Broaden your perspective on falling housing prices: Boston & Beyond

Prices are down again, but are they affordable? That question caused Boston Real Estate Now blogger Scott van Voorhis to draw a stark contrast between the median sales price of single-family homes in Greater Boston during the past month, $417,000 in April 2011 versus $250,000 in 2000.  Beyond the numbers in that decade-long retrospective, some buyers — particularly first-time home buyers — should be reminded that the tech bubble had inflated housing values to unsustainable levels in 2000 – 2001 and beyond the Boston Foundation’s concern about “decreased affordability,” more important voices predicted falling prices and warned of potentially devasting impact on banks.

In an article published on August 13, 2001 entitled “Feds Report: Housing Starting to Weaken“, nationally-syndicated columnist Lew Sichelman cautioned that:

Deputy Comptroller of the Currency Nancy Wentzler reminded reporters recently that housing values dropped 8 percent on average during the last recession in 1991. Not only could it happen again, she said, it could “happen rather abruptly.”

In the first federal reserve district, the Boston bank reported that while the overall housing market is still strong, “signs of softening are emerging.”

Housing prices, as the Boston Foundation wrote, had risen to a median sales price of nearly $300,000 in Greater Boston, a jump of more than 50 percent over three years.  That defied predictions made in November 1999 by James Smith, former Chief Economist for the National Association of Realtors, that a recession would occur after the Presidential election of 2000, followed by a two to three year downturn in the housing market.

Instead of raising interest rates to cool housing prices, the Fed dropped them fourteen times after 9/11 to stimulate the economy and housing market.

By June 10, 2005 the New York Times ran a graphic counting the number of “major world newspaper” bubble features that had been published in the days of May: 0 in 2001; 18 in 2002; 20 in 2003 (a relative plateau); 35 in 2004; and more than double that to 77 in 2005 (and Fed Chief Alan Greenspan only weighed in with his “froth” concerns on May 20, 2005).

In retrospect, it is clear that the Fed knew that housing prices were inflated and that a price correction could have widespread impact on banks and the economy.  Ten years ago this summer, Sichelman reported:

…Deputy Controller Wentzler is worried enough that a crisis could be just around the corner that her office has advised the national banks it oversees to take a look at their book of mortgages to make sure they are not over-exposed.

“What we are suggesting from all the models we are doing is to watch this carefully make sure we stress test for a potential rather steep and decided drop in house prices that could effect collateral values at banks,” she said.

Specifically, Wentzler is concerned that banks could be hit by a double whammy — an increase in delinquencies compounded if appreciation goes flat and an increase in foreclosures if layoffs accelerate.

As Voorhis wrote, “Sound familiar?”

Related Articles

Bubble babble

Sign of the times or self-fulfilling prophecy?
Trendster
John Naisbitt (Megatrends, et al) used to count media mentions to track
trends. On June 10, the New York Times ran a graphic counting the
number of "major world newspaper" bubble features that had been
published in the days of May: 0 in 2001; 18 in 2002; 20 in 2003 (a
relative plateau); 35 in 2004; and more than double that to 77 in 2005
(and Fed Chief Alan Greenspan only weighed in with his "froth" concerns
on May 20). Will the babble break the brawny housing bubble? Or is it
just chit-chat chatter?
–Christina B. Farnsworth
                   
                   

If job creation drives housing prices, what is preventing the Boston housing market from falling?

Add to unemployment / job creation section of The Real Estate Cafe’s ongoing data collection / spreadsheet of factors underlying the housing bubble.  This information has been archived periodically since 2000.  Initially, a snap shot was taken each year just before Halloween for an annual update of our slideshow entitled, Haunted by the Housing Market.  During 2005, we began making updates more frequently as evidence of the coming slide in housing prices began to mount locally and nationally.  While it’s hard to miss the fact that some of "the biggest employers in town are leaving," as the Boston Herald article reports, this statement is stunning and more including in one’s prediction of where housing prices are headed in 2006 and beyond:

"The roughly 740,000 jobs in the Greater Boston area is still more than
80,000 shy of its 2000 peak. And it may take years more, perhaps as
long as a decade, before those boomtime employment levels are seen
again, said Nordby. Only by 2015 will the Greater Boston area boast
roughly the same number of jobs, 821,000, that it had in December 2000"

The Housing Bubble 2: ‘Sky-High Housing Costs’ Drive Away Boston Jobs.

Mortgage banks dispell housing bubble notion


Mortgage banks dispell housing bubble notion

http://www.dallasnews.com/sharedcontent/dws/bus/stories/072305dnbusmba.a0e653dc.html

Mr. Duncan said that the impetus for the paper was a “crescendo” in inquiries about the existence of a housing bubble. The MBA paper cited a Lexis Nexis search for the term “housing bubble” for July 2005 that yielded 650 articles.  According to Inman News, "The purpose of the 30-page analysis of housing and mortgage markets, Duncan
said, is to put the flood of housing market commentaries and analyses into
perspective, review the risks and discuss the systems in place to help mitigate
risk."

Though the landscape has changed in recent years, Mr. Duncan emphasized the paper’s conclusion that, “there are risks but they are far less dramatic than the hyperbole of recent months.”
   

“House price growth will slow and there could be a flattening or even a slight uptick in delinquencies and foreclosures in coming months and the U.S. economy could slow.”
   

A full 35 percent of Americans own their homes outright and an additional 51 percent hold fixed-rate mortgages. In all, Mr. Duncan said the paper estimated that a scant 7 percent of homeowners were exposed to interest rates sensitivity, which did not include data on home equity borrowing.
   

According to the National Association of Realtors, condo inventories shot up from a 3.5-month supply in June to a 5.3-month supply in July. Though inventories for single-family homes also rose for the month, the increase to a 4.6-month supply from June’s 4.3 months was far less dramatic.
   

“The appropriate stance,” the paper concluded, “is one of caution, not of panic.”
   

"There are risks, but they are far less dramatic than the hyperbole of
recent months," said Doug Duncan, chief economist for the Mortgage Bankers
Association. Duncan co-authored a report, "Housing and Mortgage Markets: An Analysis," released today.

Inman News say, "While the trade group is not predicting a housing-price crash, it does
predict a sharp decline in housing-price growth next year, with average appreciation
levels dropping to between 4 percent and 5 percent from this year’s double-digit
appreciation rates, Duncan said."

Inman:  But there are a number of factors that work to mitigate these risks, according
to the MBA analysis. For example, there is an alignment of incentives among
the borrower, lender and the investor, Duncan said. Each has a stake in the
borrower making mortgage payments and the alignment limits the extent of
problems caused by any potential downturn.

Inman:  Duncan said sharing of incentives is why the trade group suggests mortgage
borrowers see a lender before seeing a real estate agent. Agents have no
stake in loan delinquency once the house is purchased, he said.

 

Boston housing market 2006: “Hard landing” or “return to normalcy”?

Three weeks after economist Nicholas Perna told the Boston Globe that "both early data and the anecdotes — are pointing more toward a hard rather than a soft landing" for the [Massachusetts] housing market, Perna repeated that assessment in the Boston Herald following news that single-family home sales fell 9.2 percent in November.  Need to confirm, but isn’t that the four month this year of near double-digit decreases compared to 2004?

"It sounds more and more like the housing adjustment is a harder landing in Massachusetts than elsewhere in the country,’ said economist Nicholas Perna. ‘I don’t think we are seeing anything like that in the country as a whole. My guess is that Massachusetts is among the most seriously affected."

Some real estate professionals dismissed the significance of falling sales, calling them a "return to normalcy."   What’s your take?  Your comments are welcome below, or on our readers’ "record your own podcast" line:  617-876-2117. 

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