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May 03, 2005

Failing grade for front page froth on condo conversions

Globepg1_condos050305Real estate is back on the front page of the Boston Globe today with a photo and headline which reads "Condo Conversions Spreading."  Despite 22 paragraphs and three graphs, the story fails to cross examine frothy quotes from local developers and brokers perpetuating the myth that "real estate is 'a great investment'" for ordinary home buyers in today's market.

Acknowledging that, "many are betting that real estate will provide better investment returns than the stalled stock market," the Globe fails to look critically at the fundamentals behind that assumption.   

For starters, the story focused on emerging housing markets, but failed to point out that fringe areas are the last to rise in a housing bubble and first to fall in a housing slump. 

Second, the story quotes one local broker who asserts  that "15 percent of the city's condos are purchased purely as investments," but fails to note that the National Association of Realtors reports that investors made 23 percent of purchases nationwide.

Third, the Globe quotes an overly enthusiastic Dorchester-based real estate agent who claims that, "The second a building comes on the market in the hot areas, ...It sells immediately" but fails to balance that rosy assessment with statistics, reported two weeks ago by the Boston Herald, showing that foreclosures are up and prices are down in Dorchester and Roxbury.

Still "real estate is 'a great investment'" we are told by a developer. 

To their credit, the Globe reports that Yale professor Robert Shiller, author of ''Irrational Exuberance," foresaw the tech bubble in 2000 and "he predicts real estate may be next."  Instead of substantiating his position with a critical look at the underlying fundamentals, the story closes by quoting a real estate attorney who says strong demand will moderate any price correction in Boston. 

Is that kind of reporting causing false security in an overheated housing market where the price-to-income ratio in Boston is now 6.5 to 1?  Maybe investors can afford to make a mistake, but first-time home buyer commuting to remote markets to find affordable housing cannot, especially with rising gas prices.  They should know that a recent industry study ranked Boston as the housing market most likely to fall.  They should also be told that prices and demand are being driven by risky mortgages:  (1) one third of properties sold last year involved interest-only loans, (2) another third involved adjustable rate mortgage, and (3) still another quarter involved subprime loans.  Add amateur or "momentum investors" and there appear to be four shaky legs holding up an overheated housing market driven, in part, by high-profile real estate stories that report on the symptoms of the housing bubble without questioning the underlying fundamentals.

07:00 PM in In the News | Permalink


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Well said. When I first read that article on the Globe I was furious with the misleading perceptions that it seemed to be promoting. Well, have you looked at the real estate section of the Globe? It's an integral part of their business I'd say, and they have much to profit from fueling this bubble even more. So much non-biased reporting. Everyone I've spoken to in Massachusetts real estate agrees that housing has flattened. Go figure how the Globe thinks otherwise!

Posted by: Dimitris | May 4, 2005 2:10:18 PM

Great and fortuitous coincidence that I stumbled across your website. It sounds like we are of like mind. I'm not a real estate agent, but a recent (two years ago) home buyer in Menlo Park, CA. I've been asked by so many friends to "consult" on their real estate decision, that I decided to put up my analysis on a website www.nestegghomebuying.com.

I think it's confusing to most people. For the most part, (except the globe), the press is clamoring about a bubble, while
most real estate agents pretend it doesn't exist. I think that there's a real need for a balanced analysis. So, I've created my website with not only qualitative thoughts on the bubble and whether to buy, but also a quantitative cash flow model that calculates the difference between buying and renting after factoring tax, monthly expenses, etc.: www.nestegghomebuying.com

At any rate, I'm glad to find someone of like mind out there.

Posted by: Dave | May 5, 2005 10:21:37 AM

You quote the Herald story that in turn quoted some guy from Dorchester, who said (without providing any source) that prices had fallen. In fact, based on a simple review of MLS data, prices DID NOT fall but have risen over the past two years. And, number of sales has increased more than 50% (200 to 368, 2003 to 2004).

I disagree with those saying things like "the Globe has a good reason to keep the bubble going". That argument could be made for just about any story they run. If they wanted to keep their movie advertisers happy, for example, they'd just run positive reviews, but, of course, they don't.

Posted by: John K | May 21, 2005 10:42:21 AM

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