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alstry (35.40)

Housing-50% Additional Decline Ahead?

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March 12, 2008 – Comments (4)

Mind the Gap: Home-Price Downside

By SCOTT PATTERSON
March 13, 2008

The economic balance hangs in large part on how much further home prices will fall. A look at one important measure -- the relationship between home prices and household income -- suggests we might not even be halfway there.

Over the long run, home prices and income should march along the same path. As households earn more, they can afford to pay for more expensive homes.

But the two can get out of whack. During much of the 1990s, incomes grew faster than home prices. The landscape shifted around 2000. From the start of the decade through the mid-2006 peak, home prices nearly doubled, thanks in part to falling interest rates. Over the same period, income per household rose just 26%, according to Moody's Economy.com.

In certain states, the disparity was extreme. Seven states, including California, Florida and Arizona, saw annualized growth in home prices outpace income growth by 10 percentage points from 2002 through 2006, according to housing expert Thomas Lawler.

http://online.wsj.com/article/SB120537399243232501.html?mod=hps_us_whats_news

In contrast to Moody's, the New York Times recently reported:

 "The median household earned $48,201 in 2006, down from $49,244 in 1999, according to the Census Bureau. It now looks as if a full decade may pass before most Americans receive a raise."

Regardless which is more accurate, the mainstream media is finally catching on about the issue of income disparity and house pricing.  Whan builders say they have seen this kind of environment before, they are lying.  Never in American History have house prices outpaced incomes to anything close to resembling that last seven years.

Even though we are finally beginning to hear about the obvious disparity between incomes and housing prices, few are commenting on the explosive increase of NON HOUSING related expenses relative to incomes.  Expenses such as Property Taxes, Interest, Insurance, Food and Fuel.  The the incredible increase in NON HOUSING related burdens over the past seven years have diminished the amont of dollars left for housing even further.  As a matter of fact, for many, the NON HOUSING burdens have increased by over $10K which translates into over $150K of additional home mortgage buying power, not factoring higher proptery taxes.

Factoring the above, house prices in CA, FL, and AZ must return to well below 2000 pricing in order for housing to reach historic affordibility levels.  That means we still have a ways to go.....at least 50% MORE in many areas.

4 Comments – Post Your Own

#1) On March 12, 2008 at 11:00 PM, thisthatother47 (89.91) wrote:

Freddie Mac CEO said we were only 1/3 of the way there - stop being so optimistic Alstry.

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#2) On March 13, 2008 at 12:20 AM, zygnoda (27.27) wrote:

Wahoo!  Gotta love them bubbles..

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#3) On March 13, 2008 at 12:39 AM, EScroogeJr (< 20) wrote:

alstry, I'm now totally lost. Do you want to keep prices at today's level, or do you want to restore the historical balance with incomes, which would obviously take them way down? (the answer "let's increase incomes" will not work here, for obvious reasons).

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#4) On March 13, 2008 at 8:59 AM, alstry (35.40) wrote:

Actually, falling home prices is a negative for the country.  Especially when many Americans are very leveraged against that home value.  And many municipalities are dependant on the tax revenues.

Creating a bubble and crashing it is one thing.  Creating a bubble and leveraging against it creates much more severe consequences upon implosion.

Nothing like what we have now has ever happened.  Not even close.  In 1929 the stock market was leveraged but relatively few American's invested in the market in 29. 

This implosion will be much more difficult to work out of.  In the past we were an export county and could sell our way out of slow downs.  Now we are a consumer based import machine leaving relatively few areas to sell overseas.  Do we have some exports, sure.....do we have enough is the question?

In the mean time, as new builders keep building specs that they know they are going to dump, they are only driving down home values even further exacerbating the problem.  The fact that executives are now bonusing themselves on units sold only throws fuel on the fire.  At this rate, pretty soon, losses will be bonused....the more the CEO loses the bigger the bonus.

Its crazy, we punish countries for inventory dumping.....I am not sure any foreign country in history has rained down as much damage to value in America as the recent overbuilding of spec homes and subsequent dumping by builders.  AND SOME BUILDERS ARE CONTINUING WITH THIS DESTRUCTIVE BEHAVIOR.  Moreover, some CAPs players and banks have supported this behavior.  Maybe they are looking to buy some cheap assets on the other side....it just sucks if you are an innocent family caught up in the mess......and the number of those families is growing rapidly (not including speculators or fraud).

 

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