August 24, 2005


House sales slip again; condos surge (Kimberly Blanton, August 24, 2005, Boston Globe)

The July decline in sales of single-family homes in Massachusetts mirrored nationwide figures. Sales of existing homes across the country slowed last month as mortgage interest rates, which dipped in early summer, edged up to 5.8 percent. The 2.6 percent decline is the largest since July 2004, the National Association of Realtors reported yesterday. Despite the decline, July 2005 was the third highest on record, and sales continued at a still-strong clip of 7.16 million homes annually.

Analysts noted that the condo and single-family markets are coming off record sales in 2004, and prices continued upward in July. The median single-family price of $375,000 was 7.1 percent higher than July 2004. Condo prices also rose 7.4 percent in July, to $287,900, a record price.

From 2000 to 2003, Massachusetts home values rose 50 percent, the greatest increase in the nation.

But state and national numbers suggest that the era of double-digit increases in home prices in the Boston area may be over.

''The guy who is expecting the house he bought five years ago -- for maybe $300,000 -- who was expecting to sell it for $800,000, may be happy with about $500,000," said Gary Bigg, an economist for Bank of America Corp. ''Expectations may be dampened for those who are expecting to make a killing on their house."

When not getting a double-digit annual return is considered a crisis you know folks have gone silly.

Posted by Orrin Judd at August 24, 2005 12:00 AM

Wait until maybe '08, when the guy who is expecting the house he bought eight years ago -- for maybe $300,000 -- who was expecting to sell it for $800,000, may be happy with about $400,000.

Posted by: Michael Herdegen at August 24, 2005 2:00 PM

Didn't Massachusetts' population decline last year? There's a situation where you could concievably see that sort of depreciation.

Posted by: Timothy at August 24, 2005 2:41 PM

So when a bubble bursts you get a 33% return?

Posted by: oj at August 24, 2005 2:54 PM

That would be 3.6% annualized over the last eight years. As more and more people invest more and more money more and more investment vehicles will converge towards the same rate of return, which over the long run should be about the same as the rate at which the economy as a whole is growing. So yes.

Posted by: joe shropshire at August 24, 2005 4:38 PM

strange kind of bubble.

Posted by: oj at August 24, 2005 4:46 PM

Joe: 1. You're completely ignoring the value of housing for the 8 years. No wonder the relationship between home prices and rents has broken. No one even thinks about their imputed rent.

2. You're also ignoring the power of leverage. The guy who bought a $300,000 house might have put down $60,000 and paid another $150,000 over 8 years.

Posted by: David Cohen at August 24, 2005 6:24 PM

I am, but so does everybody else. Even ignoring imputed rent and assuming you paid cash you're still getting a market rate of return.

Posted by: joe shropshire at August 24, 2005 7:45 PM

I also ignored the opportunity costs of not renting and investing the difference, but I expect Michael will be along shortly with some thoughts. It seems to me that a house is the biggest chunk of savings that most of us have, and also the biggest opportunity to invest on margin that most of us have. I'm not sure if I think that's a good thing or a bad one -- I'd like to see the savings and the debt separated more.

Posted by: joe shropshire at August 24, 2005 8:04 PM

If you've worked awhile your 401k will be bigger.

Posted by: oj at August 24, 2005 8:11 PM

So, the implied value of housing is zero.

Posted by: David Cohen at August 24, 2005 9:07 PM

They're worth the same as stock according to the bubble boys.

Posted by: oj at August 24, 2005 9:11 PM

Buying a home is a lifestyle choice.

From the financial perspective of a generic, average situation, it usually makes more sense to rent, and invest the difference between the cost of homeownership and renting in a Dow index fund.

However, most people like being in a home that they can call their own.

The problem with the leverage example is that almost NOBODY puts down 20% anymore, especially in America's top 50 local hyperpriced unsupported discontinuity zones; 3%, or LESS, is the norm there.

Further, 40% of mortgages written in '04, in those 50 markets, were INTEREST ONLY.

The problem is that leverage works both up, and down.
If you put down $ 15,000 on a $ 500,000 home, and its market price rises to $ 700,000, you've made a 1,300% return.
However, if its market price FALLS to $ 400,000, you've LOST 650%.

When you lose $ 100,000, it doesn't really matter if you lost it on, or the San Diego real estate market.

Orrin assumes that 99% of homeowners will choose not to sell during the downturn, or will not have to.

That position cannot be supported by the behavior of any group of homeowners during any market downturn in any American city since WW II.

For instance, during the last real estate downturn in SoCal, it took between 11 and 12 years, depending on location, to BREAK EVEN, in real terms.
Also, at the nadir, all of the gains for the previous ten years had been wiped out, in real terms, except for Los Angeles County, where by 1996 the median home price was the same as it had been in 1983, in real terms.

Since the average American family moves every seven years, another market move that behaves the same way will cause losses for three cycles of homeowners, which would include the vast majority of them.

As for computing the value of shelter when analyzing the return on a real estate investment...

Earlier this year, I rented a very nice four bedroom apartment in LA, between LAX and Loyola Marymount University.
The rent there was $ 1,800/mo, for a total annualized cost of $ 22,000/yr, and the same apartment is renting for the same price right now.

This apartment is in a good neighborhood, and is neither luxurious, nor value-priced.
A comparable apartment further east, in one of the suburbs between LA and Ontario, (a 40 mile stretch), could be had for ~$ 15K/yr.

The median home price in LA County, in July '05, was $ 543,890.

On Aug 24th '05, the average rate in LA county on a 30 year fixed jumbo mortgage was 5.75%.

So, if I were to return, but instead purchase a home in LA, at the median price, and get a $ 525,000 mortgage to pay for it, in the first year I'd pay $ 30,000 in interest alone, to say nothing of property taxes and maintenance issues.

Over the first ten years, the annual tab for the interest alone would average $ 28K/yr, or 130% of the cost of renting.

Posted by: Michael Herdegen at August 25, 2005 2:53 AM


More than 1% will sell--all will buy other homes.

Posted by: oj at August 25, 2005 8:45 AM

Michael: Do you have a cite for those mortgage numbers. They are much more extreme than any others I've seen.

Posted by: David Cohen at August 25, 2005 11:26 AM