Are U.S. Home Prices Reasonable? 19 comments
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There is all this hue and cry about the value of the US single family residence (“SFR”) and why it needs to head even lower. I can't understand this hysteria!
A reading of the US Census data on housing shows that if one were to track the values of homes we provided over the last half-century, here is what emerges:
In 1950, the average SFR was about 983sf (square feet) and it fetched $11,000. There were 1.9MM starts that year.
In 1972, the average SFR was about 1,634sf and it fetched $30,500. There were 1.7MM starts that year.
In 1999, the average SFR was about 2,241sf and it fetched $87,000. There were 1.7MM starts that year as well.
In 2007, the average SFR was about 2,320sf and it is now reported that its median price in 2008 is $181,300.
Housing starts (SFR + Condos) now average only 800,000 per year.
Now, if we ignore for the most part, that homes now are of vastly better quality, and come with many amenities, and are far more efficient (thermal windows, forced-heat, exemplary plumbing, permanent roofs, and have useful lives that are 3X for the home in 1950), but simply equate to create an “apples for apples” comparison, we observe that for the "1950's" home, the following applies:
Average psf (per square foot) cost (1950 home): $10.33/sf in 1950 dollars
Average psf cost (1950 home), adjusted for CPI (2007): $89/sf
Average psf cost (1950 home), adjusted for value of the "consumer bundle" (2007): $137/sf
Average psf cost (1950 home), adjusted for value of unskilled-wage (2007): $143/sf
Average psf cost (1950 home), adjusted for nominal GDP (2007): $244/sf
Average psf cost (1950 home), adjusted for relative value of our GDP (2007): $486/sf
So, the average home being produced and bought today for $181,300 is a steal! We are paying only $78.18/sf in 2007 dollars!
What is wrong with this picture I ask? Why are many pundits crying "foul"?
US homes are a sterling value, and to boot we have greatly advanced the quality of homes we live in. We are additionally and consciously becoming environmentally sounder in what and how we build. The average cost for environmental impact exceeds 15% of the cost of the home these days. Plus, we spend not less than one year entitling the land and gaining a permit to build a home. This implies we view building with far more discrimination and scrutiny. And, we observe much better (OSHA regulated) safety standards than before and build with far more precision, with amazing speed and very low waste.
This is all GOOD. No, it is GREAT!
What appears to have gone wrong here with this ‘collapse’ is not that we build homes that no one wants (as is the case with Detroit), but that financial engineering went too far, in how homes are owned. While wages have increased they haven’t been able to keep pace with the larger homes we produce and demand. It is but obvious, that credit may have been too easy. No one was taking responsibility with the mortgages being written, as the folks in this finance industry, were playing 'passing the pillow", and then all of a sudden the music stopped and credit ended, and phew we busted the chain of passing the pillow. This is GOOD. Many of our investment bankers were held with way too much esteem, when it is the common worker that deserves the accolades and the bonus.
Therefore, as for value, there is "real value" in the homes we have produced. Perhaps we need to make smaller homes and learn to live like in smaller quarters (and in matter of fact our average household size has decreased from about 3.54 to 2.23). Or, we acknowledge that it is bad financial engineering relating to home ownership that needs to be fixed. It appears that the financial engineering as orchestrated was not the right way to make homes more “affordable”. I think if we stay focused on this aspect of the problem we will quickly solve our current problems. Reducing or advocating that the value of homes must fall, is not the right answer.
It is an interesting coincidence to see that FHA rates for conforming mortgages (80% of value was loaned) in 1950 were 4.5%, then in 1972 increased to 7%, and then to 17.5% in 1981, but declined to 7.46% in 1999, and now we see rates approaching 4.5% again!
Now, since we mostly live longer, can work for more years productively, and our homes last longer perhaps the better way to financial engineer affordability is for us to re-write Reg-Q for the banks (match savings to mortgages and hold them to maturity), and perhaps make loans that last 40+ years, but with interest rates that re-set every five years, so as to parallel our increases in standard of living. That is the way for us to fix the bad financial engineering and address affordability. Wasting countless tax dollars and doling them out to the same crowd that got us in the mess in the first instance is not wise. All of Wall Street is complicit in this mess.
There is a reason why America is the beacon of free enterprise and why we have the best quality of life on the planet - and we show, that we can be wise but also be compassionate at the same time. Owning a home must be rewarded, as it is a form of national savings. Besides building homes is a massive job engine, and we in the US are particularly brilliant at doing that – building superlative homes that our people deserve living in.
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This article has 19 comments:
With these policies and lots of financial engineering, we increased home ownership rates from 65% to 68%. In the wake of the financial crisis, this is unwinding and ownership rates will probably go back to prior levels.
We have made many mistakes along the way, including meddling in the workings of the market. The last thing we need is an engineered solution to the unwinding of the housing mess which has seen prices drop 24% from their peak.
They have further to fall and will probably overshoot....to the low side... their economic value as determined by price/rent ratios. After any bubble induced financial crisis, it is typical for asset prices to collapse and then slowly recover.
The market is very capable of determining the rate of this recovery and the price at which homes should trade. Longer-term, the market is very capable of determining home sizes as well.
Consider what areas of a house are the most expensive cost per sq/ft?
Kitchen and bathrooms right? A smaller house <1000sq/ft will always cost more per sq/ft with like materials. So a 2500 sq/ft house will look like a bargain because it has more of the less costly areas per sq/ft (bedrooms, foyers, hallways,family rooms, ect.)
Find out how much a 983 sq/ft house costs today and compare it and you shall see that your thesis falls apart.
Your logic is like saying " I can go to Hawaii with the $5000 I saved buying this new car".
"A man who doesn't watch the news is uniformed, A man who watches it is misinformed"
Be thankful we're not getting all the government we're paying for. (Deserve)
But we soon will. We'll get exactly what we deserve.
Buy a piece of land. Get permits and approved plans. Get a saw and hammer (plus 1,000 other items). Take time off and build it yourself. I mean ENTIRELY by yourself if it takes 4 years. Then stand back and admire your work. THEN, you will know what it's worth. Until then, you don't know 'nothing'. I did it and I know what it's worth-------priceless !
If homes are not between $85,000 and $125,000 (max). Then they are out of reach for normal working American's. The size or cost of square foot makes no difference ... Its final price that does. And most homes are out of reach of hourly working US Citizens. Its a shame on the American Dream. Taken away the hope we once had.
On Jan 04 09:38 AM Dr.Jackpot wrote:
> Here's how I value housing.
>
> Buy a piece of land. Get permits and approved plans. Get a saw and
> hammer (plus 1,000 other items). Take time off and build it yourself.
> I mean ENTIRELY by yourself if it takes 4 years. Then stand back
> and admire your work. THEN, you will know what it's worth. Until
> then, you don't know 'nothing'. I did it and I know what it's worth-------priceless
> !
In 1972, the average SFR was about 1,634sf and it fetched $30,500. There were 1.7MM starts that year.
In 1999, the average SFR was about 2,241sf and it fetched $87,000. There were 1.7MM starts that year as well.
In 2007, the average SFR was about 2,320sf and it is now reported that its median price in 2008 is $181,300.
Can you point me to your research? I cannot believe that a 2241sf house in 1999 fetched only $87,000. I paid twice that in 1995 in a geographically undesirable area. In great areas such as the coasts, houses of this size were going for $300k in 1999, not less than $100k.
It appears from your post, that you missed the statistic that is quoted -
The Value of the home using the relative value of GDP, would suggest that the fair value in 2007 should be north of $486/sf but isn't! Its equivalent today is only $78/sf. Our GDP also increased and far more than the relative value of the home.
Even using wage scales for unskilled workers it should be $143/sf but isn't there either! It is less than half!
You are right that the absolute value of $181,000 appears to have increased ever so fast. This makes affordability harder. Yes 20% of $181,000 is $36,000 and this is almost 90% of our per-capita income. What this implies, is that we must "save" for more years before we qualify to buy a home. There is no inherent 'over-value' issue with the home itself! As it is, we make fewer new homes now.
Thanks for the post.
There really is no way to rationally control the cost to replace commodities that go to make a home.
But with better financial engineering we can allow more of us to share in the American dream - of home ownership.
On Jan 04 06:46 AM pmorgan_m3@yahoo.com wrote:
> The author misses the root cause of the problem despite sharing with
> the reader the data which makes the problem clear. The problem is
> the extremely rapid increase in average SFR value from 1999 to 2007.
> According to the author's own figures average SFR value increased
> by over 200% in just 8 years. the author's own figures show that
> it took over 20 years for similar value growth from 1950 to 1972,
> and 1972 to 1999. Of course, new financial products made it easier
> to finance the debt portion of the rapidly inflated values but it
> was the buyers who accepted these new prices as "real" even though
> the average buyer did not experience a 200% growth in nominal income
> in 8 years. Clearly if price goes up by more than 200% in 8 years
> the standard 10 to 20% down payment of purchase price would also
> be over 200% more.The new debt products came into being because buyers
> did not have the standard 10 to 20% down payment of these inflated
> purchase prices yet the buyers demanded a means to purchase and an
> unregulated Wall Street was happy to supply the mechanism.
Pre-1960's, most development was in cities. They extended infrastructure - roads, water & sewer, with low interest municipal bonds. The housing was then built within the grid. Suburban development - post WW-II, often in unincorporated areas of Counties, had infrastructure demands, but the Counties did not have much infrastructure. The developers then put in what was needed and dedicated it to the public utility. That ended the grid road system and led to the cul-de-sac as developers sought the shortest possible runs. It was aesthetic, but did not "connect" to adjoining projects. Thus you got the suburban problem of: "you can't get there from here" and eventual suburban congestion as every resident over 16 needed their own vehicle.
This "solution" meant that public infrastructure was being financed at market interest rates because those costs were put in the house, rather than municipal bond rates. Housing values increased to reflect this cost. Today, a lot cost before the unit is built, can range up to $300,000. Close in jurisdictions use this to keep values high and school children out. The farther out communities provide housing more cheaply, but there's a 45-85 mile, or more commute. Whatever is cheap to a suburbanite - $300,000 compared to $500,000 - is always unaffordable to the local market. Here in Virginia's Northern Shenandoah Valley, affordable housing in 1999 was a $90,000 townhouse for a $25,000 income family.
Post 9/11 - the Washington, D.C. metro area contractor employment ramped up and local values nearly doubled in three years. Bigger units were built for the commuters and retirees cashing out from D.C. area home values. Now they are sitting empty and prices are dropping.
Housing, it turns out, is also a commodity. The recession of 1990 proved that on a small scale, and this collapse is reinforcing that lesson. Just looking at a spreadsheet does not tell the whole story. Bigger houses require more maintenance. Who is going to be able to afford that? The Victorian homes were high maintenance too. Their owners of the time could afford to hire the help. When that was no longer the case, those neighborhoods declined and the units became rooming houses. That could be the fate of McMansions. Zoning ordinances won't like it, but economics is likely to win out. Modern housing construction materials are not as sturdy as those used in our cities up through the 1950's. Demolition is as likely as rehabilitation for many units.
No doubt the aspirational readers of Seeking Alpha have goals of big estates and multiple homes. Many do live large, and by doing so, create employment for others, but feeding the wants has exceeded the need. Easy credit enabled the ramp up by giving people a Midas touch. Financial leverage does have risks, so a conservative approach is warranted. It generally takes time to fully "experience" inflation. We now get a chance to experience "deflation." Meanwhile the people will be doing their best to create long-term value for their families and human society.
The dollar has lost 45% of its purchasing power in the last 20 years.
The dollar has lost 71% of its purchasing power in the last 30 years.
The dollar has lost 84% of its purchasing power in the last 40 years.
Historically, housing prices rise pretty much at the rate of inflation. Housing has been a good investment due to the combination of inflation and leverage (i.e., 20% or less down). The current crisis stems from a debt/credit-fueled increase in prices beyond the trend line. Like a tsunami, things aren't the same when the water/price level returns to normal.
Human nature being what it is, I don't think we (via our political leaders) will accept deflation, even back to the trend. Too many people have mortgages they can't manage, and negative equity in their homes. More importantly, our over-leveraged financial system won't survive another 2-5 years of lower prices.
I'm betting on government-induced inflation. Crank up the printing presses, flood the economy with dollars. Pretty soon, inflation will roar, and kick the trend line up to a new level. The proper solution is lower house prices. The politically acceptable solution is higher house prices. Let's see which wins.
We Americans love our homes. Unfortunately, the financial side got a bit out of hand due to the greed of those involved in the industry, speculators, and buyers who could not actually afford the upkeep and mortgage payments for their homes. Owning a home is a major desire for many working Americans. It is a dream that inspires us to work harder, work that overtime, or work that extra job to buy and keep our home.
The dream still lives and will eventually fuel new buying in the housing market in America. The pent up demand that is growing will lead to a shortage of new homes on the market within 5 years. Give Americans a lower price for homes combined with a lower fixed mortgage interest rate and the housing market will again stabilize and continue its inflation price increase as it has done in the past.
THE AMERICAN DREAM IS NOT DEAD!!!
On Jan 04 09:05 AM standfast77 wrote:
> Are you a liberal or a socialist? We only deserve what we can PAY
> for.
>
> Be thankful we're not getting all the government we're paying for.
> (Deserve)
>
> But we soon will. We'll get exactly what we deserve.
1) GDP is not a good indication of how average Joe has performed financially over the years
2) The article completely ignores the rules of supply and demand
3) Average wages have been stagnant for many years. Our standard of living drops when we take into account inflation.
Please we need more informative articles.
In addition, in case you haven't noticed rents are actually falling as home prices are falling because more people are moving in with family to save money instead of renting when they get kicked out of the home they could not afford. When these rents stabilize home prices can stabilize as well.
www.crashmarketstocks....