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December 13, 2005

Boston bubble bursting...

Dean Foust

So much attention has been paid on the softness in California housing, and here at BusinessWeek, two of my colleagues have an article in the current issue talking about the weakness in the Washington, D.C. suburbs. But if you want to talk about a market in freefall, look at Boston. This article in the Boston Globe (registration required, but it's free) quotes a Realtor who dropped the price of one luxury home by $550,000, or 22%. And it quotes a couple who originally listed their home at $899,000, reduced it four times to $800,000 -- and sold it for a price that they won't disclose (think, much lower). The sellers all complain about "vultures" who are making what they consider ridiculous low ball offers. But they weren't complaining at the top, when buyers were having to pay above asking just to get a hearing. That's the free market isn't it?

02:43 PM

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Hi there, I am a real estate agent in South Africa and we have had a huge boom over the last few years with property values tripling in many areas. There are fears of a crash looming here too. The comment I would like to make though is huge price reductions don't necessarily indicate a drop in prices. Sounds nonsense but here is why.

In a boom, when a property comes onto the market it is almost always the highest asking price ever for an area, this is because when prices are rising at 30% a year or more it stands to reason that the property should be priced at a level higher than previous sales. When the booms ends though and prices stablise...the sellers are usually the last to want to hear about it and the result is that they still tack on a "boom premium" like 20% or so above recent sales. The reality that the boom is over is realised after the property sits on the market for month after month. The result is that the price is reduced (sometimes by as much as 30%)to bring it inline with what the market is currently paying. Comparing actual selling prices though, the market has not dropped. For example the last property sold for $300,000 and this one also sells for $300,000 (but was originally on the market for $360,000). In actual fact there is no crash at all. The public make a mistake when they read price reductions in advertisements to mean that actually selling prices are also reducing.

Stephen Bartels

Real estate agent

South Africa

Posted by: Stephen Bartels at December 14, 2005 06:13 AM

Yeah, the same "vultures" who drove the prices up are driving them right back down. The pigs(sellers) have gotten very fat, time to get slaughtered!

Posted by: Allah at December 14, 2005 10:00 AM

As Mr. Bartels correctly points out, even with price reductions, many properties are still greatly overvalued. However, I've seen numbers in the Boston area that show that the median ASKING price has been dropping since August. So, if the median asking price drops, and people continue to slash prices after the property sits on the market, well then that would have to indicate the air is being let out of the bubble.

Posted by: Craig at December 14, 2005 12:37 PM

"Vultures" - ha! Why should someone make $100,000 for taking out a ridiculous loan? It really is insulting to buyers, all this crap. I want a place to *live* not to "invest" in... I wish all these get-rich-quick nimrods would hurry their plunge into financial ruin...

Posted by: B. Rintoul at December 14, 2005 02:33 PM

"Comparing actual selling prices though, the market has not dropped. For example the last property sold for $300,000 and this one also sells for $300,000 (but was originally on the market for $360,000). In actual fact there is no crash at all. The public make a mistake when they read price reductions in advertisements to mean that actually selling prices are also reducing."

You have only described Phase I of a crash.

In Phase II, the speculation premium disappears from buyers' willingness-to-pay, as they become aware that those anticipated 20% YOY gains you refer to were a mirage. At that point, the real air goes out of the prices, and valuations adjust downwards from where they were at the height of the boom when anticipation of untold future riches artificially inflated valuations.

In Phase III, the drop in price from Phase II comes to light, and the downward movement in prices gets taken into consideration, setting off a tail-chasing correction of valuations back to fundamental levels or lower.

Stephen Stohs

Economist

Posted by: Stephen Stohs at December 14, 2005 04:24 PM

And the worst part is the sellers will blame the agents.

Posted by: Todd Alvarez at December 14, 2005 06:25 PM

The seeds are sown for the crash well in advance. The grotesque distortions in capacity eventually come to light. Those who see a flattening have never seen a crash. Japan is down 80% from its highs of fifteen years ago. Nice inflation-adjusted return, eh? BTW-I agree with the "nimrod" comment.

Posted by: Thomas at December 15, 2005 09:30 AM

Yes, the asking prices of homes in many areas are dropping. But lets not confuse asking prices with the prices of what a home has sold for. A home that has sold and is a completed deed transfer is one thing versus asking prices.

Appreciation has slowed or flattened and the days a home is on the market has lengthened, but to suggest that "sold price values" have fallen is irresponsible.

Posted by: Frank Mercurio at December 15, 2005 10:04 AM

this is the end of a 20 year cycled in 1985 house

price where at around $ 20k to 50k median price in

arizona now the same house sell for at abut $200.000 if we go back to dic 1985 when foreclousced properties started to rise at 100% per week this can be a big big big messs.

Posted by: andres reyes at December 15, 2005 10:44 AM

Everything I'm reading here sounds like wishful thinking. The reality is the U.S. population is growing rapidly 280 million now, 400 million projected by 2050. More and more people are moving to the large metro areas where the jobs are, now that manufacturing and farming are disappearing. These metro areas have little or no available land to build on. High house prices are the new reality and we might as well accept it.

I'd love nothing more than to have an affordable place to live close to my job but I'm being realistic. I live in Southern California. Home prices for the last couple of years have fluctuated quite a bit. A temporary slowing in my view is just that. Temporary. Wishing won't change that.

I struggled to sell my two bedroom condo in Long Beach a couple of years ago for $300,000. I could have sold it in a week for $395,000 this past summer. When sales slow down here many people don't bother to try to sell. Then inventories drop and prices skyrocket again.

Keep in mind that despite high house prices the average homeowner today spends a smaller percentage of their income on their mortgage than people did in 1980. So, things could be worse.

And investors aren't the problem. Only about 3.5% of homes are bought by investors, which isn't nearly enough to affect prices in any significant way. I know a guy who flips homes. He buys rundown houses and fixes them up. I think these kinds of flippers are great because they are helping to revitalize many neighborhoods. However, I don't like flippers who buy brand new homes and hold onto them. It isn't fair to people, like me, who really need a home.

Anyway, I've accepted that I'll have a long commute everyday on clogged freeways. I can wish all I want that home prices will drop but I just don't think it's going to happen.

Posted by: lr at December 15, 2005 12:24 PM

Read Peter Coy's suggestion that to find affordable housing try buying somewhere further out with a longer commute (eg Pensylvania for NY city). Problem with that is that if prices do actually drop significantly then new buyers find that as prices fall they can afford to buy further in and this adds to the speed of the drop in outlying areas. Consider the possibility that outlying areas may actually be more of a risk at the moment - last to rise, first to fall.

Posted by: Rachel at December 15, 2005 10:47 PM

> The pigs(sellers) have gotten very fat, time to get slaughtered!

This hostile attitude toward people who may suffer in the crash puzzles me--why do you dislike people for having gotten into the market at the wrong time.

Everyone who is buying and selling real estate is not an investor--yet an ordinary person can suffer by buying at the peak and then having to sell before prices recover. Your glee at the misfortune of those in this situation is nasty.

Posted by: littletiger at December 17, 2005 07:45 PM

I would like to know how much new construction is going on in Boston. If NYC were to follow the same trend is it safe to say the planned and soon to be "condos" in NYC will really be "rentals"? If that is the case will the rental market be driven down further as well?

Posted by: Edmund Bogen at December 18, 2005 07:28 PM

Keep in mind that despite high house prices the average homeowner today spends a smaller percentage of their income on their mortgage than people did in 1980.

Even assuming this particular realtor talking point is correct:

1) That was at the time of record high interest rates. Interest rates are much lower now.

2) In those days, interest only and other exotic products were unheard of. These days over half of california mortgages are paid for with IO and other mortgages.

And investors aren't the problem. Only about 3.5% of homes are bought by investors, which isn't nearly enough to affect prices in any significant way.

Again, the real problem is in some areas where investors predominate -- Las Vegas, Arizona, SoCal, Florida etc. These investors most definietely do drive up prices.

Posted by: josh at December 19, 2005 01:40 PM

"Everyone who is buying and selling real estate is not an investor--yet an ordinary person can suffer by buying at the peak and then having to sell before prices recover. Your glee at the misfortune of those in this situation is nasty"

Is it worse than the glee of those joyful about how high prices have risen for their houses ?

In any case, ordinary people who buy at the peak should most definitely have done due diligence, should have bought only as much house as they could afford, should have taken into account the possibility that housing prices should fall. Thsoe who did their due diligence would probably have avoided buying at overinflated prices or only bought as much as they could afford (in which case, losing money would be painful, but not serious).

But for people who indulged in bidding wars, who bought houses with mortgages they can't afford, who counted on appreciation to bail them out, or for flippers -- I have no sympathy whatsoever. They took a risk and now they got bitten by it. In healthy financial markets, those who take excessive risk should get bitten badly once i a while -- it keeps the market honest and ensures that risk is properly valued.

Posted by: josh at December 19, 2005 01:46 PM

"Everything I'm reading here sounds like wishful thinking. The reality is the U.S. population is growing rapidly 280 million now, 400 million projected by 2050. More and more people are moving to the large metro areas where the jobs are, now that manufacturing and farming are disappearing. These metro areas have little or no available land to build on. High house prices are the new reality and we might as well accept it."

You must be right IR. I'm just a little skeptical because I once heard Yahoo was a steal @ $300 a share and that anyone who didn't buy in at that price would never own Yahoo and would be living in a Honda.

Your growth numbers are wrong as well (~300 million today). With the numbers you gave the next 45 years will look easy compared to the last 45. Only growing 100 million in 45 years? Heck, this country grew close to 50 million in the past 15.

As Josh said, great realtor talking point. What you are failing to consider is that less than 15% of all land in the US is urbanized. To continue to expect people to 'grin and bear it' with high prices is insane. With the advent of the internet, increasing remote work, and more jobs moving to the suburbs there is always a safety valve where people can CHOOSE and move to places where housing is cheaper. There is nothing offered in Boston that isn't offered in Dallas, TX. Dollar for dollar, Dallas is a better place to live with a more temperate climate.

Try telling people in Ohio and Michigan that housing is overpriced. Those states have largely been stagnant or declining during the great boom felt most everywhere else. And to think that Cleveland was once a great steel town along with Cincinnatti, Pittsburgh, and Philadelphia, of which all of those have been largely stagnant in the great housing boom.

Posted by: Wes at December 20, 2005 11:40 AM

Concerning Boston, the real estate/cost of living index has actually driven major corporations out of town (as well as out of Mass) like Reebok and soon Gilette and Fidelity. In addition, mainstay Boston companies like Putnam and Polaroid are on the rocks. This job loss at the higher end white collar work isn't being replaced locally by droves of startup companies like it was during the early 90s. Instead, some high end work in biopharma, etc appears to be growing while the rest of the "white collar" space is contracting as a whole. So, I don't see Boston's real estate values holding up over the remainder of the decade with increasing interest rates and decreasing career opportunities in the bay state.

Posted by: Randy at January 5, 2006 06:00 PM

In 1992 I had a job making $7.00 an hour. With a little overtime I made about $300 a week. That equated to $15,600 a year. Using the traditional guideline to buy real estate at around three times a person's income would have put me in a $46,800 condo in 1992. It was possible, even with a low income job. Today I make $80K a year and if I were to use the same guideline it would put me in a $240,000 condo. It was possible then and it is possible now. The only difference is today I would have to settle for a condo not as nice, even with a much higher income job.

Posted by: Todd at January 7, 2006 03:56 AM

"Today I make $80K a year and if I were to use the same guideline it would put me in a $240,000 condo. It was possible then and it is possible now."

Todd, you'd have to move out of the Boston area, Rte 495 and beyond, to find a condo for that price. Condos within the 128 beltway (single bedroom) are starting at $320K.

In '92, Boston was in the mist of a major condo collapse and one could pick up $40K condos in Brookline on foreclosure (worth $500K+ in today's market) and if you'd worked in the Metro North, you could find whole houses in Haverhill/Methuen for $15-$30K during that time.

Posted by: Randy at January 10, 2006 10:35 PM

It cannot be denied that house prices in the USA, and if you look Worldwide also in the UK and in "western" Europe have reached an high.

If you compare buying power and housing costs, you will find that there is virtually no room for rise in house prices.

You could use this to predict that house prices will level of.

But, if you look further you will also have seen a reduction in employment in all of above emntioned regions.

Due to companies outsourcing to the Far East, maily China, and in Europe also to eastern Europe, employment has fallen dramatically.

This also means that buying power is falling.

You can only come to one conclusion, the current leveling of of house prices will have to be followed by a drop in prices to accomodate for a lower average income in the USA, Uk and western Europe. The only hope is that the drop in value of housing is accomplished by a few percent inflation while the house prices remain stable.

On the other side, investment oportunities must be huge in China, India and eastern Europe. If property investors turn their eyes on these areas and their back on the local market, we are in for a major crash in the local real-estate market.

Marcel Geleijnse

Posted by: Marcel at January 31, 2006 04:29 AM

OFHEO Housing Price Index for Boston. Looks like the bubble is popping:

http://www.housedata.info/MA/Boston.Quincy/

Posted by: Justin at February 5, 2006 02:19 AM

"Todd, you'd have to move out of the Boston area, Rte 495 and beyond, to find a condo for that price. Condos within the 128 beltway (single bedroom) are starting at $320K."

This statement is just completely incorrect. I am single, make around 55k, and have 40k saved for a down payment. This puts me in the 200k range, and there are plenty of palatable condos in my neighborhood of Brighton for 200k. They're just not as nice, which was the previous poster's point, but they're certainly livable.

Posted by: Chris at February 10, 2006 01:17 AM

I think the name of the game is to milk something as long as you can and then bail leaving someone else holding the bag. This is true of contractors on the Big Dig, and the "Me" generation that wants to sell their overpriced home in Massachusetts and retire to Florida leaving the next generation struggling with the higher cost of living here in Boston.

Posted by: John at February 15, 2006 04:00 PM

See, this is the trouble.. yeah its wishful thinking... but like tinkerbell coming back to life, you get enough people who are wishing and things happen.

I've become increasingly angry at the market in my neighborhood. To date, each bedroom must support 100-200,000 worth of debt at market rates... if times got uncertain, renting them would mean taking a big loss... The asking prices have gotten silly.

As for the pigs at the slaughter and the hurtful glee, I feel it, and I feel a bit guilty for the everyman (no sympathy for the investors- who've accepted the risk)... but the truth is, that investors and everymen alike took great joy in flipping and selling their already paid-off houses and absurdly mortgaged properties for large bundles of cash - 2-3 times the accessed values. I recently saw a 271 sq ft condo listed for 151,000 -- and a 'low income' 376 sq ft for 131. 'Low income' is not 45,000 a year... and nobody should ever have to spend 'build equity' by living in a shoebox for 10 years...I'd rather rent, and save my money at an interest gain, not an interest loss.

I'm an everyman, an artist, trying to keep cultural capital in an area that I've spent many years in...Sorry guys, I'd love to help you out of your investment, but the greed has to stop somewhere, and I'm not buying until the utter idiocy stops, and I'm not buying the candy-fluff stories about awesome market is, and I'm not buying a condo with a kitchen, that looks like cookie-cutter Home Depot display that calls itself 'top quality' or 'luxury'.

Posted by: Hapto at April 26, 2006 02:56 PM

Rates are headed up. The inflated values possible at 4.5% just aren't possible at 6.5 much less 7.5%. The brokers on easy street never tell you that fewer people can buy your "investment" when their monthly payment jumps 40%.

As prices fall in the outlying areas in SoCal (price of gas, prices ourstripping income), flippers will abandon the market as they appear to be doing East of LA. Prices will fall. Builders will discount ahead of any remaining flippers.

People cheerfully spending the proceeds of their 2d mortgage on junk or other real estate will try to salvage their equity by a sale. Not many will have the fortitude to wait 8 years for the market to return, assuming it does. It hasn't in Japan.

Those waiting for a population boom to save them better be sure that incomes in that boom group can keep up (nope). And the fall off--the demographic slump--as the baby boomers head for retirement homes not condos--means droves of oldsters will drop their houses on the market or deed them to kids. The kids will live in them or sell them=even more inventory on the market. Good luck investors.

Posted by: Frank Drebbin at May 11, 2006 07:54 PM

My husband and I have tried to save up for a house the last five years. We have two small children and are looking for a safe place, good school to call home. I find it so sad we can not find a simple home at a affordable price.

This is digusting....The american dream was there for my parents and it is not for us. I will not move my children into a dangerous neighborhood just to own a house and have both parents working. I have friends who want to make that 100,000 profit flipping homes that were given to them by their parents, grandparents...Sometimes the profit is more than that. It is greed, I am sorry. A home is were you raise your family, make memories and grow old in. Now it is looked at just an investment. My family is my investment. I don't know when we will be able to buy our first home. I wonder how many other families feel the same? Something has to be done...The middle class is vanishing....We are middle class family with good values, good to society. But We feel very left behind.....

Posted by: Rachelle at February 10, 2007 10:16 AM

Curiously, a major real estate boom occurred just after 9.11 when W told Americans, "just go shopping." Terror struck, cocooning was more intense than ever, the dot.com meltdown had stock investors exiting in droves. Suddenly, RE seemed like a brilliant idea in America, where factories were closing by the thousands and jobs disappearing.

But the chickens are coming home to roost. With a huge current account deficit, "real jobs," and real companies gone the way of cigar store Indians (or simply cigar stores!) the RE market seems to have hit the summit.

Now just what can Americans invest in any more...?

The handwriting seems to be on the wall, however, and coming to a neighbourhood near you:

the Argentinization (or Italianization) of American finance. Yes, folks, simply devalue the dollar seriously and you won't have any choice. You'll simply HAVE to buy American.

Now THAT's a patriotic idea, isn't it...?

Posted by: Clay at February 19, 2007 07:49 AM


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