Full disclosure: I rent. On purpose. For now.
Who are you gonna believe in this housing market? These guys, who say we’re looking at a late-’80s style crash — which might actually be good for the local economy, drawing people back to the state?
The Massachusetts housing market will remain in a slump, and by the time it hits bottom about a year from now, prices will have dropped 14 percent from the peak in 2005, according to an economic forecast released yesterday.
Such a decline would mean the current downturn would match the real estate collapse of the late 1980s and early 1990s, when the median single-family home price also fell about 14 percent.
“This is the low point, and if they miss it, they may not have another opportunity like this for years to come,” Greater Boston Real Estate Board CEO Gregory Vasil said.
How does the real estate guy know this is the bottom, hm? For realtors, it’s always you gotta buy now!!! The market goes up, you gotta ride it up! Market goes down, you may not have another opportunity at these prices!!! It’s like some beautiful Zen state … The Eternal Now. (Smart people say: Don’t try to time the market. Buy value.)
Wellll, the national trends seem to point in one direction on this front. In fact, prices are declining here. More reasons to ignore real estate agents with magical crystal balls.
Well, maybe that’s a little strong.
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But price is not the main factor when considering if you should buy – interest rates are. And they have been at historic lows for a loooonnnngggg time.
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Flash back in time – to the days of the Carter presidency, when 21% interest rates were commonplace. When I bought my house, I slept in a car in the parking lot of a bank for 3 days, fighting to get a special, super-duper, low-income, limited amount available, 18.5% interest rate. Thank you, Sentry Bank!
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I still live in the same house, which has appreciated in value approx. 400%. My mortgage payment, which will soon be a thing of the past, is approx. 1/3 of local apartment rents, never mind houses. And my fixed rate mortgage – the only kind I ever had – is 5.5%.
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At the time, any house was STUPENDOUSLY expensive. I had had chance to buy the house I was renting for $100,000, and walked away laughing at such a grotesque figure to find something I could afford. That same house recently resold for $1.3 million.
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Look at your rent vs. a mortgage payment. Be sure you know the price of taxes, water and insurance as well. But factor in equity that you are building, too. There’s an old stock market saying – be a bull, be a bear – but don’t be a pig. You will NEVER find a perfect moment on any financial continuum to purchase instead of rent, because those are only visible in hindsight.
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There was a sign in the local bank when I was a child – The Homeowner’s Child Has A Head Start In Life. It’s still true.
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(Disclaimer – I do not now, nor have I ever, had a real estate license or sold real estate – perhaps the only person on Cape Cod who can make that claim)
Also, I was very, very surprised at the size of my tax refund the first year in which I paid mortgage interest. The deduction is a pretty big benefit.
There are houses for sale all over. Many have been on the market for over a year. There are seven houses for sale within one mile of my not overpopulated neighborhood.
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The market is dead as a doornail here.
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Mark
It depends on the degree to which the market was driven by subprime lending. I’m not sure that this is something that can be easily determined, except in hindsight.
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The theory goes that real estate got so expensive solely because low-income, bad credit people were getting access to credit that allowed them to compete in the marketplace, and the existence of this additional demand, with a constant supply, drove up the price. Now, with this component of demand gone, prices will crash.
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A subtheory is that the failre of these loans is increasing the foreclosure rate, which has the effect of dumping supply on a market from which demand has been reduced, creating a death spiral. The death spiral is what killed us in the late 80s.
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I’m not sure that I buy the theory because I am not convinced that subprime is the only factor that led to the bubble in the first place. Low interest rates and the HUGE amount of money people were making in the mid to late 90s in the equity markets, and in many professional jobs, played more of a role, I think.
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I think the decline is a result of rising interest rates (historic lows compared to the last six decades, but high compared to 2003 and 2004) and rising energy prices, which act just like a tax in that they make everything more expensive without adding any new value to the economy. (Worse than a tax, even, because at least some tax is used to build or maintain roads, or fund government services, which are not valueless.) along with a general sense of insecurity about the economy. The subprime lending crisis is contributing to the soft market, but not all by itself, and not enough to cause, all b y itself, an outright collapse on the order of magnitude of the late 80s.
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Our big problem in the 80s was vast over deveopment resulting in a huge, unwanted, supply. I don’t think the present soft market is caused by vast oversupply, but by softening demand
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Far more threatening, in my view, are energy prices. Not because of any direct impact on the real estate market, but becuase of the havoc that steep hikes can cause to the economy. The economy is more service-oriented now than it was in the 1970s, and is less susceptible to an oil shock. Less susceptible to an oil shock, not impervious to an oil shock.
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I have always been told that a financially sensible person would make a 20% down payment, and expect to spend 25-30% of their income on monthly payments.
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I see pretty ordinary single-family houses in Medford still selling for $350,000 and up. That means a sensible person would have $70k liquid and be able to pay $1700 a month at present interest rates, indicating you ought to be making around $70k a year — roughly median income for a Boston-area family.
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So … how many families making $75k a year have $70k in cash lying around?
Even 25+ years ago, I put down ten percent, and my monthly payment was closer to 30% than 25.
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Consider – are you spending 25% of your income on your rental? Becasue 30% sounds high to me when you build no equity.
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Zero money down is fatal – I certainly wouldn’t put down less than 10% – but my relatives loaned me about 50% of my downpayment to supplement my savings.
I agree with PP that this formula is ancient, and reflects a time when lower middle/working classes were expected to live in tenements. Also, is there a certain fashion to renting, thus removing oneself from what might be perceived as the acquisitive mania of real estate owenership?
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Seems to me that, in this day and age, there are two considerations. One, what portion of your income are you devoting to housing? 15-20% seems right to me, 30% seems high, and the portion should be at the low end of that range or lower if it is rent. I would push the higher end if you can qualify for fixed or slow rising rate, and if you can reasonanly expect your income to grow over time. Two, are you a transient? You have to be far more concerned about the up-to-the-minute value of your home if you expect to sell it next year. If you aren’t going anywhere, who cares if it takes a 15% hit in the short term?
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If you are expecting to move away in the next 5-7 years, then renting probably makes sense. But I know people who have rented the same apartment for years and years, and I simply don’t undertand their financial planning thinking. The gains that they have forgone by doing this are huge.
who scrimped and saved and worked several jobs to give their kid the best shot.
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Whether it is a realistic investment in the future is another matter.
3 1/2 years ago I bought a small condo north of Boston while my life was in transition. The market price for similar units in the same complex went up 10% in the first 2 years. This winter I sold the apartment for 1% more than I had paid for it. The unit was on the market for 9 months. A lot of people looked at it. I felt lucky and relieved to sell it and get as much as I did.
Adding up mortgage costs, condo fees and insurance, I increased my net worth by about $5000 in that 3 years compared to where I would be if I had rented.
They are always consistently more optimistic than reality. They think people should stop waiting and buy now? Shocker! I agree more with the other report and also people who say that you can’t time things correctly. Often the ups last longer than people think they should and so do the downs. Its mass psychology and articles about it change it. If you see a place that you like and can afford and will stay in for 7 years, why wait?
I pretty sure that PP , Central Mass. and I are approximately in the same ballpark chronologically.
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Thirty three years ago I bought my first home, same house I am currently residing. We put 30% down (thanks to mother in law). Wife constantly wringing her hands that we would default as monthly nut was around $350.00 PIT. Wife and I both worked. We banked one salary and lived off the second.
We lived very, very frugally. We saved everything for kids education and the ability to help kids with house downpayment as we had so graciously been helped. My wife and I never had a hole lot. I never owned a new car until three years ago. I personally have been on a vacation once in my life. Wife and kids always went somewhere every year.
I’d just as soon work anyway—got in my blood. I realize things are different now and younger people have different priorities. Many of which I do not agree with. The instant gratification and I must have XYZ mentality seems to be almost all pervasive. People now spend a whole lotta money on crap and nonessentials. My oldest daughter and her husband I would guess about 60-100 dollars a week on restaurants. I don’t spend that much in six months. How can people complain about the cost of housing when the fritter away hundreds and thousands on crap?
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Lastly. Fifteen years ago the realestate market in SE Mass. was on fire. I took a chance and bought a fix-r-upper and fixed it up and sold it. It was on the market about three weeks. I then proceeded to buy and sell quite a few houses over a ten year period. I did a lot of research on employment, development, transportation, and realestate trends. I was very successful. Three years ago, I saw the clouds on the horizon. The biggest concern I had was that I saw the demographic shift. People were leaving the state, not necessarily because of the high cost of realestate, but because that Massachusetts politically, educationally, transportation/commuting, and employment had started the downward slide. People were looking around and asking themselves, “Can I do better elsewhere?” and the answer was “Yes.” I sold everything and within nine months the realestate market began the downward spiral. A fortuitous decision.
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The point being: young folks and many other people are looking around. Massachusetts and specifically the business community and the electorate had better wake up. The imprudent fiscal policy of our legislature and our current executive branch have this ship pointed right at an iceberg. Taxation cannot keep up with current or planned spending. The revenue stream has dried up.DiMasi has already been notified that there is an ice field ahead and that a berg is looming, he just hasn’t spotted it yet. If this ship is not slowed and an imminent course correction made then we will face the consequence.
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Can you give a citation some facts behind that quote? Can you give me personal anecdotes of people who left Massachusetts for “political” reasons?
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Wouldn’t a better phrase to describe someone looking to “do better elsewhere” be “for economic reasons”? And isn’t that directly related to the high cost of real estate — in other words, can’t find a cheap enough house close enough to your job?
There is a group of people 20-35 who spend lots of money on crap and who don’t own their own home. My wife and I were real spendthrifts saving for our downpayment, and were able to put 20% down on our first home, in the Boston metro area, without any help from parents or g’parents.
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We just worked hard, and worked hard at saving money. Heck, its six months after we bought and we went from one car to zero, and I still don’t own a cell phone. We don’t have cable television either. Lots of money goes to JPMorganChase and to the condo association, but not much goes elsewhere in terms of bills.
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But, it’s hard to be this cheap. It’s stressful on the relationship, and its such a shift from the status quo that it’s a tough transition to make.
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But, don’t just narrow it to the 20-35 age group. Folks all over the spectrum are spending far too much. Savings are down across the board. Far too many people have a negative net worth. A portion –not all of — this population has negative net worth due to material greed, lack of self control, and poor planning. Methinks society could chip away at that by (a) making it hard to market credit cards, (b) particularly on college campuses, and (c) raise the minimum payment threshold, helping to force people pay their balances off more quickly and force the CC companies to consider lower limits.
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Or, you could forget trying to regulate your way to encourage savings and just give people an incentive to save: further lower the tax rate on savings income.
since that seems to be about the most regressive tax I’ve seen you propose around here.
To keep the white, christians guys in charge!
“A spendthrift is someone who spends money prodigiously and who is extravagant and recklessly wasteful. The origin of the word is someone who is able to spend money acquired by the thrift of predecessors or ancestors.” Wikipedia
Thanks for the correction.
And Stomv – yes, being frugal while young is difficult, but through the Miracle of Compound Interest, it has more signifigance then than at any other time of life. You and Mrs. V are on the right track.
For many folks like myself the real issue of buying a place is the lack of affordable property for folks who have a single income. I would be looking at likely doubling my monthly housing expenses to get anything even similar to my apartment. Strapping myself just to say I own something really doesn’t make sense to me. There is a point to building equity, but doing so by completely destroying you cash flow makes no sense. I think many folks my age and younger, particularly those who are single, feel the same way. The housing supply does not meet modern demographics, where there is an increasing number of single people and decreasing number of traditional households; large multi bedroom homes do not make sense for us to buy. The supply of decent quality small starter homes and/or good small condos is very limited. So I think you have a lack of supply and high demand in specific types of homes if not actual numbers, making the financial jump to ownership prohibitively expensive for first time buyers.
I like to think in data, and the NYT just posted a nice dataset and graph (click on the figure itself). They basically plot the housing downturn now on top of one in the late 80’s/early 90’s and show that this one so far is slightly steeper in the downturn in prices, and just getting going compared to that one. Of course it doesn’t mean that it will follow the previous “correction” exactly. But I agree with some of the comments above. The market got frothy and overheated with individuals moving investment money from the crashed stock market into housing as an investment.
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I think the key is to look at how rents haven’t moved much but housing prices skyrocketed. If you don’t live in the real estate, then there’s no way to cover the mortgage by renting at that home sale price to rent price ratio. So who’s going to hold on to a property that is losing money now in hopes that it will appreciate someday? If its your own home to live in, it might be worth paying the expensive mortgage. But as an investment home that’s a tough sell, so people put those houses on the market to cash out now, and houses prices are starting to come down. I wonder if it will come back in line with rents completely or not. And the NYT graphic shows something else important too, the slow rate of housing market corrections. Buying and selling takes time and is expensive, so the correction happens over years, not months as with the stock market.
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I’ve been house shopping around here on cape cod, and the market is flooded with inventory. More houses than the realtors have seen in a long time.