As you can see from the mid/late 1970s to 2001/2002 the ratio was consistent in a tight range between 2.6x to 3.0x. Essentially this means the median home price in this country was 2.6x - 3.0x median household income. And it's been right around 2.8x for most of that time. That's 30 years....
In 2006 at the height of 'innovation' (where were these politicians 1 year ago? seriously), the ratio went "off" the chart, it appears 4.0x. After the 'correction' we've had, that ratio has fallen all the way to.... 3.8x.
What are median incomes nowadays? As of 2006 the median household income was $48,201.
$48,201 x 2.8 ratio (historical average for past 30 years) = $134,962
Folks that is still nearly $73K away.... or a drop of 35% from October 2007 levels. And a drop of 41% from peak levels in July 2006.
Now that's assuming we return to historical norms. I am fully confidant that by the time this is all said and done NEW financial innovations will be introduced (along with bailouts) which will keep prices elevated above where they 'should be' without the 'not so invisible hand' propping things up.
And let's assume instead of returning to the 2.8 ratio that is historically where median house values vs income falls, but instead we can now subsist at say 3.2x because of 'the invisible hand', this takes us to
2008: $52,134 x 3.2 ratio = $166,829
That's still a $40,971 drop in median pricing or just under 20% from today's levels.
Let's fast forward just under 15 months.... what's the latest data say?
- Prices of existing U.S. single-family homes dropped a record 12.4 percent in the fourth quarter from a year earlier to the lowest level since 2003, the National Association of Realtors said on Thursday.
- The NAR said distressed sales, which includes foreclosures, accounted for 45 percent of transactions in that quarter, dragging down the national median price of existing single-family homes to $180,100. It was the lowest since the second quarter of 2003 when it was $177,900.
And no, I don't give a damn what interest rate the Mother State deems "correct" - many in this country will NOT want to ADD debt at any interest rate. To that end, the much hyped Toll Brothers (TOL) 3.99% mortgage rate? As CNBC pundits screamed at the time - this is gonna do the trick! Reality?
- Toll's sales in its latest quarter were grim. Across the country, orders fell 59% from a year ago to just 266 homes, a larger decline than some analysts expected. They plummeted 70% in the North, followed by 63% in the Mid-Atlantic and 56% in the South.
- Toll also acknowledged that a much-touted 3.99% mortgage interest-rate promotion had been used by only two dozen buyers since the builder started offering the rate last month.
Once more let me prepare you for the coming era of hype and misguided punditry. We are going to have a lot of housing "transactions" coming, and people will point to it as the rebound. It's going to be a "good thing" indeed as it works off inventory, but there is going to be a flurry of foreclosures for a long while yet. And people trying to sell their homes at "reasonable" prices (i.e. non foreclosure pricing) are going to have a lot of trouble. Since the majority of buyers are people who already have a home... if you can't sell; you can't buy. Which leaves us with first time home buyers. Who, if they don't use FHA require a down payment of 20%... in a country of non savers. So the great recovery rests on FHA first time home buyers ;)
But all the stock market needs to be happy is the pickup in sales, not the factual reasoning behind it, to build a thesis. Hence our burgeoning "housing stock" exposure. The fallout from job losses and typical business cycle on the housing market still lays mostly ahead of us. On top of that Americans are already levered up and need YEARS to disgorge - this is a quantum change in society. Not just a "cyclical" issue that gets solved by more easy money thrown at the problem. That was the LAST 20 years.
*Kool Aid is known to offset all intellect slowing diseases associated with the ingestion of mustard seeds.
[Dec 24, 2008: Median Home Prices Fall Most Since Great Depression]
9 comments:
consumer pay based on monthly payments so the dramatic drop in interest rates makes these houses much more affordable then this index suggests.
Absolutely on the margin - 4% interest rates will "help"
but people forget we had (a) record low fix rates in 2005-2006. Well record low until the new Federal Reserve managed record lows we now have and (b) many people were in ARMs then at 1-2% teaser rates.... so unless we can get down to 1-2% fixed I'd argue many cannot get lower rates than 2005-2006.
Still lots more to go on the downside.
The only thing I could see stopping the downside is the latest government plan of basically paying people's mortgages. You wrote about it yesterday with the Obama administration looking at at risk people prior to them even getting in trouble.
Of course no houses will sell either, but prices might stay fixed a bit longer. It amazes me, if the gov. would just get out of the way and let things correct we could have already hit bottom in some areas and be on our way back up. Sigh...
Yes. Unfortunately we basically have a repeat of NASDAQ 1998-2002 but in homes. And homes are much more illiquid than stocks so the situation will be more drawn out.
That said someone sent me homes in Fort Myers area for $35K... 1/3rd of replacement value. Those should sell like hotcakes but if the govt steps in and doesnt let prices fall by keeping people hanging by fingernails in homes - that won't happen in other places.
p.s. another foreclosure moratorium.
http://www.nytimes.com/2009/02/14/business/economy/14housing.html?_r=1&ref=business
JPM did this in November ... sure "helped"
Just remember when we get to the March report on February foreclosure rates as "better than expected" ;)
p.s.s. Fannie Freddie did the same over holiday season (into Jan) which is another reason foreclosures are lower than they "should" be.
this whole mess really makes me sick. owning a house is not a right which it seems to have become. some people should just not own a house, and most of these people should have been renting all along. if the free market acutally worked, the banks would have turned their mortgage departments into property management and the "owners" into renters. with no money down, that's all they were anyway. ugh, we really are a nation of whiners!
lisa
it was just announced on bloomberg that BAC was splitting into two banks, regular and investing. i wish i was smarter to know if that was good or bad!
lisa
Lisa, my contention is low house prices would be better for this whole country. Just imagine a world where housing only took up 20% of your income. We could do out of the box things like "save". But it's turned into a speculative instrument.
In certain parts of the country there is no way a 25 -30 year old young professional could ever buy a house without mommy and daddy helping. In other parts people who make "normal" salaries are priced out... they had to move 1-1.5 hours out into these exurbs (for example teachers) and then drive into work 90 minutes each way. Does it make sense? No. The only place it makes sense are places that are space constrained like San Fran or Manhattan
when Las Vegas with miles of desert, or Phoneix or wherever see those type of increases - its ridiculous.
Take the building cost, mark it up 20% and you can have a bevy of nice $150K-$170K houses across America even for 2000 sq feet.
But no, in major cities it should be $400K.
Again, I go back to the point it would better if we had a 1 time RESET (which would be painful for me as well as a homeowner) and then if home prices either were flat or 1-3% (keep up with salaries)... it would be better off for the masses. 15-25% annual gains are good for the top 5% who can afford to daytrade homes.
But the rules are set by those in that top 5%, since they make the political contributions.
And I don't want to hear about how its ACORN's fault... if it was, this would of been over by now since the sub prime borrowers are already all back on the street.
Why does Google no longer work on this blogsite ?
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