April Market Wrap

April numbers came out this week from both the Warren Group (covered here in the Globe and here in the Herald) and the MAR (here). Given the historical numbers available from MAR, I'll continue to post updates based on their market stats.

The biggest surprise was the drop in sales from both last year and, shockingly, from last month. Typically sales rise throughout the spring, but that pattern was disrupted this year. SFH sales dropped 10% from last year and 5% from last month. Condo sales dropped 10% from last year and 3% from last month. The drop in condo sales is especially unexpected, given the strength in condo sales until now.

SFH prices recovered somewhat, and were basically flat from last year (up 0.3%).

Condo prices took it on the chin, and were down 2.5% compared to last year. The first drop in 88 months. The condo price chart is suddenly exhbiting an ominous trend.

The unsold inventory of SFHs continues to surge...

While condo inventories continue to build at an accelerating rate.

Below I've plotted the Months Inventory of combined SFHs and Condos to give a unified picture of the market's current state. Keep in mind MAR puts a balanced market at ~7.5-8.5 months inventory.

To put the surging inventory levels into historical perspective, here's the yearly appreciation rates and inventory for the last 15 years. Notably, inventory levels above 12 months have historically been associated with declining prices.

The Evolving Market

Each quarter the Massachusetts Association of Realtors issues a press release to accompany the sales and price numbers for the quarter. These press releases are archived on their website (here), and provide a telling recapitulation of the market's recent evolution. Each quarterly report (until the latest) ends with a quote from an MAR official summarizing market conditions (and in some cases offering up rosy projections). Recent quotes are reproduced below, accompanied by a link to each press release, and the YOY change in SFH prices for the quarter.

3rd Quarter, 2004 (11/15/04) SFH prices up 11.1%

“With today’s attractive mortgage rates, low down payment requirements, and steadily rising home values, it’s an ideal time to get into the housing market,” added Moore, who also noted that first-time buyers, immigrants, and baby-boomers who’ve reached their peak-earning years are all helping to keep demand for housing strong.

4th Quarter, 2004 (link) SFH prices up 12.7%

“Today’s healthy price increases are consistent with a market in which demand has outpaced supply, and we think that trend will continue in the coming year as large numbers of immigrant buyers and baby-boomers in their peak earning years hit the market,” said Tomkiewicz. “The good news for buyers is that we should see some moderation in price appreciation in 2005, especially if mortgage rates rise as forecasted,” she added.

1st Quarter, 2005 (5/12/05) SFH prices up 11.8%

“The current low interest rate environment is likely to prevent prices from falling any time soon,” Tomkiewicz predicted. Housing prices generally reflect supply and demand levels, so as long as mortgage rates stay attractive home buying activity should remain strong, thus prices should continue to climb rather than soften, she explained.

2nd Quarter, 2005 (8/15/05) SFH prices up 6.4%

“Predictions of a price bubble are simply unfounded, and ignore the fact that housing production across the state has failed to keep pace with demand,” asserted Tomkiewicz. “On top of that, zoning restrictions in many towns are contributing to today’s higher prices because they add to the cost of land and require that the homes that are built be larger in size. For these reasons, we don’t anticipate any decline in prices in the foreseeable future, unless the economy slips into a recession.”

3rd Quarter, 2005 (11/15/05) SFH prices up 5.7%

“With more sellers than buyers, especially at the upper end of the market, and mortgage rates now starting to rise, there’s not as much upward pressure on prices,” Tomkiewicz said. While sellers have started to adjust their asking prices, declines in property values are unlikely, according to MAR’s president, primarily because the risk of the market becoming overbuilt is minimal due to tough local zoning laws that restrict new housing production. “We expect homes will continue to appreciate in value in the year ahead, but more modestly than in recent times,” Tomkiewicz remarked.

4th Quarter, 2005 (2/15/06) SFH prices up 1.5%

“Prices may soften, but look for flat to modest appreciation this year rather than sharp price declines,” said Wluka.

1st Quarter, 2006 (5/15/06) SFH prices down 0.9%

No quote.

Nightmare Scenario?

Interesting article at MarketWatch today (Housing slowdown behind rise in inflation). The whole thing is worth a read, but here's the idea: housing is factored into inflation through rents, not house prices.

During the housing boom (while house prices surged) weakness in rental prices made CPI inflation (as measured) low, allowing the Fed to justify low lending rates.

Now this virtuous cycle is reversed: declining affordability means rental demand and prices are picking up, contributing to inflation pressures and further Fed action, which could further decrease affordability. The net effect in this nightmare scenario: increasing rents, increasing borrowing costs, falling home sales, and declining house prices (with increased borrowing costs offsetting an unknown portion of the decrease in purchase price).

The Bear Market Begins

The Massachusetts Association of Realtors (MAR) released cumulative market numbers for the 1st quarter of 2006 today, accompanied by a press release (here). Overall, 1st quarter sales of single family homes were off 6.5% relative to the 1st quarter of last year, while condo sales were basically flat relative to last year. SFH prices dropped 0.9%, while condo prices were up 2.4% relative to 1st quarter 2005. I have some doubts about the condo prices they report, given that their own monthly reports for Jan, Feb, and Mar report YOY price increases for condos of 1.9, 2.2, and 2.2%. No way this could result in prices for the quarter being up 2.4%. Nevertheless, the downward trends in price appreciation that began in the second quarter of last year remains intact.

In one year we've decelerated from double digit price appreciation to flat or negative price appreciation. Those with the most interest in keeping the market afloat continue to paint lipstick on this pig (see the MAR press release, and the latest Boston Magazine - BUY, BUY, BUY), uttering all the reassuring phrases about normalization, healthier levels of inventory, soft-landings, buyer's market, etc.

But their reassurances seem to be failing. How do we know? A stunning article in the Boston Herald last week revealed that Coldwell-Banker is, brace yourself, pressuring SELLERS to LOWER PRICES!!! This admission, more than any other, signals the end of the bull market and the true beginning of the housing bear market in Massachusetts. Market participants are out of excuses (weather, hurricanes, wait for the spring market, etc.), and it's clear to almost everyone that the sellers vastly outnumber the buyers. Want to sell your house? Price below the competition, and be prepared to negotiate. First time buyer? Wait if you can. If not, take your time, find exactly what you want, and offer below asking (after all, prices will likely be lower in a year).

Don't believe me? Ask Fortune, who labelled the Boston housing market a "Dead Zone" that is 30% overvalued. They lay out a worst case scenario:

For the past few years the housing boom has driven the economy, adding jobs in construction, remodeling, and real estate services. And consumers gorged on the equity in their homes, taking out a total of $2 trillion via loans, refinancings, and sales over the past five years.
Those powerful stimulants, which added a full point to annual GDP growth, will soon vanish. If corporate spending or some other force doesn't come along to pick up the slack, we could go into a recession that would cut income growth to zero. Then inflated housing prices would have to shoulder the entire, wrenching adjustment, falling 30 percent or more over several years.

Why worry about a seemingly unlikely worst-case scenario? Take a look at the homebuilders, on the front lines of the housing market nationwide. Their confidence in the future of the market is falling like a rock, and has reached an 11-year low (link here), while their stock market values have been tanking (52-week lows today for PHM, CTX, HOV, RYL, DHI).

Given the hand-wringing at Coldwell-Banker, I'm guessing the April numbers (to be released next week by MAR) are not pretty, and the spring market will prove insufficient to reverse current trends. At that point reality will be harder to sugar-coat, pressure on 'must-sell' sellers will continue to ratchet up, and price declines should accelerate.