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| Is The Intrinsic Value Of Housing Down Or Is Just Its Price Down? |
Rajiv Laroia CPA, Principal , Laroia Realty
03/05/2008
A focus on Greater Boston real estate market
Warren Buffet sees an opportunity when the stock price reflects a value lower than the business' true intrinsic value. He believes that is it futile to time the stock market. Rather he tries "to price the stock market." The concepts highlighted here for the stock market are also valid for the real estate market. The value of residential real estate held by households and non-profit organizations nationwide totaled US$ 22.4 trillion in 2006. This is greater than the US$ 19.3 trillion held in domestic equities and comparable to the US$ 25.9 trillion held in fixed income assets. Investors have shown increasing interest in the residential real estate sector. The National Association of Realtors recently reported that, in 2006, 37.2% of home purchases were made for a purpose other than the buyer’s primary residence: 31.5% were for investment and 5.7% were second or vacation homes.
While the obvious economic concerns in Massachusetts (and elsewhere) are the state’s housing slump and potential fallout from the credit market turmoil, the Boston regional economy in Massachusetts performed well in 2007. While there are many models that are used to predict real estate prices, the two factors, according to Harvard's Joint Center for Housing Studies, that directy and consistently impact a home's price are: employment growth and overbuilding. In evaluating the fundamentals of any location, it is important, therefore, to understand a region's economic base, its potential for income & population growth and the availability of housing supply and office space.
The National Association of Realtors® (NAR) has insisted for years, and insisted adamantly since the market began to soften, that real estate, like politics, is local. The quarterly survey of home prices that NAR released in February indicates that, while the housing market is grim in some parts of the country it is doing quite well in others. Strength of Boston/ Greater Boston region was evident throughout 2007.
"In Dec. 2007, Median prices for the country as a whole and for each of the four regions were down from the fourth quarter of 2006. The median price for the country declined 5.8 percent from $219,000 to $206,200. The West, which also had the highest prices in the country, took the biggest hit. The median price in that region in the fourth quarter of 2006 was $355,000 but had declined 8.7 percent to $324,100 in the latest report. The Midwest, which has the lowest median price fared the best, losing only 3.2 percent to a fourth quarter price of $156,300." (MortgageNewsDaily.com)
Greater Boston's condo prices appreciated to $356,000 in 2007 from $ 340,000 in 2006, an increase of 4.7% while single family home prices remained unchanged from 2006 level. However, statewide condo prices fell 1.3% in 2007 compared to 2006 and single family home prices declined by 4.3% in 2007 relative to 2006. During this same period, number of single family homes sold in Greater Boston increased from 9,792 to 10,061 units, an uptick of 2.7%, while condo volume increased from 9,529 to 9,960, an increase of 4.5% (bucking a statewide trend of lower sales volume in every other part of the state). NOTE: Greater Boston does NOT include South Shore, Cape Cod or central, western, northeast and south east Massachusetts.
The City of Boston is the center of New England’s economy in addition to being the home to the region’s finest cultural, medical, educational and government institutions. Over the past half century the city has shifted from an economy focused on manufacturing and trade to a service and finance based economy. The health care and education industries, for which Boston is known, also continue to play a lead role in the city.
Boston continues to be the economic hub of the Commonwealth of Massachusetts and the center for commerce in New England. Since the end of the national recession of the early 2000s, Boston’s job growth rate was 75% greater than that of the rest of Massachusetts — highlighting the city’s instrumental role in attracting workers at all skill-levels to the various industries that make up the Commonwealth’s economy. As of October 2007, the unemployment rate in the greater Boston Metropolitan area stood at 3.4%, significantly lower than the national rate of 4.7%.
Between September 2006 and September 2007 the Boston-Cambridge-Quincy metropolitan division (the core of the Boston Metropolitan Area containing half of the state’s jobs) expanded employment by 26,700 jobs while the rest of the state grew only 4,100 jobs. Although Boston is home to just 9 percent of the Commonwealth’s population and 17 percent of its jobs, between 2004 and 2006 Boston generated 26 percent of the Commonwealth’s job growth. (Boston Redevelopment Authority)
So how did Boston, Brookline, Newton, cambridge and Somerville real estate prices fare in 2007 relative to 2006? The table below shows that median condo prices in Boston, Brookline and Somerville either remained unchanged or increased in 2007. Cambridge condo prices declined by nearly 1% (marginal decline) while the median price of single family home e declined by 18%. This steep decline in median price was primarily due to the sale of a significant number of less expensive homes in 2007 relative to 2006 in cambridge...thus skewing the median dramatically.
Other towns that have shown resilience are Burlington, Watertown and Lincoln.
Change in Prices Between 2007 and 2006.
What's in store for 2008 and how is the present year shaping up? In January 2008, statewide condo prices increased by 3.5% compared to January 2007. Boston/Metro Boston single family homes prices also increased by 3.5 % over the same period. Statewide single family home prices dropped by 5.6% in January compared to the same month in 2007. However, Boston/Metro Boston single family home prices increased by 0.4% over the same period. Housing woes will continue to weigh on both the national and regional economies in 2008 and most forecasters agree that Massachusetts’ housing market will be slow to recover.
According to Boston's Reserve Bank, "we have little historical precedent for sustained declines in national housing prices, which makes it difficult to forecast future home prices. However, one of the significant downside risks to the economy is that further declines in housing prices could depress residential investment, reduce consumer spending, generate elevated foreclosures, and contribute to financial instability. Taking appropriate monetary, regulatory, and fiscal actions to mitigate this risk seems prudent." The Government is attempting to do just that...mitigate the risk .....the results of its actions , however, will become evident in the months ahead. Stay tuned.........................
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