May 31, 2005
Globe warns "Mortgage trend poses risks in downturn"
My compliments to the Boston Globe for running their third front page story on real estate in the last four weeks (see previous blog posts on May 20th and May 3rd). Today's lead story, Mortgage trend poses risks in downturn, is the first to raise cautions about the downside of the real estate bubble to the lead headline and includes an alarming graph showing that interest-only loans and adjustable rate loans made up about 70 percent of all loans in Massachusetts last year, and just under 60 percent currently. Those market trends are even more troublesome when one adds no money down deals or sub-prime loans. According to the Washington Spectator, one in four loans nationwide involve sub-prime loans.
So what is any ordinary buyer to do now to protect themselves, now that there are signs the real estate market has peaked as reported six days ago in another Globe story entitled: State home sales sag 10% in April?
The Wall Street Journal's online site, RealEstateJournal.com, has been raising concerns about risky loans since last fall, and has written a number of articles to help buyers "Know the Real Price of New Mortgages." One encourages buyers to exercise due diligence and includes a link to an innovative negative-amortization calculator:
If you're considering an ARM and aren't sure whether a sudden jump in rates would break the bank, ask your broker to run a worst-case scenario for monthly payments and outstanding loan balance, based on the highest rate you could potentially be charged. This negative-amortization calculator from the Web site of Jack Guttentag, professor emeritus at the Wharton School of the University of Pennsylvania, also offers a stark look at how homeowners with these types of loans can get burned should interest rates turn sharply higher.
If as the Globe writes, "analysts fret over use of interest-only loans," you should look carefully, too, particularly if you are first-time homebuyer. Real estate decisions involve a complex, imprecise set of factors and online calculators "don't take into account individual circumstances" as the WSJ wrote in an article a year ago on "Five Reasons to Remain in Your Rental Property." Today's lead story on "timing the market" in RealEstateJournal.com says some long time homeowners are "tempted to sell, reap a huge profit -- and rent for a while to wait until prices possibly come down."
Locally, that could result in more inventory on the housing market, and softening prices -- regardless of what kind of loan you use -- by the end of the year. If "worse-case scenarios" play out and new homeowners are forced to sell in coming years because of they can no longer afford monthly payments on their interest-only or adjustable rate mortgages, today's rising inventory of unsold homes could become bloated and some sellers may be forced to sell at a loss.
May 27, 2005
That man is richest whose pleasures are cheapest
A New York Times article entitled "Billionaires Beware This Bubble" reports that Worth Magazine's cover story this month "makes a convincing case that there may be a bubble on the extremely high end of the market." While overly optimistic resort developers believe that the rising number of wealthy households will offset downward pressure felt in other price ranges, MIT Economist William Wheaton argues that resort buyers will substitute "the next mountain or beach or lake" in search of lower prices, and Christopher Mayer of the Columbia Business School says that supply will "outstrip demand, depressing prices."
Falling high-end prices are not limited to resort communities. In a
March 2005 article on their Luxury Housing Affordability Index, Business Week
reported that "Luxury housing became significantly more affordable in
Boston and Chicago, where prices fell a little over 10%; in Miami, down
6%; and Washington, D.C., down about 7%."
A year earlier on Valentine's Day 2004, The Real Estate Cafe released it's own study entitled "Sweetest Deals of 2003: The Year of the Million Dollar Markdown." At that time, only 50 properties in the MLS had ever been marked down by $1 million dollars in Greater Boston and 30 of them occurred in 2003. That price correction helped trigger a comeback and record setting pace for luxury homes in the first quarter of 2004.
What's happening now in the multi-million dollar price range in Greater Boston?
Our sense is that the supply of multi-million dollar homes continues to rise as the demand remains relatively flat (see graph above through 2003) causing downward pressure on prices. How far down? Ask us after Halloween, that's when most of the million dollar markdowns took place two years ago.
The NYTimes article puts the prospect of losing real estate wealth in perspective with some statistics and a parable about personal happiness. First, "6.6 million Americans 65 and older - 22 percent of all older beneficiaries - have no income other than Social Security. The average monthly benefit for retirees is about $955." Then, in a touching tale of "diminished - yet satisfying - expectations," a former world traveler, now retired, told the Times, "For 75 cents I can ride down to the airport, walk around the international terminal, and watch all the people headed for their planes. For me, that's enough of a travel fix."
While that simple soul is not a billionaire or a casualty of the real estate bubble, his contentment reflects the wisdom of one of Boston's favorite sons, Henry David Thoreau, who once said, "That man is richest whose pleasures are cheapest." That's a comforting perspective our real estate obsessed culture may have forgotten.
May 25, 2005
Single family sales drop 10% in MA
Real estate headlines seem to be everywhere these days, from today's lead story in USA Today, -- the second in two weeks, to Monday's "Condo a Go-Go" story and slide show in the New York Times, to Saturday's story in the Washington Post about a Playboy centerfold who is giving up her modeling to become a real estate investor.
Despite those sexy news angles and industry spin that "everything is coming up roses," the most revealing finding for home buyers and sellers in Massachusetts is today's Boston Globe Business headline:
According to the Massachusetts Association of Realtors, the number of single-family homes sold in April was down 10.4 percent from 2004, marking the first double-digit decline since April 2003.
After years of warnings, is Boston in for a Real Estate Reality Check? That was the title of today's talk show on The Connection, a nationally syndicated radio program, which will be rebroadcast in Boston at 9pm this evening on 90.9FM and archived online.
Wellesley economics professor Karl Case, cofounder of CSWv.com and partner of Robert Shiller, told the Globe, ''I think we are beginning to see the beginning of a soft period." His comments could foreshadow the slide in housing prices, forecast last week by the New England Economic Partnership, that could last through 2007.
If you are a buyer or seller in Massachusetts has your thinking begun to change about whether this is a good time to buy or sell, and what are you doing to protect yourself? Want to talk about it online, or at a monthly "Bubble Hour" where you can share insights and questions with other consumers?
May 20, 2005
Three Percent Drop or The China Scenario?
Two weeks after we challenged frothy assertions about the housing market in a page one story in the Boston Globe, the real estate bubble is back on the front page. This time instead of quoting brokers and builders, the Globe turned to a more credible source: the New England Economic Partnership. They forecast "a modest housing slump in Massachusetts that will last through early 2007, with prices, at the bottom, declining about 3 percent."
While NEEP projects that falling prices will be offset by a strengthening regional economy, Princeton Economist Paul Krugman paints a much bleaker scenario in his editorial, The Chinese Connection, in today's New York Times. Here's a snippet:
"Here's what I think will happen if and when China changes its currency policy, and those cheap loans [to the US treasury] are no longer available. U.S. interest rates will rise; the housing bubble will probably burst; construction employment and consumer spending will both fall; falling home prices may lead to a wave of bankruptcies. And we'll suddenly wonder why anyone thought financing the budget deficit was easy."
Earlier this week, Krugman told an audience in Bangkok, "There is a real bubble mentality in the US housing market,'' adding that prices of US housing were 250% of their real values.
So if one's perception of the regional, national, and global economies determines one's belief about whether the housing bubble will deflate or burst, where do you stand? We'd love to hear your perspective, particularly if you are buying or selling this Spring. (If you do decide to buy despite the real estate bubble debate, we invite you to use our commission rebates as a cushion against a loss in value. If you're selling, why not try for sale by owner to maximize your equity particularly if prices begin to slide in the second half of 2005?)
Co-authored by Bill Wendel and Douglas McCarroll, our newest real estate consultant / buyer agent at The Real Estate Cafe
May 18, 2005
$60 Billion question: How do consumers uncouple real estate commissions?
Steven Pearlstein of the Washington Post hit the real estate cartel with a one, two punch today writing a hard-hitting column entitled, Realtors Aghast At Notion of Competition, then hosting an hour online discussion where consumers -- 84% of whom feel that real estate agents are overpaid according to a recent CNN/Money poll -- underscored the importance of the DOJ and FTC's "laudable campaign to bring price competition to one of the last outposts of cartel-like behavior."
After more than a decade of advocating industry reforms it's a pleasure to have the press championing the cause and for Pearlstein to respond to my question during his chat:
Boston, MA: Does the negotiate your own fee, "bring your own broker" (BYOB) compensation plan you suggest in the final paragraph of your column require the uncoupling of the traditional two-sided real estate commission? That seems to be the glue that holds the MLS together and commissions artificially high. How do consumers as a group or individual buyers and sellers get there from here?
Steven Pearlstein: Well, that's the $64,000 question (or should I say the $60 billion one, which is what brokerage fees were in the U.S. last year). I think it will require some changes in state and federal laws (such as on whether brokerage fees can be financed), professional codes of conduct and a change of heart at the National Association of Realtors. If there is no change, however, the system will eventually change on its own as Internet brokers gradually increase their market share and lower prevailing commission rates.
Will Pearlstein and others in the press follow-up with more coverage? Will consumer advocacy groups, like the Consumer Federation of America, once again champion commission reform particularly the ability for buyers and sellers to finance fees outside the traditional two-sided commissions? With their support, new groups like the National Association of Real Estate Consultants can move the industry towards a tipping point where "The next major revolution in real estate," as the former chief economist of the National Association of Realtors once predicted, "will be fee-based services replacing the blanket commission pricing that has dominated the industry for so long."
May 07, 2005
Looking for hot buyers? Check out these stats!
How hot is the real estate section of Boston.com, the online counterpart to The Boston Globe? A recent email sent to online advertisers reported these stunning statistics:
"Boston.com is proud to announce that in March 2005, traffic to our Real Estate section surpassed 7 million pageviews for the first time in history... with more than 1 million homes-for-sale searches conducted that same month..."
With traffic like that and a starting price of just $69 for a two week ad, The Real Estate Cafe recommends that anyone selling "for sale by owner" should include Boston.com in their marketing mix (and it's not because we are pleased to be a long-time advertiser on their open house search page.)
Looking for another best practice to increase your exposure? Place an inexpensive one line listing in the Globe's Friday open houses section (shown in the photo above) but be sure not to miss their deadline: 4:30pm on Wednesday.
More best practices and hot tips on how to sell your own home are now available in your own home. Call 617-661-4046 or email RECafe@mac.com for an appointment.