellers. Having been conditioned by a market that virtually guaranteed unimaginable appreciation, many sellers are reluctant, at best, and unwilling, at worst, to accept this inevitable shift in buyer behavior.

How should Realtors confront the daily challenge of persuasively managing clients with pricing demands not in step with the market?

Unrealistic Expectations
“Their expectations aren’t unrealistic,” says Chuck Lemire, regional director for RE/MAX of New England in Natick, about sellers’ pricing. “They’re just based on the information they have at the time.”

“The agents are having a really rough time with them,” says Margie R. Richard, vice president and broker/owner of RE/MAX First Choice Real Estate based in Northborough, about sellers with high price points. Agents are under pressure both from sellers to maintain high prices and the competition from other Realtors to acquire listings, according to Richard.

The Price Factor
For clients thinking about pulling properties and waiting for the spring market, Montalto advises against it. She cites increasing inventory and rising interest rates as factors that will make those sales even more difficult.

Jack Attridge, sales associate with Carlson GMAC Real Estate in Marblehead also suggests using nearby over-priced homes that have lingered on the market as ominous examples to a client. He includes a warning to sellers that initial high pricing can eventual end up with lower offer prices than correct pricing would originally attract.


No mention of "soft-landing" and "normalization" here, just a hard-nosed and realistic survey of a changing marketplace.