Back with a full market wrap

It's been three months since my last post. Way too long, but family and work deadlines come first.

After relatively strong months in July and August, the housing market in Massachusetts abruptly slowed in September. The mismatch in market results reported by the MAR (here) and the Warren Group (here) continues. Below is a comparison on the year over year change in SFH prices reported by both organizations over the past 19 months:

According to the more complete Warren Group numbers, SFH prices are down 4.4% from last September, and a cumulative 13.1% since September 2005.

Looking more closely at the MAR numbers, sales for both SFHs and condos plummeted in September:
Condo sales in September were the weakest since 2002, while SFH sales were the weakest since 1992 according to the MAR press release (PDF).

MAR continues to report that median prices are holding up fairly well:

Note that while median condo prices remain above past year levels, median SFH prices reported by MAR are down 5.5% from 2005 levels, and are below 2004 levels.

The one tentative sign of improving market conditions over the past year has been the better balance between for sale inventories and monthly sales (i.e., Months Inventory). The plummeting sales in September returned this figure to 12.1 months, close to last year's level.

June Market Wrap

Here's the latest price data from MAR for SFHs (down 1.6% YOY) and Condos (up 4.4% YOY) plotted relative to recent history:
Frankly I'm surprised MAR has been so restrained about the new record high median condo price reached in June. Perhaps even they recognize that the relatively strong sales in the pricey downtown Boston condo market (see story here) are skewing the median price higher.



MAR also offered up a summary of Q2 data (see here) which I'll cover in a future post.



Once again the Warren Group reported prices that were much weaker than MAR, with SFH prices down 4.6%, and condo prices down 4.1% YOY. Here's a comparison of SFH YOY price changes over the last 16 months from the two organizations.

The reason I want to emphasize this plot is that the differences between the two reports are now spanning at least a two year period, so the trend is beginning to amplify. For instance MAR reported 2007 prices down 1.6% relative to 2006, and 2006 down 1.1% from 2005 (pretty much the market peak). That means MAR numbers indicate that the statewide SFH median price has fallen a cumulative 2.7% from summer 2005.

In contrast, the Warren Group has 2007 prices down 4.6% from 2006, and 2006 prices down 3.9% from 2005, for a cumulative drop in SFH median price of >8%. Now that is a meaningful difference, and one I don't see mentioned anywhere in the local coverage.

March-April-May Market wrap

I'm back from a too long hiatus, and just wanted to post updated SFH and Condo prices published by MAR for March, April and May.

Reading the media and blog coverage of these data releases, I couldn't help but notice a growing move toward balancing MAR numbers with those from the Warren Group and others. Below, I've plotted the YOY change in SFH prices over the last 15 months from both MAR and the Warren Group. For comparison, I've also plotted the S&P Case-Schiller HPI for the Boston MSA, which differs from the others in that it reports prices from repeat transactions, in a smaller geographical area.

Clearly MAR numbers have trended toward less severe price declines than those from the Warren Group (I couldn't track down Sept 06 data). The difference was particularly pronounced in May (+0.65% vs -4.6%). One likely explanation for the trend: sellers at lower price points are increasingly selling without a realtor, hence some lower price transactions captured by the Warren Group are missed by the MAR.

Bear markets: how deep, how long?

Using the S&P/Case-Shiller® Home Price Index for comparable sales of single family homes in the Boston MSA, the peak of the late 80's / early 90's market occured in July 1988. Plotted below in black are the percent price declines in the subsequent 106 months relative to that peak.

The market did not bottom until ~36-48 months after the peak. One way to interpret this plot is that on aggregate, a home purchased in July 1988 would be sold at a loss for the next 106 months (>8.5 yrs). A home purchased when half of the ultimate price decline was complete (-8% @ ~24 months) would be sold at a loss during roughly the next 56 months (>4.5 yrs). These are NOT inflation adjusted prices. This does NOT include commision costs.

There is no reason to expect history to repeat itself exactly, but the yellow bars on the plot show very similar price declines from the recent September 05 market peak. The arrow indicates the most recent data release for January 2007. The final five bars in the plot correspond to the CME futures for the Boston MSA for the next 12 months (as of March 27).

Only time will tell whether the current bear market wil match or exceed the severity of the previous cycle. But the plot does provide cautionary evidence that purchasing in a falling market is no protection from potential losses for extended durations. Next time someone tells you "now is a great time to buy," keep this in mind.

February Market Wrap

MAR and the Warren Group reported market stats for MA this week. For once their numbers were in reasonable agreement. See the Boston Globe for the overview (here). Below are plots of SFH and condo median prices, as reported by MAR for the past few years:

One thing that I have been noticing is that MAR is continually revising their stats from past months/years. I don't have the time to keep up with their changes, and they don't bother to report the changes when they make them, so I will have to acknowledge that the numbers I'm plotting are "as originally reported." The differences are typically small, so not too big of a deal I guess. Doesn't do much for my confidence. I plan to spend more time from now on using the S&P/Case-Shiller® Home Price Indices, which have a number of advantages (see previous post here).

Months inventory continued to run below year ago levels in February:

December/January were unusually warm, and mortgage rates dropped, likely contributing to unusual seasonal strength in Jan/Feb closings. In Feb the weather turned and rates rose, and I expect the March closings and months inventory will suffer by comparison to last March (which was relatively strong).

Comparing the previous and current real estate cycles

The Case-Schiller Home Price Index is available for a number of markets around the US. This index tracks the repeat sales of single family homes, and thus serves as a unique measure of changes in house prices across time, without distortions from new development, changes in sales mix, etc. A detailed discussion of the index methodology is available in PDF format (here). From this document:

The S&P/Case-Shiller® Home Price Indices are designed to be a reliable and consistent benchmark of housing prices in the United States. Their purpose is to measure the average change in home prices in a particular geographic market. They are calculated monthly and cover 20 major metropolitan areas (Metropolitan Statistical Areas or MSAs), which are also aggregated to form two composites – one comprising 10 of the metro areas, the other comprising all 20. The indices measure changes in housing market prices given a constant level of quality. Changes in the types and sizes of houses or changes in the physical characteristics of houses are specifically excluded from the calculations to avoid incorrectly affecting the index value.

The historical indices go back to 1987, and are available in Excel fromat from Standard & Poor's (here). I've extracted and plotted the data for the Boston MSA to emphasize a few points. The Boston MSA consists of these counties: Essex MA, Middlesex MA, Norfolk MA, Plymouth MA, Suffolk MA, Rockingham NH, and Strafford NH. Here's how prices in this MSA have behaved since 1987:

The prices are indexed to a value of 100 in January 2000, thus this plot shows relative price changes indexed to that date. Interestingly, the Chicago Mercantile Exchange (CME) now allows futures trading based on this index (here). The last five bars in the plot correspond to the contract prices for futures over the next 5 quarters, recorded on 3/12/07. The predictive value of these contracts are suspect, given that they are thinly traded, but they do give some indication if where bets are being placed.

To put the price changes into a more accesible format, below I've plotted the year over year change in Boston MSA prices starting in 1988, along with the CME futures contracts:

This plot makes clear the previous bear market starting in 1989, followed by a slow recovery, eventual multi-year bull, and the current bear market beginning in 2006.

Zooming in on the end of the last bull run, one can see the growing downtrend in prices (trending at -5% yoy for the most recent available data), and the CME futures for the next five quarters. Clearly, little immediate recovery is anticipated in the futures market, which are predicting continued deprectiation in SFH prices at around -5% yoy through next winter.

An interesting comparison can be made by examining the YOY % Change in the CS HPI for Boston MSA starting in the last bull year of each cycle (1988 and 2005). Here the black bars report % price changes in the 1988-1991 window, and the yellow bars % price changes so far since 2005, with the CME futures also included.

One striking point that comes out of this side by side comparison is how much sharper the onset of the current bear market in SFH prices has been relative to the last cycle (note that the comparison for condos would likely result in the opposite conclusion). Thus far the CME futures are not predicting anything like the severe price drops observed over the fall/winter of 1990-91. For reference, the light blue shading represents the early 90's recession which coincided with the depths of the bear real estate market. Given all the recent talk about recessions, it is interesting to ponder how the current cycle would fare in a similar scenario. It is also interesting to note that during the last bear market recovery, the yearly change in the Boston MSA CS Index did not exceed 5% until 1997, 5 years beyond the end of this plot. A long and slow recovery indeed.

January Market Wrap

The Warren Group results for January (reported as yoy change):

SFH sales up 5.1%

SFH prices down 3.4%

Condo sales up 2.7%

Condo prices flat

MAR numbers were much stronger for January:

SFH sales up 12.6% yoy

SFH prices down 2.4%

Condo sales up 5.3%

Condo prices down 0.7%

Here are MAR reported median prices for SFHs and Condos relative to recent history:

In the January press release MAR no longer reports inventory broken down by SFH and condo, so I will omit those plots. The increase in sales, and decline in inventory from last January to this January led to a major decline in Months Inventory from 14.1 to 10.7 months:

Overall, these numbers reverse or halt many of the trends that have been consistent since the summer of 2005 (e.g. declining sales, increasing inventory). However, median prices continue to decline. The coming months will certainly be interesting. My sense from reading the MAR press release is that February numbers will be much weaker, likely due to the turn in the weather in January, and the surge in mortage rates that began in December (which should affect closings with a 2-3 month lag).

Urban condo market analysis: noise or signal?

Here are two sets of urban condo data from highly reliable sources and that on the surface are difficult to reconcile:

1. The Warren Group "Boston" (defined as Beacon Hill, Back Bay, North End, and South End) condo median price for January over the last three years (available here):
2005 - $502,000
2006 - $364,000
2007 - $580,000
That works out to a yoy decline of 27.5% from 2005 to 2006, and a 59.3% increase from 2006 to 2007. Does anyone believe that the median condo in these neighborhoods increased in price 59% from last January to this January? An obvious problem here is the sample size. The total Jan. condo sales for each year were:
2005 - 172
2006 - 112
2007 - 143
If a new project or two comes online during a particular month, it can have an inordinate effect on the median price reported. To me these data are useless without more info about the projects that were coming online, and/or more data about the size and type of units that were selling.

2. Joe Wolvek of Coldwell Banker Residential Brokerage reports on his website (here) the price per square foot (obtained from MLS-PIN) for three of the four neighborhoods lumped together in the Warren Group "Boston" sample. Plotted below are the data for the past 3.5 years, plus the data for closed sales this year through 2/7:

Price per sq ft appears to have peaked in late 2005 / early 2006 for all three neighborhoods. A simple analysis of the quarterly YOY change in price per square foot results in the following plot:

The light blue line represents the MA statewide change in median condo price (not normalized to square footage). I added this line to show how closely these urban condo markets are tracking statewide trends when price per square foot is analyzed.

In contrast to the Warren Group numbers, there does not appear to be a significant surge upward in price per square foot in these neighborhoods. All three show price per square foot down 2-10% YOY so far in Q1 2007. Perhaps the North End is the critical piece of missing info that would reconcile the Warren and Wolvek numbers. Perhaps not. More likely the Warren numbers for nieghborhoods undergoing rapid development (at ever increasing price points) are subject to inevitable noise and sampling problems.

December Market Wrap

This week the Warren Group posted Massachusetts housing market data for December and all of 2006 (link here). For the month of December they report SFH prices down 8%, and condo prices down 2%. For the year, SFH prices declined 5.8% and condo prices declined 1.2%.

MAR reported their numbers on Thursday. Below are their numbers plotted relative to recent years. NOTE: MAR incorrectly reported (and all other sources I have found failed to correct) that December condo prices were up 2% yoy. In fact, according to the data available on the MAR website (link here), condo prices were DOWN 1.8% yoy. The prices were up 1.9% over 2004 levels, which is where they likely made their mistake.

SFH prices for December were down ~5% from 2005 levels, and down ~2% from 2004 levels. They are still up ~8% from 2003 levels. This is the 5th consecutive month that prices have been below 2004 levels.

Condo sales in December strengthened slightly relative to the recent trends. SFH sales continue to deteriorate.

Both SFH and condo inventories showed their smallest yoy gains since early 2005. Importantly, inventory is still climbing (though much more slowly) and is well above recent year levels. The spring market inventory levels will be interesting to watch. We could see the first yoy decline in inventory levels for SFHs in the coming months.

Months Inventory continues to run at high levels as inventory levels out and sales deteriorate.

I'll put together the year end numbers in a future post and try to make some early projections for 2007.

Boston "Urban Core Condo Market" Performance

Prompted by a frequent commenter, I downloaded condo stats from the Warren Report (link here) for all of 2005 and 2006. For this analysis I included all Boston neighborhoods, as well as Cambridge, Brookline, and Somerville (my "Urban Core Condo Market"). I then excluded West Roxbury, Roslindale, Hyde Park, and Mattapan from this analysis because these are the four smallest condo markets, each has the same or more SFH sales as condos, and I wanted to focus on condo-dominated neighborhoods. (Note: The Warren Report defines Boston as Beacon Hill, Back Bay, North End, South End, so I don't have breakouts for these neighborhoods)

First up, lets look at condo sales in 2005 and 2006 for these markets. To aid comparisons, I've labeled the % change comparing 2006 to 2005.

Only two markets showed an increase in sales, Dorchester (up 33.9%) and Somerville (up 17.7%). In every other market sales declined (sometimes precipitously), though the largest market (Boston) shows a modest decline (-1.4%). The total number of sales in these market declined 8.4% YOY.

Here are the median condo price figures for 2005 and 2006.

The only markets with an increase in median condo prices are Dorchester (up 5.5%) and JP (up 0.3%). Every other market is down YOY. On a sales weighted average basis, prices in these markets are down 2.3% YOY.

Interpret as you will. I doubt this will change anyone's mind about the state or trajectory of the market. The purpose is to provide a complete analysis, using year over year numbers and including all relevant neighborhoods, as a basis for discussion.

Bottom Spotting

With the new year upon us, many "interested parties" are calling for a bottom in the Massachusetts housing market. I think their pronouncements are very premature. Keep in mind these points:

1. To real estate professionals, the bottom in a market occurs when SALES bottom, not when prices bottom. Their livelihood depends on turnover (commissions), not prices.

2. Affordability in MA is near record lows (see recent post). There is very little room for upside price movement.

3. Catch-22. Dropping prices will increase affordability and potentially increase the pool of buyers. But, stabilization in prices is needed to motivate and reassure buyers. This process will continue to play out with declining prices and sales.

4. Credit standards are tightening. An unprecendented number of mortgage holders will face rate adjustments and payment shock in the coming year.

5. The building cycle is still bringing new product to market as demand continues to dissipate.

6. Markets take a LONG time to turn. Think about how long the anticipated peak in the market took to come to fruition.

7. Psychology has only started to turn negative. At a market bottom, the psychology of fear will dominate greed. Sellers will capitulate.

8. Supply and Demand. "Months Inventory," the number of months it would take to sell all existing inventory at the current sales pace, continues to increase. This means more houses are coming on the market than are selling. By this metric, the market has not stabilized, it continues to weaken. Here is months inventory for the last 4 years:

Last November there was ~8 months of inventory. This November, ~12 months. Think the trend is decelerating? Here is the year over year change in months inventory over the last three years, along with a six month moving average.

How important is this metric to prices? Plotted below is the historical relationship between Months Inventory (averaged over each year) and Appreciation Rates (averaged over each year) for the past 14 years.

Looking for an early sign that prices will firm? Wait for "Months Inventory" to show a meaningful and sustainable year over year decline. Until then, all pronouncements of a bottom in PRICES are fantasy.

November Market Wrap

Last week both the Warren Group (Globe link here, Herald link here) and MAR (link here) released November market reports for Massachusetts. Plotted below are the MAR price, sales, and inventory numbers relative to historical trends.

Typically, the most informative single metric is "months supply," which indicates how long it would take to sell all inventory on the market at the current sales pace.

More analysis to follow shortly.