Condo Speculators Take ‘Silent Price Cut’ In Boston
A Boston Herald columnist writes on the housing bubble. “As reported here recently, the number of unsold condos sitting on the Boston market has doubled in the past year. Who knows when this is going to end? Is it a lull, or the slow deflating of a wild property bubble? Count me in the bubble camp.”
“You would have thought, just a few years after the zaniness of the dot-com bubble, people might have been more circumspect. No, it isn’t ‘different this time.’ It never is. That’s just what people say in a bubble.”
“When the penthouse at 51 Commonwealth Ave. went on the market two years ago, it was a symbol of the sky-high real estate market. At $14.5 million, the 7-bedroom luxury home with skyline views was the most expensive condo in Boston history.”
“Toney agent Beth Dickerson found herself fending off inquiries from the likes of The New York Times. Today, the penthouse is a symbol of a different kind of market. It’s still there. Unsold.”
“Dickerson observes that it takes time to sell a property like this. No kidding.”
“Since July 2004, the property has been off and on the market for ‘refurbishment.’ And even after the investment, the price has been cut by half a million dollars to $13,995,000. But no buyers yet.”
“That makes it just the most singular example of the rising number of properties stuck on the Boston market, as their owners drum their fingers in frustration and worry. As reported here recently, the number of unsold condos sitting on the Boston market has doubled in the past year.”
“If high prices really were simply a function of rising demand for homes, rents would have soared too. They haven’t.”
“In the case of 51 Comm. Ave, I should point out that the sellers may think they’ve only cut the price by half a million. But of course, like every other homeowner holding out, they’ve taken a bigger hit than that.”
“When you factor in inflation and lost interest, a check today is worth about 10 percent less, in real terms, than the same check two years ago. In this case, that’s a silent price cut of $1.4 million. And still it’s there.”
The MSM is about 6-12 momths behind. This makes me wonder what they will be saying at this time next year??
What we’re saying now!
The press is *finally* starting to understand the situation. They are still far behind, but at least they are getting the gist of the situation now.
Maybe folks reading this blog should go to the article and give it a 5-star rating … give the poor MSM some little extra incentive to pursue this line of reporting …
“When you factor in inflation and lost interest, a check today is worth about 10 percent less, in real terms, than the same check two years ago. In this case, that’s a silent price cut of $1.4 million. And still it’s there.”
Great point. While sellers hold the line on prices, and their houses sit empty, they are bleeding money due to inflation, lost interest, and lost rent.
One way or another, this bubble will pop. It will either be through a quick price adjustment and sales can resume, or it will be through this type of “silent price cut” and houses will languish on the market. I’m hoping for the former.
Wow, great article. It the media is catching onto the actual costs of overpricing to the seller. I wonder if other media markets will figure it out.
Not sure why you’re putting it in future tense. I’d say for all intents and purposes, the bubble HAS popped. It seems like it popped some time between July 2005 and Jan 2006. Is there some specific demarcation we can use to pinpoint a date?
I’ve long tongue-in-cheek declared Oct 6th, 2005 shortly after breakfast as the tippy-top. I, of course, was kidding about being that exact but it represented the start of Q4, the first reflexive upticks in commercial credit from Fed tightening and the start of the normal holiday slow down in real estate.
That date works for me. It’s also the start of the Federal fiscal year, so implicitly takes into account the deleterious effects of yet another year of trillion-dollar deficits.
Hearing no objection, October 6th, 2005 it is.
Man, this is one sharp crowd. Yes.
LOL - I remember the gold crash in 1980. The top was when a secretary was posted on the Chicago Tribune with a Krugerand that she/he had purchased for >$850.00 and said the purchase couldn’t go wrong. I nominate the lovely lady in San Francisco who wanted her squirrels fed. My immediate gut feeling was this is the top.
Although the “Suzanne researched this” commercial does have to rank up there with the Pets.com sock puppet commercial in some way.
Are they still showing the “Suzanne researched this” commercial anywhere? Haven’t seen it aired here in weeks. There are seemingly increasing amounts of realtor “feel good” ads out there though. Wonder who lost their job at the ad agency for the Suzanne ad.
Oct 6th is actually a pretty good call for a couple of other reasons. I have a chart that shows the national median and mean prices peaking in August and Sept of ‘05, respectively. These national figures move very slowly and deliberately, so it is a big deal to see an actual change in direction - and they did. And, the Dow Homebuilders index put in a clear top in July ‘05, and has bled off 33% ever since. October 6th is as good a date as any. It’s like a tree crashing in the forest, though. The only ones who heard the pop are the ones who, like on this blog, tuned their ears to hear it.
I almost bought a house just about then! I know I’m not so sharp…but I’m trying to learn from all of you!
To be fair to me, though, it wasn’t *me*, but hubby of course. Who begged begged begged me to buy this house at the very tippy-top of our price-range, and at the very lowly-bottom of our space requirements. It was one of those deals where the location was ‘unique’, the cache high, but the downpoints significant for our situation. (and some serious feng-shui problems; despite some onthefaceofit charm, it would have been unfun to live in). But it clearly had appeal to a certain other kind of buyer and sold really quickly (within 1 month or so) for this market. I think, however, it was bought as an investment property, but I’m not sure. Hubby felt like its quick sale ‘proved’ he was right about what a great house it was. It had too many negatives for me; he was devastated and is still mad at me about it. I think in part because that fall of 05 felt like the very very end of any expectation of continued crazy (or even historically-average) appreciation…it felt like the last time you could buy without feeling like “duh, that was stupid”, even though it would indeed have been incredibly silly to do, you could still pretend like it wasn’t, like you were ‘getting in’ albeit rather late. Now you’d have to be fine with losing money and/or really rather deluded, I think!
go to stockcharts.com, enter “$DJUSHB” in the ticker field, bring up the chart, select the 3 year period, and refresh. Show hubby what Wall Street thought of the future of housing as of July ‘05. Tell hubby that, based on this and tons of other objective data, he was completely totally uttterly uselessly WRONG. Be patient until the fall of ‘07 and then go shopping for your new house!
He’s still mad at you? Well, if he’s still mad at you next year, show him the housing prices and say cheerfully, “Look how much MORE house we can buy now!”
My “radar” really starting going off in Spring ‘05. A Realtor actually knocked on my door and told me that a client of his had lost a bid on the house next to mine and was wondering if I was interested in selling.
Pinpoint! No pun intended, I’m sure!
july 4th 05
=pop
makes sense. The peak being June 2005, when Time magazine put on it’s cover Home $weet Home. Sometime after that the deflation began. Can we say bubble “popped” as do not hear gushing out sound yet in Ventura County, CA , even though sales have declined , wait, 41% per latest report.
Silent… but deadly.
amirite?
And this from Los Angeles:
Valley’s homes sitting on the shelf
http://www.dailynews.com/business/ci_3834889
Enjoy
LEI ,is down .1% (april) was expected up .2% . Interesting 10y is 5.09 ,as it was 5.18 just the other day. Lots of money hopping around it seems.
“When you factor in inflation and lost interest, a check today is worth about 10 percent less, in real terms, than the same check two years ago.
We need a new term; CondoMath. $14.5m two years ago by the CPI is worth $13.8m today. $14.5m two years ago earning 5% is worth $16m today. -IF- they get their price it is a 15% loss not 10% but I imagine there were a few expenses along the way that easily turn this into a 20-25% loss compared to better things to do with your money. This teaches two maybe three important lessons; don’t own the most expensive house on the block, much of the value in real estate is in living somplace nice not the investment component and finally you are unlikely to recoup improvements. This condotbomb should be Boston’s poster child like D.C.s Bubblicious Bench.
ahahaha! like BistroMath?! That’s going back a ways (distance reflected in the length of the arc of the coffee I just spewed) … very funny.
OT, loved the books, HATED the movie…
How many know that the dollar fell 6% last month ? …I guess it’s inconsequential to todays business models….
Well, it does mean I have to put off buying that farmhouse in the South of France I had my eye on. Oh well….
Yes I knew that. I have a trip planed for next Jan. I need to hurry and buy my ticket, pay for my hotel etc.
More interesting and along the same lines is the price of gold relative to other countries currency valuation. The graph on the link is excellent.
http://tinyurl.com/a7xqf
Dabchick’s Gold Index
This index is intended to show how gold is valued throughout the world independently of the value of any country’s individual currency. It is not really much use as a day-to-day indicator when currencies are stable relative to one another, and is best plotted as a monthly chart.
The 18-year decline seen in the index from its start in 1982 appears to have come to an end in 1999 with the sharp upward movement at the time of the Washington Agreement on Gold (WAG). Let us hope the WAG marked the beginning of a climb of similar duration.
The Dabchick Gold Index is calculated each day using this formula : A x B / 452 where :
A = Today’s Gold price in US Dollars
B = Today’s Bank of England Effective Exchange Rate Index ( ERI ) for the US Dollar
452 = a constant which contains the values of A & B in Jan 1982 and also makes allowance for the rebasing of the ERI from 1973 to 1990 conditions in 1995
Calculation of Rebasing Constant ( 452 )
{ ( $ Gold Price Jan 82 ) x ( $ ERI Jan 82 [basis 1973] ) }
divided by
Adjustment factor when BoE rebased the ERI to 1990 in 1995
equals…………….. { ( $ 386 ) x ( 1.10 ) } / 0.94
equals ……………..424.6 / 0.94
equals………………452
January 1982 was chosen as the starting point because gold seemed to have settled down quite well by then after the excesses of 1979 - 1981.
The Index was 100.00 on 1st Jan 1982
If you’re holding an ARM, it’s of great consequence. Foreign investors will need a higher interest rate to compensate them for the slipping dollar.
“If high prices really were simply a function of rising demand for homes, rents would have soared too. They haven’t.”
That is the key line summing up this entire fiasco.
This isn’t necessarily true. Rents may have stayed low for a number of reasons not least because so many of the better properties have been converted. Take out the high end and it may appear that rents on average are stable but in fact the second tier properties are now being priced at the first tier rates.
How about the fact that to cover your payments on an I/O loan @ 3%, rents have gone down? All other economic thoughts aside, I feel this one, overlooked, piece is very important for low rents. We’ll see what happens as these loans reset. I don’t see how it isn’t going to be an increase in rent/foreclosure.
I disagree. Those very same foreclosures will be bought back at greatly reduced prices and many of those will be rented out at rates much closer to actual mortgage costs. This will continue to put downward pressure on rents.
While there may be a brief uptick, it won’t last long at all.
But rents HAVE risen. Substantially in Los Angeles, for example. I’m not sure of the nationwide trends, but didn’t the article on CPI talk about rental increases yesterday? Pushing an inflationary trend.
Yes to that. In my apartment at Thousand Oaks, So. Cal. they are increasing by 8-10%. Do not know it is really FREE market or Price Fixing. The fact is they are increasing and easy escape route is on fire. (no buying home at 0% down and moving out)
IMHO
In Orlando area, if you can find an apartment because of all the conversions, you are paying 30-50 % more than just a year ago.
I live in NE Tampa and my rent went up by 5% this year January. Usually the increase is 2% or so. Lot of condo conversions in this area and choices for renters are getting quite limited.
Rents have been flat to trending down in the past 5 years or so in the Boston area.
My (Boston area) rent is the same now that it was in 2001, and that’s not an uncommon occurrence. Considering inflation, my rent is lower than it was five years ago.
We’ve been in our apartment for 7 years now. Our rent in Cambridge (just across the river from Boston) is down 9% from what it was in 1999, and down 23% from it’s peak in 2001.
Mind you, salaries are down too.
This won’t exactly save the LA housing market market, but rents ARE rising there…
http://tinyurl.com/os5wd
“Perhaps nowhere is the trend more evident than in Los Angeles. Rents rose 7% last year — more than double the rate of increase of recent years — as the occupancy rate soared to a historical high of 97%, according to the Casden Forecast at USC’s Lusk Center for Real Estate.”
(Today’s LA Times)
Not tru entirely, because governments restrict and control rents in a veriety of ways in many of the major urban cities (bubble markets).
Rent control and rent price restrictions have a large part in keeping rents down from true levels.
(“When you factor in inflation and lost interest, a check today is worth about 10 percent less, in real terms, than the same check two years ago.”)
Both inflation and short term interest rates have risen. Low interest rates cushion the blow of holding property empty.
Of course, for long time owners without a mortgage, the “blow” is lost gains. For short term owners with a mortgage, the blow is paid interest AND lost gains. For those with an ARM mortgage, the blow is severe.
Bernanke just acknowledged the housing market is slowing…just after talking about tighter banking regs. ( Basel II ). Mitigating increasing risks….What is saying about the future? Not very subtle…
From N VA -
We’re in a weird situation - we sold our house last spring for $665K and the new owners put in about 30K in upgrades (granite, deck, paint, extra bed and bath in basement - it was a new McMansion to begin with). Now they have to move (and can’t sell) and are offering it to us for 2300 in rent. There’s another 850K house on the market with a home theatre, mahogany bar, deck and grill in a gated golf community for 2250. What to do . . .
What to do? Sounds obvious to me… point out the lower price house & the niceties of the other place. Then throw out, say, 1800 ( = 2300*665/850).
Next question?
I would never rent from someone I sold to in the past .Move on and don’t even think about the place anymore .
i agree… I wouldn’t want to move back into it as rental; it would be weird karma. You liked it, you lived in it, but you moved on. the feel of having sold it at the top to someone and their needing to rent it because they now can’t sell it would feel creepy to me at multiple levels, even if they were willing to rent it for considerably less than other houses around.
If that karma issue doesn’t bug ya though, I’d go with JP’s suggestion above, but maybe say you’ll throw in an extra 100/mo for their trouble and upgrades
even a sale/leaseback feels strange. the moment your sale records you are living in someone else’s house. wierd feeling
Thanks all - I try not to feel responsible for their plight - our asking price was 70+K lower than comps and nobody made them do all those upgrades and expect to sell in a year and break even - sigh - they just have to move across the country because of a job change.
The fact that your saying that you try not to feel responsible for their plight tells me on some level you could fall in to feeling responsible . Some people have posted on this blog about a uneasy feeling toward buyers of their houses they sold to at the peak . I still say move on because there must be other houses to rent .
How to they come up with these high end condo prices of 14.5 mil.?
I know some go out at that price in prime spots in New York City with million dollar views . You would think that some sort of logic goes into pricing . In the case of this condo you wouldn’t have market comps to go by. I wouldn’t want to be the lender on this condo ,so it would be a cash buyer . I think the seller just pulls a price out of the air .
A friend of mine and his brother recently sold 3 out of 4 condo-conversions on West Springfield St. (South End) Just got an offer on the 4th.
Their secret? Underprice those babies like it’s 2003. Just get ‘em sold, take a small gain and be happy enough.
How far off are their prises from the current asking prices on the comps?
About 17%-20%.
wow. big difference. …and arguably prices were too high in 2003!
Well, when I say “17-20%” i am talking down from today’s comps. Not last year’s. Today’s real comps (in South End condos) are down about 10-15% from the peak of last summer/early fall. This is not widely reported but it’s true. So… they sold at about a 30% drop from the peak.
They worked hard, made a small profit and are OK with it. They wanted to finish and sell in 2005 but ended up dealing with a rogue subcontractor, which caused a lot of delay and stress.
This makes sense, since it was in 2003 that the housing P/E ratio really took off. It seems to me that prices have to come down enough to make the P/E ratios in line with long run averages.
Yes, but I want to party like it’s 1999.
Wanted to repost this as I had it at the end of a long thread which some of you may have given up on already. This is tradeable stuff.
Some commentary:
Away from the pretty pictures, and shifting to irrational rationalizations of what’s happening, I keep coming back to the thought that the markets are seriously worried not about Bernanke’s policy, but a widening sense that he is not sure what his policies are. With housing doing its best Wiley Coyote impersonation and the government’s inflation data moving slowly toward reality, Boom Boom is in a corner and staying in it is not a solution. With that said, I don’t really think he has a choice: if he blinks and stops hiking the bond market will do the tightening for him. If he keeps going he will add weight to the outstanding mountain of debt, but at least the crowds might think someone is in charge.
And on the topic of debt, a big thanks to one of our own for bringing to my attention the KBW Mortgage Finance Index (MFX). For those who believe that the real fun for the housing market will begin when “I-don’t-really-have-to-pay-it-back” mortgages start blowing on homeowners’ faces, this index might be a very handy-dandy tool. First, it diversifies you away from takeover risks; it gets around the “borrow” problem as many stocks in this group have already attracted short sellers; and offers options with volatilities that, IMHO, do not reflect the potential risks in the underlying stocks. Unfortunately, the MFX does not include the primary sub-prime lenders, but when the fireworks start I doubt sellers will be too discerning. There is quite a bit of catchdown potential between these two well-correlated brothers.
And did you hear Countrywide Financial’s (CFC) CEO saying on CNBC that they are starting to see an uptick in delinquencies?
And Countrywide always claims they are the master underwriters in the business .
Can I ask a stupid question about how this KBW Mortgage Finance Index (MFX) works. Do you buy or short in order to bet that real estate and lenders are going to tank?
Robert Cote -
Did you read the spin in the Ventura Star after sales dropped 41% in your neck of the woods?
Ohhhhh yessss. Worst reporting ever. Here are the first two paragraphs:
Sales that closed in April involved buyers who were on the hunt in February and March, when more rain than usual kept buyers away, said Brian Troop, president of Simi Valley-based Troop Real Estate.
“I think this is the first major surge of the year that we are seeing right now,” he said. “Based on the activity we are seeing, the buyers are out there in droves right now, and we are expecting to see a very high-powered marketplace for the next several months.”
And where did the 41% decline show up? PARAGRAPH NINE.
I smell a weekend contest; The Prosiac Prose Pollyanna Paragraph of the Week.
That rain excuse has to be the lamest one I have read yet. I can just see every RE agent’s eyes lighting up when they read that “Yeah, the rain….that’s what I’ll tell them”. I mean how does that work-you think a ton of buyers “were going to” buy on a given day, but due to rain they decided to keep renting instead? God….
Could have a point about rain because they had a big fire there and people might of been waiting to see if the mud slides were going to happen or not .But than again , there is always excuses for lack of sales .
Write and tell her how crap her article was. I did; she actually sent a reply that was a lot better than her published article. Strange that what she said to me didn’t make it into the article…
I feel for some of the journalists out there. Reading some of their articles, it sounds like they want to write bearish articles, but can’t. I’m suspecting that part of that is because their editors won’t let them.
I think the other part is that they know their views are too far away from what Joe Average currently thinks. IMHO, if you write something too far from what Joe thinks is the truth, he’ll ignore it, you, your article, and your publication. You become irrelevant. If, on the other hand, you write something that sounds like you share Joe’s views, but sprinkle dissenting facts and opinions throughout your writing, Joe’s beliefs will slowly come around.
Carson City homes fell 10% year over year! Minden/Gardnerville is down 7% and Reno down 2%.
http://news.rgj.com/apps/pbcs.dll/article?AID=/20060518/BIZ12/605180304/1071/BIZ
Another YOY decrease. Add Reno to the list.
The Reno market was on fire the last few years. This YOY should decrease can’t be good for all the Sac and SF investors who flooded that market.
Aoccording to the realitor who sold our home in 2004, at the time we sold, Minden/Gardnerville had people from all over the country buying.
OT, Article about hombuilder/building material companies value.
http://tinyurl.com/p78jb
sorry if this has been posted before.
A most insightful article, economist. Thanks for posting it. And here is something from Richard Russell that I posted late last night. Worth a look:
One of the wisest men on the investment scene today is Richard Russell who for the past 53 years has been writing Dow Theory Letter.
Here is what he said today:
“As subscribers know, I’ve been zeroing in on the home building/real estate picture, mainly because this has been the engine of growth in the US over the past four or five years. Low interest rates have allowed the builders to run “wild” year after year. Furthermore, consumers have taken trillions of dollars out of the price appreciation in their homes, taken the money out through refinancing their mortgages. This money hasn’t been spent on capital improvements or new industries, no, the money’s been spent on cars, restaurants, vacations, room additions, kid’s camps, you name it.
The charts are telling me a story. If I’m to believe the charts, the story is that the housing boom is kaput — it’s over. Below are the daily charts of three of the biggest builders in the US — the Ryland Group, Toll Brothers and Lennar Corp. You don’t have to be a chart genius to be able to interpret what these three charts are saying. In a word, it’s “top-out” (or is that two words?).
At any rate, what these charts are telling us, I believe, will show up in the economy and in consumer spending before this year is out. And I think it’s going to be deflation of the housing boom in both prices and the number of new houses that will be built.”
If you haven’t shorted the home builders yet, do it tomorrow.
Just remember. A loss isn’t a loss until it’s realized.
Kinda like Toll’s inventory?
“I don’t see any major movement down. There’s no reason for that,” Blake said.
Sheesh…talk about having one’s head-up-their-rear. I hope for his sake and the sake of his school that the NAR or some derivative is funding his “research”…that way, he can’t be completely faulted for spewing forth garbage. Otherwise…what an ass.
sorry… blogger is acting up today. This was meant as a reply to Only-A-Matter-Of-Time’s post above.
in dc buyers in the same building have paid very different prices per square foot depending on when they bought after factors like view. often the last guy in paid the least, as opposed to paying the most, as one would expect.
http://dcbubble.blogspot.com/2006/04/airline-style-pricing-for-condos-you.html
I wonder what the HOA is on the $14.5M condo? Factor that into the loss?
“That makes it just the most singular example of the rising number of properties stuck on the Boston market, as their owners drum their fingers in frustration and worry.” It’s easy to unstick these properties, LOWER THE PRICE!!!
Damn right. See my comments upthread. Friends just sold 4 out of 4 condo units, between March-May, by underpricing 17-20% off today’s comps (which are in turn about 10% down from peak of Fall 2005).
Amazing what happens when the seller really just wants to sell.
For those of you in MA/CT/RI, you can use The Warren Group to track all property transactions, with monthly closings and median prices at a town level.
In April, Boston condo sales volume fell 23% from 2005 levels (to 157) and the median closing price fell 15% Y/Y from $565k to $480k.
In Needham (a prototypical upper middle suburb) single family prices fell 18% y/y from $670k in 2005 to $550k in 2006 on a similar volume in both years (30 sales).
So much for the spring bounce…
http://rers.thewarrengroup.com/townstats/search.asp
WOW. The town of Wrentham, generally considered a nice place to live, is at 2003 SFH pricing! That means that the prices have dropped to what they were 2 years ago, consequently anybody who bought since ‘03, is now officialy a submariner!!!!
April Boston condo sales volume fell 23% from 2005 levels (to 157) and the median closing price fell 15% Y/Y from $565k to $480k.
In Needham single family prices fell 18% y/y from $670k in 2005 to $550k in 2006 on a similar volume in both years (30 sales).
So much for the spring bounce…
http://rers.thewarrengroup.com/townstats/search.asp
i sold a condo near harvard square about two years ago. i live near porter square now and watch the condo market in cambridge/somerville pretty closely. the inventory is building in these two towns only among the less desirable properties in the least wanted neighborhoods. prices of the 1-2 bedrooms around harvard, porter, and davis (as long as the building isn’t slummy) have been flat for about the past year. so while i realize that these properties are not immune, they are not yet affected by the general downturn.
i sold a condo near harvard sq last year. watch prices and inventory on nice one-two bedrooms in desirable parts of cambridge and somerville. inventory still definitely low, prices flat, no decline that i see–remember, i’m talking about in-demand starter/retiree condos.
not saying inventory won’t build or prices go down, but it’s not happenying yet.