Will U.S. Housing Prices CRASH 70% from peak?
February 10, 2008
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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.
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