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alstry (35.98)

Will U.S. Housing Prices CRASH 70% from peak?

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February 10, 2008 – Comments (10)

In 2000, the average American family income was X.

Today, the average American Family income is still about X.  For many, incomes have actually gone down.

Ex mortgage expenses, costs for the average American Family have skyrocketed.  These are costs that can't be avoided.  Health Insurance, HomeOwners Insurance, Auto Insurance, Revolver Debt(credit cards, auto loans), Property Taxes, Medication, Food, Fuel ect......American Families today are spending many thousands more on the above expenses per year compared to 2000.

THE AMOUNT OF MONEY AMERICANS HAVE LEFT TO PAY MORTGAGE PAYMENTS IS LESS TODAY THAN IT WAS IN 2000 SIMPLY BASED ON ADDITIONAL SPEND OBLIGATIONS.

However, the cost of the average American home has doubled since 2000.  Just to get home prices back to 2000 levels, houses would have to decline 50% in value from the peak.  However, to get homes back to 2000 affordibility levels, homes would likely have to decline about 70% or more in some cases.

This is the first time since the Great Depression Americans have a negative savings rate.  Never had Americans ever borrowed up to 10X their income to speculate on a home.  In some cases, traditional home buyers became speculators and speculated on a number of speculative homes.  Mortgage fraud was rampant and home prices were driven up to stratospheric levels.  It got so crazy, people were actually waiting in line just to get a chance to speculate.

Homebuilding executives loved it cashing in on their stock options at the peak.  Banking executives loved it even more, making billions and billions packaging and reselling the toxic paper.  The government didn't mind becuse they were generating HUGE sums in higher property taxes, sales taxes, permiting fees, and income taxes.  And the people really loved it, everyone was living in Vegas and the house became a bottomless ATM...what a combination.  Finally, the foreigners were having a ball as well because we were buying their goods without hesitation and our capital was flying over to their markets supporting the growth of their infastructure as we were spending away our money on granite countertops.

Now a home is back to being a place to live.  As part of living you must buy food, health insurance, fuel, pay property taxes, homeowners insurance, ect.....whatever is left over can be used to service a mortgage payment.  After factoring the rise in non mortgage related costs in the last seven years, Americans can likely afford about 30% to 40% less of a mortgage today than they could in 2000 assuming similar interest rates.

So if a family could have supported a $200K house in 2000, they likely can only support a $100K to $140K  house today.  The problem is that the $200K house skyrocketed in value to $400K in 2005.  In some places, even more.  Many people took out loans to purchases houses at those levels.  Others borrowed against their new perceived equity....sorta like margining a dot.com stock.  Attacched to the higher mortgages were higher property taxes, higher homeowners insurance, higher fuel bills, and higher association dues.

Now reality is setting in and the family realized that $100K to $140K is really what they can afford.  Whoops, that is approaching 60-75% less than their current $400K stated income no money down negative amortization mortgage.

We have about $13 TRILLION of outstanding mortages and homeequity loans.  At the peak, the American housing stock was estimated to be worth between $20 - $22 Trillion.  A majority of the outstanding balance is from loans taken out in the last five years.

Now some people are saying this is a subprime problem?  Others are saying it a $400 billion dollar problem like the S&L crisis?  The above doesn't even account for defaulting corporate debt, commercial real estate debt, consumer revolver debt, and potential municipal defaults. 

It really sounds like a MASSIVE accross the board debt cluster flop that is going to affect just about everything that comes in its way.

If you really want to have some fun, back out the multiplier effect of the above on our banking systems' reserves to get some really goofy numbers.  But don't worry, there is a solution.

10 Comments – Post Your Own

#1) On February 11, 2008 at 12:22 AM, EScroogeJr (< 20) wrote:

For anybody who feels confident that home prices will drop 70%, the next logical step should be to sell his house or apartment, move to a rented home, wait out the storm and then buy three houses for the price of one. I hear a lot of bubble talk from people who claim to believe that we'll soon have a 20%, 30%, or 70% drop but I see very few people acting on that belief. Why make predictions that you don't believe in?

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#2) On February 11, 2008 at 12:24 AM, dwot (65.40) wrote:

$43k for every man, woman and child...

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#3) On February 11, 2008 at 12:35 AM, alstry (35.98) wrote:

Now what if I did exactly as you described?  But even so, the analysis rests on its own merit, my personal behavior only relates to the my confidence in my analysis, and very little to the objective quality of the work.

The fact that a man believes he should sleep with a different beautiful woman every week, and the fact that he may believe the nature of man leads him in that direction, it does not negate the fact that his wife might divorce him if he acts in accordance with his beliefs and thus the rational man may have to balance a life of acting on ones beliefs against that of a happy marriage.

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#4) On February 11, 2008 at 12:36 AM, alstry (35.98) wrote:

DWOT, I estimated $50K, but I left a little fluff for savings and maybe we differ on our estimates of undocumented individuals.

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#5) On February 11, 2008 at 12:38 AM, alstry (35.98) wrote:

DWOT, I estimated $50K, but I left a little fluff for savings and maybe we differ on our estimates of undocumented individuals.

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#6) On February 11, 2008 at 2:30 AM, mickeyc21 (29.70) wrote:

I thought I was the biggest housing bear on here!

Escrooge I did exactly what you described: sold all RE in April 2007 and put most of the $$$ to work in short RE and financials. Ambac over 80% in my real life portfolio.

I see plenty of people making the decision to leave their homes every day - not usually on a voluntary basis. 

I hope your real life portfolio doesn't mirror your caps one. 

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#7) On February 11, 2008 at 4:16 AM, DemonDoug (81.94) wrote:

Escrooge, plenty of people have invested in that belief, not just the few people who are vocal here on CAPS.

By the way, I am totally jazzed at how contentious this whole real estate discussion is getting here on CAPS.  This seems like the only place on the entire internet where housing bulls and bears have an actual civil discourse with debates that involve numbers and facts, as opposed to other blogs and discussion boards that are completely slanted one way or another.  Me personally, I love reading the bubble/bust blogs, because the info in there every day just celebrates all the bad news that comes out as we return to normalcy, and not only that the bust blogs tend to have people that realize that low home prices are a GOOD thing as they allow entry level workers to build homes as opposed to speculating which causes all sorts of nasty problems in the long-term.

Hope all you housing bulls have your parachutes on because it's a long way to go until we hit the bottom.

 

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#8) On February 11, 2008 at 5:28 AM, EScroogeJr (< 20) wrote:

DemonDoug, I don't doubt that cheap price is a good thing.  My problem is, I don't see a possibility for that.  The more I think about it, the greater my confidence that we haven't seen the worst. I can see ahead a second leg of the rally that will be steeper and longer than the first. I have yet to see a convincing bear case for housing.  Take my word for it, I would really much rather be in the HousingPanic camp, the trouble is, I can't see there a single well-argued position that I could defend.

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#9) On February 11, 2008 at 10:36 AM, mickeyc21 (29.70) wrote:

escrooge - based on what? Your emotional attachment to your house?

This completely contradicts your other statements: " The more I think about it, the greater my confidence that we haven't seen the worst"

I would love to see some bullish reasons to back RE but you are giving zero facts to back up your opinions. After a long post filled with fact one from you to bolster your assertions would make sense.

Based on your replies I would put money on you being a RE officer or in the loan business. 

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#10) On February 11, 2008 at 10:47 AM, leohaas (32.18) wrote:

Alstry, well argued. EScroogeJr, you are doing an excellent job of countering. We will see in the next couple of years where this ends up. Somewhere half-way, is my guess.

Just one thing:

"The government didn't mind becuse they were generating HUGE sums in higher property taxes"

Maybe, indeed the government does not mind, but this is not how property taxes work in most locations. Local governments typically have a budget, and calculate how much the tax rate needs to be to support that budget. In times of low property prices, the rate is high, and in times of high property prices, the rate is low. At any time it is Rate times Value that remains constant (or goes up with the budget of the local government).

My town went through a reassessment two years ago. My assessed value went up, but the tax rate went down. I actually ended up paying LESS in taxes (and believe me, that is a miracle here in NJ), even though the value of my property had gone up significantly.

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