Nice WSJ interactive graphic on the changes in Housing markets in various regions:
click for interactive graphic
The Brighter Side of Housing
Amid Downturn, ‘Unaffordable’ Is Within Reach
JAMES R. HAGERTY
WSJ, April 24, 2008; Page D1
“Are homes becoming affordable?”
Are they affordable now?
Are they becoming affordable, and will they be affordable some time in the future?
When will that be?
At the bottom: 2013.
How hard is it to look at the Case/Shiller housing price index that goes back about 150 years, see the direct connection between rent/own and income/price that held steady up until 5 years ago. Then see how far prices need to decline to go back to the mean. This is basic Econ 101, shouldn’t be hard for professional economist.
What Shark said, with one addition. They’ll only be affordable to those people who will still have a job and are among the relatively few people that banks will lend to.
And of course, well-to-do people who didn’t do anything stupid with their money will find real estate of all kinds downright cheap.
Affordability has never been easier.
I simply look for homes with a ‘Yes’ checked in the “Marked-to-Model – Tier III Assets” box in the MLS. Then I find a mortgage store with marked-to-model financing based on LIBOR…
…When they ask me about my income, I start by saying, “Well, I should be making…
Bingo! That one chart tells you all you need to know about the housing market: where’s it’s been, where it’s going, and how long it’s going to take to get there.
As the accompanying article notes, the chart uses data from Q4 2007. Here in Seattle, for instance, there’s been a lot coming down the pike since then. Inventory is now at record levels and is growing at about 2% per week; Washington Mutual is in a tailspin; and just this morning it was announced that Safeco, which employs almost 2000 locally, has been sold and will downsize. I don’t look for objectivity and timeliness in a chart that was designed to support a “heart-warming” story angle.
Here’s a little scenario I like to game out in terms of housing affordability.
My father (partial college education) bought the house I grew up in in 1975 for $35K. (This was an era of high interest rates, if I’m not mistaken.) It was a perfectly acceptible, Midwestern suburban neighborhood in a secondary city of around 1M people. So, no complaints here from an upbringing standpoint. Another 300ft. sq. would have been nice, which would have put the house at around 1,600ft. sq.
Even without a college education his income likely topped out in the low 40s. So, he was eventually able to earn more on an annual basis than base price of the house. Now, let’s consider the current situation.
I live in a city comparable to the one I grew up in, but not the same one. An 1,800-2,000ft. sq. house in a similar neighborhood would cost $180-210K. (And, this is considered dirt cheap by many metro standards!) With a college education, I have twice the income my father did at his peak income, and I’ve got 32 years to retirement at age 70. (That’s the new retirement age for people born after June 30, 1968.) I’m optimistic that I will make more over time.
Riddle me this, Batman. If I bought a house today, what are the chances my personal (not household) income will ever exceed $180K? (We don’t want to outsource our child rearing, so my wife works part-time from our large underpriced apartment.) 1-in-10? 1-in-20? What is the exact price-to-annual-income ratio at which a house becomes affordable? 2-to-1? .75-to-1? IMHO, prices have a long way to go to reach what I would call “affordable”.
Just throwing it out there.
The finance industry (scamulators) specialize in semantic gymnastics. It’s all about keeping enough people off balance to swindle a buck off them before they catch on. Define, redefine, restate, reiterate what has never been said and “invent” some old con as the “new” thing. Montebanks and horse hockey specialists all.
“Legitimacy is a precious possession; once lost it’s not easily retrieved. Today, the myth of the “ownership society” confronts the reality of the “foreclosure society.” The great silence of the second Gilded Age may give way to the great noise of the first.”
Steve Fraser is working on a book about the two gilded ages. A Tomdispatch regular, he is the author of, among other works, the just published Wall Street: America’s Dream Palace. He is Editor-at-Large of New Labor Forum magazine.
Housing affordable? Hell no…
My wife and I are well educated (M.S./Ph.D. in engineering), compensated well above average (at least for ppl in mid/late 20’s) and very conservative in regards to saving money and there is still no way we could buy anything in the Boston area that is semi-decent without leveraging up to our eyeballs. I feel evil saying this, but I am kind of hoping that the housing market collapses down to historical trend rather rapidly so that we can actually afford a home sometime before retirement.
Of course, I won’t hold my breath b/c I am sure that Bush, Paulson, Bernanke, congress, etc. would give their respective left nuts to perpetuate the inflated housing fraud.
Shark–I’m w/ you on about 2012/13–after a new new president is elected to replace this next one-termer, no matter who it is.
The ratio of annual income to housing prices is a problem that has more to do w/ an inflationary international wage arbitrage than w/ the economic fundamentals or price/income ratios. Americans are getting poorer, even if it does not appear thus, and the mechanism is through currency devaluation/inflation that the fed has decided is the best (least likely to cause wholesale legions of unhappy people) method of doing so. People seem willing to blame every thing but the money when they see eggs triple in price, and rice being hoarded like a five-gallon jerry can of diesel in a Mad Max movie.
But it is ever, and always, a monetary phenomenon, particularly in housing. The fed gov is now propping up house prices through FNMA,Freddie and the FHLB. They’re now the only game in town.
Don’t feel evil, HCF. The profligacy of others has caused the responsible earners and savers to be in a bad spot. It is normal to wish for that to end. My wife and I are in a similar spot (though we are merely tech bachelors folks) in San Jose. We wish the same thing. We are sorry that that means lots of people who made bad choices will be hurt, but we are not so sorry we think those who made good choices should be hurt too.
So the market is pricing in a 8.5 % drop in new home sales .It’s almost funny hearing the TV cheerleader talk about how the markets have bottomed . What do you do if your a Bank ? Pull the credit lines from your home builders ? Then you end up with 100’s if not thousands of new home neighbors underwater.
“Are Homes Becoming Affordable?”
Sure, but who wants to buy a depreciating asset ?
Unrelated topic – I’ve enjoyed your earlier posts on the BP “pageview contrary indicator.” http://bigpicture.typepad.com/comments/2008/03/contrary-indica.html
Was curious how that indicator has been lately, seems like volume / heatedness of messages has slowed down lately…
HCF – That’s not evil, it’s just sane. My wife and I are right with you (MS engineering/PhD science), in our early 30s, and we simply cannot stomach paying $1000 a foot for a shack in Silicon Valley.
We may find that the global supply of fools is greater than our patience and relocate to a cleaner, safer, CHEAPER alternative. If that’s how it goes, well, the better for our family.
Here’s some insight on affordability:
Houses routinely went for 400x monthly rent about a year ago where I live, in San Jose.
Now, there are many areas where the multiple is down to 200x rent.
Are they affordable? Well, that’s still 6x-8x median income, so, no. Not by any reasonable measure.
Will they become more affordable? During the last bust, they hit 120x rent, and about 4x income.
And that wasn’t even a really bad housing bust – this time’s going to be much, much worse.
I’ll start shopping at 120x rent, but I expect to purchase at around 80x rent, like the midwest has right now.
I live in LA, and my wife and I just started looking at houses in January. At first, the only things in our range (under 400k) were dilapidated crackhouses in the worst neighborhoods. Almost everything we saw was a foreclosure or probate sale. In the two months, we’ve seen three bedroom two baths in decent neighborhoods come into our range – some of these were short sales, that is sold for less than the loan value. In the last two weeks, people have stopped listing their homes, I think out of paranoia. Still, sooner or later they will have to list. Unless I fail to understand the market pressures, I think higher interest rates will also favor me – less buying power will mean less demand, right? Who in there right mind would buy real estate at this time?
Same exact scenario as you. Earning >2x median household income in MA and can’t afford to buy close to what we want (grinding it out in grad school as the RE bubble inflated.) Now delighted to see places I worked so hard in school to be able to afford coming closer to attainable. At the same time, friends and relatives are watching equity evaporate and some will end-up underwater by the end of this. Yes, Congress, Bernanke, Paulson, et al will ensure a premature bottom, but not before reasonable prices return. The ship has only started turning from trouble and, as we know, takes a long time to turn.
but with a wife and two kids and a demanding gig as my own boss…. I don’t want a house that has been neglected. I want to move into a house that has been cared for — and is more than 15 years old (before they starting making them out of insulation and vapor wrap).
So, yeah, you can get a better deal (Phila suburbs) but you can’t put the baby down on the carpet. Which is what I am looking for.
So, anyway, looking for a solid house in a solid neighborhood and may pay more than I could if I waited.
I guess the point here is that I don’t want to get into a distress sale, b/c having seen a few, they’re terrible.
As a commenter a week ago said, saving 20 40k is not much compared to the upkeep needed over 20years. (or deferred maintenance that I would inherit)
my 2 cents: buying stocks when they are low is more palatable b/c my family will not eat dinner in the stocks. If things do get really bad, the only ones who will sell are those that are forced to sell, and you are unlikely to want to eat/live/sleep there.
Yes, houses are becoming affordable.
No, houses are not affordable yet.
If fact, the more people that get laid off and the more people that have reduced wages and the more that people have to spend on other things the further house prices have to fall.
We sure do attract market bubbles, don’t we? First the Dot.com bubble, then the Housing mess.
Jonathan, San Francisco
I would remind all that real estate is still somewhat regional/local. If you want affordability, move to Texas. Here in Austin (the most expensive city in Texas) new homes are about $150-$200 ft. depending on area. In Houston, they are even less. Though I was angry for many years about everyone elses homes going sky high – and making money for nothing, now I’m quite glad Texas (generally) didn’t join the party.
Y’all come on down where a home has always just been a nice place to put yer boots on – not just another investment to buy and sell like an old shoe.
Given that median incomes are now back to where they were in 1999 and that credit is restrained even though rates are low, prices should eventually fall to 1998-99 levels. We have a long long way to go as unemployment goes up housing must go down further.
“Of course, I won’t hold my breath b/c I am sure that Bush, Paulson, Bernanke, congress, etc. would give their respective left nuts to perpetuate the inflated housing fraud.”
HCF, you assume that politicos have nuts…this is a very generous assumption, since if they had any, they would do what’s right for the majority.
“If things do get really bad, the only ones who will sell are those that are forced to sell”
Let me guess – you’re young, and you’ve never seen a down market.
Trust me, if things get really bad, EVERYONE tries to sell, and you have your pick of the finest houses. You just have to put up with people telling you RE is a bad investment. But since they were the same people telling you to buy in the boom, you can ignore them.
“I’m quite glad Texas (generally) didn’t join the party”
Austin, at least, joined the party. Sorry – prices there could drop by 20-30%. They rose by more than that in the last two years.
Am I the only one who thinks houses will have to fall more like 40-50%? Houses are bought with people estimating how much they can pay each month, not how much the CPI has changed since the current owners bought the house. Incomes for many people in this country are dreadful (and tentative to boot). I’m not saying all homes will fall this far, but many will have to fall more than 50% in the neighborhoods we all knew were bad or, at least, headed South before the boom. Houses in so-called “good,” or desirable, neighborhoods might bottom out at 20-30%. Also, Baby Boomers with equity are going to be looking to cash out and downsize, not take on new debt. There is simply not enough wealth coming up behind them to provide the cash for their collective assumption of equity. So, I’m not talking about a short term bottom in the next five years–more like a long-term bottom between now and, say, 2022. Again, just looking for the crowd-sourced wisdom of TBP readers.
Why there’s no incisive analysis coming from a bullish side of current business cycle.
Why no analysis on inventory-to-sales ratio and how low it is currently.Why there’s no analysis on manufacturer’s turn around time which is very high currently which means that they are struggling to catch up if there is slight boost in sales/demand.Why there is no analysis on how employment continued to fail to catch up with production growth in the current cycle which could be one of the reason that 4 months into recession lay offs are not above 100k.Is it possible that the system is already operating at full efficiency due to pervasive negativity and hence downside would be limited.Why there is no analysis on consumer surveys that says that people are comfortable with their own financial health but afraid of general economy, which
infact is a bullish sign.If everybody has already planned for recession don’t u think that precludes recession.I would like more unbiased analysis of current business cycle from a commentator whom I hold at such high esteem.
“If everybody has already planned for recession don’t u think that precludes recession.”
Let me guess – you’re young.
Some of the most vicious recessions I’ve seen, we saw coming from a mile away.
I could rebut your points individually, but really, they’ve been rebutted enough. It seems likely that you’ve read, and you didn’t believe the rebuttals, so why bother.
Here’s a taste: your employment stat isn’t measuring the thing you think it measures. Look to U6. Remember that 3-5 illegals are not recorded one way or the other – and many of them are in restaurants and construction, which have already taken a big, big hit. Remember that RE agents don’t collect unemployment either. My God, does that silly U3 figure catch *any* unemployment in the current downturn?
I am a realtor and do a-lot of business in condos. Real estate has probably seen the bottom.I think the realty market will go up in 09. greg moser