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Housing as a Percent of GDP

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December 11, 2008 – Comments (15)

I liked the graph on CR about the topic

I quickly ran numbers in my head, 50 years was sustainable, and for housing to get back in line with that it needs to go down another 25% relative to GDP today.  If there's a declining in GDP, which I think is probably, then it needs to go down even more.

And, to put that into perspective, for people who don't own a home, that's a pretty big chunk of money that doesn't go to other things in the economy at today's prices.

15 Comments – Post Your Own

#1) On December 11, 2008 at 7:46 PM, DemonDoug (86.32) wrote:

Median home price in the USA should be around 110-140k.  It is still way way way too high, over 180k.  Even homes in the midwest are over that range (around 150k).

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#2) On December 11, 2008 at 8:18 PM, starbucks4ever (98.28) wrote:

Demon, if you asked me what it should be like, I'd say $50K at most. If $500 buys you a refurbished notebook going a gazillion operations per second, then what does it cost to mass-produce something very low-tech, like a bunch of wooden planks, pipes, shingles, copper wires, etc? Now, does something come to pass just because that's what it should be like? Now that's another story.

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#3) On December 11, 2008 at 8:53 PM, Tastylunch (29.29) wrote:

just wanted to say dwot that your critics in the previous post were pretty funny. Those guys need to relax, all you are doing is sharing information. 

Yeah I agree with DemonDoug's rough guess, but if that's the case given the size burst above that rangehousing prices will probably blow way past those numbers on the downside

Yikes.

We may see a generation of Americans permanently become renters.

 

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#4) On December 11, 2008 at 9:07 PM, engstocker (< 20) wrote:

Building a nice new construction house costs about $70/sq ft. The cost of the land is the only variable. An average size house of 1500 square feet is all that a family of 4 really needs. That would be 105,000 plus the cost of the lot. In most cities (not near water) with a 200,000 or less population, lots should go from anywhere between 30-45k. Lets say at the high end your looking at 150k for a 1500 square foot house. Based on this estimate I think 130-140k should be what the average house price should be. The problem is 1500 square feet just doesn't do it for most Americans.

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#5) On December 12, 2008 at 1:02 AM, HansHauge (31.69) wrote:

I like the "How many ounces of gold buys the DJIA" chart. Basically it shows the same thing, there needs to be a correction in the price of assets. Luckily the crazy inflation on the way should do the trick.

It's sort of like flash freezing, first you get the deflation then the inflation. Hopefully this will bring home values down (deflation), incomes up (inflation) and the price of many commodities back in line (like gold).

http://www.321gold.com/editorials/russell/dow_gold.html

dwot - also I wanted to second TastyLunch on the spam you got today. Seems like so many people have no understanding of what it takes to get to the top and have so little respect for your accomplishment in that regard. Thank you for your contribution.

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#6) On December 12, 2008 at 3:04 AM, DemonDoug (86.32) wrote:

eng, I understand you're argumen, but you have to take into account affordability.  Historically, homes are affordable at 3x median annual income or less.  US household median income is around 45k - which would make the median home price around 135.  3x annual income is actually a stretch though, 2x is where it become really affordable; although of course I understand there are cetain places where this is almost a certain impossibility due to a "sunshine tax" (namely places like san diego and LA where the weather is awesome all year round).

So based on supply side inputs, that's where affordability will be.  But I've never believed in supply side BS - it's all about demand.  Can a family or a person making 45k a year afford a home at 140k?  I would say NO, not with the cost of living of everything else (education, food, gas, healthcare).  Which means the cost of building a home will be coming down.

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#7) On December 12, 2008 at 1:55 PM, TDRH (99.72) wrote:

Graphs to support Demon's point.

http://efinancedirectory.com/articles/The_Dangerous_Disconnect_Between_Home_Prices_and_Fundamentals.html

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#8) On December 12, 2008 at 4:04 PM, Rep07 (27.76) wrote:

>Building a nice new construction house costs about $70/sq ft.

I've seen a range of $70-125 for this number depending of course on location.  But I think the average has been closer to $100/sf.  Maybe declining now.  Using enqstocker's logic based on this higher cost/sf would tend to say median house prices are about right now.  But at a low, you would expect a discount to the "right" price.  So again, probably there is a last leg down still to come.

Still, there are 4br/2ba houses in Lancaster, CA right now (outside LA) selling for $70K.  How low can it go?  This is trailer-park pricing for detached homes on land.  I suspect the low end of the market is at rock bottom right now; the mid and high end still has room to correct further next year.  The low end will have demand from renters moving up and from mansion-losers moving down.

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#9) On December 12, 2008 at 4:31 PM, engstocker (< 20) wrote:

I'm a civil engineer by occupation and moonlight as a realestate investor so I know what goes into building a subdivision. If your buying the land for 10k/acre you have to sell 1/4 acre lots for 35-40k to make any profit (roads, curb and gutter, utilities, paying the engineer, etc don't come free). That is a fixed cost. You simply cannot build a house for less that $50/square foot and that is a bare bones basic FHA style house and cutting all the corners that you don't see being built hardly anymore. Even at that low end of a house you would be looking at 110K for a 1500 square foot house. I think my original estimate of 130 -140k is quite reasonable.

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#10) On December 12, 2008 at 4:47 PM, starbucks4ever (98.28) wrote:

And 130K for new means 70K for used. Now, try to find these prices on the "open market". That's why I'm saying, shut down the banks and make mortgage lending illegal. As long as banks exist, housing will always be a bubble.

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#11) On December 12, 2008 at 5:58 PM, DemonDoug (86.32) wrote:

eng: then what will happen is that no one will build homes, because they won't be able to sell them for a profit.  or they will do what the homebuilders have been doing, build homes, sell them for less than what it cost to build them, build up a mountain of debt, get numerous government bailouts, and then eventually go bankrupt.

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#12) On December 13, 2008 at 2:40 PM, Tastylunch (29.29) wrote:

engstocker

Demondoug is right, this is what happens all the time in dense urban areas, when demand is insufficient to meet a deliverable price due to fixed costs nothing gets built.

Ultimately demand and supply determine housing costs.And there is plenty of unused supply and there is very very low demand right now.

130-140 is reasonable based on fixed costs, but I doubt there is going to be sufficient demand to support that price for housing for awhile.

What you may see is more apartements or rural condos( which you can build for cheaper than 110 inclusive of land costs) if anything new gets built at all. All housing divisions in my metro have been scrapped. There han't been a new one this year. That is a first.

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#13) On December 14, 2008 at 11:40 PM, FleaBagger (29.71) wrote:

dwot, have you looked at GROW recently? It's way down. Is that because they're going under, or is it a good time to try buying a few shares?

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#14) On December 14, 2008 at 11:41 PM, FleaBagger (29.71) wrote:

Sorry that was off topic.

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#15) On December 15, 2008 at 1:53 AM, dwot (75.87) wrote:

FleaBagger, GROW was about 40% cash in January 2007.  I haven't followed what they did with their cash.  I know listening to Frank Holmes speak he demonstrated an understanding of the need for caution in the market.  I haven't looked at it to see where is has gone.  He was in some of the hardest his parts of the market and whether he took profits off the table when it was possible, or took losses, or threw the cash in and caught falling knives, well, I haven't followed it....

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