With some time house prices will start to recover.
What, back to top-of-the-bubble levels? They need to come down about 40% from their peak and stay there.
With some time house prices will start to recover.
What, back to top-of-the-bubble levels? They need to come down about 40% from their peak and stay there.
What is a “standard” house? While modern houses are nice, the construction methods and materials used in some homes of the period are nearly impossible to procure today. Quarter-sawn oak, walnut staircase, etc. Tough to make comparisons on some of that stuff.
The cost of building a home has gone up dramatically over the last 5 years or so as well. Many of those costs aren’t going down again. I started building a new home a little over three years ago. The permit fees were over $40,000. The water meter fees went up to over $32,000 (the increase was just after I got my meter for around $8,000). Copper costs about triple what it did when I started. That’s true of many other materials as well. From plywood to concrete. Add all the city requirements such as fire sprinklers, earthquake reinforcement etc. and you’ve added tens of thousands more dollars. Houses won’t cost less than what it costs to build them as long as the population is increasing and people need to live somewhere.
Now I’m not saying that explains the real estate bubble, I’m just saying it is a factor.
In fact I’ll argue several things caused it. The first being easy money. People who had no business borrowing money did and the banks cheered them on... People spent as much as their immediate monthly payment would buy... The second issue which I think has been buried is inflation which was much higher than anyone admits. I’m guessing low cost Chinese imports across the board helped hide the increasing costs in other areas. I also think the decline of the dollar is inflation catching up with it to some degree. Since dollars are worth less it costs more of them for a house. I’m no expert obviously, but it seems to me once paper currency looses significant value it very rarely gains it back again. So hard assets cost more dollars from now on. So where the cost of a house comes back to is hard to say. It depends on how much of the increase is inflation be it via government regulation or devalued dollars and how much is "Irrational exuberance". Obviously it is a mix of both, but how much?
Where's Mr. Housing Bubble when you need him ?
The problem is not the subprime lending it is the off balance sheet magic act that affects all finance recently. Enron was just the appetizer. There is extreme moral hazard.
This sort of finance gives engineering a bad name.
Even though I have personally benefited (at least on paper) from the most recent ‘boom’ I generally agree with you. I think it would be interesting, however, to see a breakdown of the cost of housing per square ft. over the same historical period. It seems to me, admittedly without any data to back it up, that a lot of people ‘moved up’ in the size of their homes over the past 10-15 years and that this has fueled some of the debt crisis.
Got the same chart adjusting for square footage size and interest rates (which affect the cost of the mortgage)? A person whom in 1980s could afford a 1200 mortgage can now afford twice the paper price of the house because of much lower interest rates.