“One final thought. How can any of this get repaired unless home values stabilize? And how will that happen? In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.
Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.”
From a blog...
Interesting...
Interesting because the person who wrote this is onto something: much of the housing appreciation in overheated markets was due to the ease with which people could over-leverage themselves into a house far, far above what they could really afford.
The housing bubble was created by the same forces that created the dot-com bubble: easy leverage. This is the same thing that is propping up oil prices: you need have only 10% margin down on an oil futures contract, which allows speculators to buy up huge contracts for oil on limited capital.
After the dot-com bubble, the SEC required that the stocks of small, thinly traded and recently-brought-public companies be bought on only 100% margin (ie, cash), which has had a beneficial effect. The same idea is being brought to bear against the real estate markets — banks tightening their lending standards, the disappearance of stated-income loans, no more cheap investor mortgages, etc.
As a result, housing prices in California are going to fall. There’s simply no way around it. And they’re going to fall pretty far; farther than they’ve fallen in the past. The price of housing is so far above the earning power of people in California that not even 50 year mortgages can keep the valuations up there.
Not while their owners can vote for a bailout.
I’ll add: Cal Assoc of Realtors reported yesterday an average price of 497,000. One year ago it was around 579,000.