Posted on 12/28/2007 12:09:11 PM PST by shrinkermd
In 2002, the median price of a single-family home in Los Angeles was $270,000 and the median homeowner's income was $65,000. With a $50,000 down payment, the annual cost of that house (taxes, insurance and payment on a 30-year fixed-rate conventional mortgage) would add up to about 33% of the median household's income -- just under the 35% mark that the Federal Housing Administration calls the upper limit of "affordable."
By 2006, the cost of that same house doubled, to $540,000 -- pushed by unbridled speculation fueled by unparalleled access to mortgage capital. But median income rose a paltry 15%. So today that same set of costs come to 60% of gross income.
That might be a manageable burden when home prices are rising at double-digit rates, creating new equity that can be accessed to support spending -- but not when prices are flat and the home-equity ATM is closed.
There are "experts" out there who once preached that there was no bubble; they now preach that all real estate is local and that prices in your neighborhood won't be affected by foreclosures and price declines elsewhere.
The cold, hard truth is that foreclosures are serving only to hasten the painful process of shifting housing prices back to a level the market can sustain. Prices must and will fall. Everywhere. Probably 25% to 30% from their peak.
(Excerpt) Read more at latimes.com ...
shrinkermd: “It would seem resonable that house prices would correct to 2002 levels (adjusted for inflation). If so, there will be many, many homes that have larger mortgages than their real value.”
The real value is whatever the market will pay. However, buyers who bought responsibly and who don’t need to move within a couple years can probably ride this out. So long as the payments are affordable, they can survive. Speculators, on the other hand, are likely going to suffer.
If you’re living in a “fly over” state, this isn’t a big deal. I live in a 2000 sq ft home I bought for $200k a few years back. The replacement cost of my home is more than 1/2 of what I paid for it. It won’t fall that far.
Greed is good. Remember that when you’re packing up for the sherriff’s sale of that home you tried to buy on interest only.
Based on what is this assumption reasonable? 5% tail of the market does not wag the 95% of the dog.
“Speculators, on the other hand, are likely going to suffer.”
And they’re going to make the rest of us hurt in the process. Not as bad, but we will feel it.
Thornberg was previously the guy behind the UCLA Anderson Forecast. He rode the bubble up and called the top just months before the actual top. For which his employers fired him. Much of what he says is common sensical, but to say what he did when he did (when real estate developers were starting to see a slowdown) - instead of continuing to mislead the public in the face of impending collapse - was more or less biting the hand (the real estate industry) that fed him. For which he deserves credit.
Mine included. But a big difference is that I'm fixed rate and I can make my payments. Also don't have a problem holding out for an extra 5 to 10 years. I don't need to sell my house anytime soon.
Good thing I bought my house in 2002...
And suddenly, that $500,000, 5000 sq/ft home on a 1/2 acre lot seems awfully big for 2 people.
“The real value is whatever the market will pay. “
With the liquidity squeeze, demand decreases dramatically, which means dramatic price drops.
Where I live, housing prices didn't come close to keeping up with inflation for the fifteen years prior to 2002, so the increases after 2002 were mainly playing catch up to inflation. All houses also became more valuable after the 1997 capital gains tax exemption. And where I live land is very scarce now. The only problem is salaries have never caught up with inflation.
I forgot to mention there are a lot more amenities than twenty years ago.
“That might be a manageable burden when home prices are rising at double-digit rates, creating new equity that can be accessed to support spending — but not when prices are flat and the home-equity ATM is closed......”
Can someone clue me in.....You always hear talking heads and financial gurus claiming how Consumer spending makes up two-thirds the economy. I want to know what it is exactly that makes up the other third. No one ever says.....Is it government spending? I really don’t know and would like someone in the know to explain the other third.
Thanks-
Only in your wildest dreams and when new high end pickup trucks sell for $5,000 instead of $40,000 plus.
Cold hard truth that is an assumption not supported by any data outside the wishful thinking of this Democrat activist with tenure desperate for some validation of his statist economic theorys. I see the LA Times have a Paul Krugman clone.
Where will the new confidence equilibrium stabilize?
That home, $500,000 in 2007 was worth $20,000 in gold in 1913.
Buy stock in TUMS.
Excellent chance to buy. Buy low, sell high.
The problem is the real estate market isn't very liquid in the best of times, especially when compared to the stock market, and now it's ridiculous.
The absurd ratios are localized. Mechanicsburg PA 2005 median income 53K median home price 140K. 2.6X income. Los Angeles median 42K median home 503K or 11.7X income. The prices are not going to fall everywhere.
Speculators and many non-speculators have already been clobbered. What we're seeing now is collateral damage.
” Probably 25% to 30% from their peak.”
Oh, they’ll fall from peak...might take a little longer to shake out, with ‘08 an election year...
check out data tab: (for peak)
http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp
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