Stabilization of U.S. Housing Prices

The direction of US home prices continues to be a hotly debated subject. The e-mail on our recent post on the topic keeps coming. Many Armageddon forecasters are too young to have remembered the numerous stresses the US economy and housing have undergone in previous cycles - so this crisis truly feels like the end of the world. And why would you buy a home if the world is ending?

There is no question that the housing market continues to be vulnerable in the short term, particularly given the uncertain employment outlook. And if the US government hasn't been involved, one could argue the price declines have more to go. But the politicians and the Fed will go out of their way to stabilize the US housing prices.

More importantly, the prices may now be at the "pre-bubble" levels (at least with respect to the national averages) after a spectacular growth and a similarly drastic correction. The following chart shows the ratio of house prices to median household income.

It's not likely we will see significant price appreciation from this point on, but for those who are buying a home instead of investing in property, it's not necessarily a bad time to do so.

Comments

[D. McHattie:]

It is the nature of averages that we should expect the ratio to either:
1) drop quickly and briefly to a level below the long-term average that is equivalent to the level it reached above the average
or
2) drop to a level that is moderately below the long-term average and remain there for a long time

Either way, there is no rush whatsoever to buy a home.

It seems to me that a person could benefit by waiting and building a larger down-payment. They could ultimately take out a smaller mortgage, over a shorter amortization period, and pay less interest to the bank.

Oct 11 12:35 PM

[Roger Knights:]

Other charts I've seen show the median income to house price ratio as still being in the abnormal (overpriced) area.

Oct 11 01:08 PM

[Jake2:]

Article lacks content.

Oct 11 11:43 PM

[OptimizedPrime:]

Most of us are too young to have personally witnessed something like our current climate to put it into perspective. In other words, most of us weren't very old (or alive) in the 1930s when the last time we had a downturn like this and the last time our country faced significant widespread DEFLATION. Many younger folks think this is the 80s where were going to have a little "recession" and then BOUNCE right back to free-wheeling credit. Most of our myopic young can't understand that we're in the midst of the greatest deleveraging our country has ever seen.

Those old enough to remember, or can read their history books know that we're about two years into a ten year long down cycle. Buying a house right now although perhaps an exciting luxury for people with money to burn is an CERTAIN LOSER from an investment standpoint even "long term".

Credit the Real Estate industry for convincing the buying public to look at a house as a RETIREMENT PLAN instead of a place to live. Today, as an investment, housing looks terrible and they are complaining that nobody wants to buy. Live by and and die by it, mo-fos.


OP

Oct 12 01:25 AM

[George Dave...:]

Defaults from borrowers with good credit contributed to much of the increase in seriously delinquent loans, echoing data from the Mortgage Bankers Association. As the recession claims more jobs, borrowers in good standing are more likely to miss their mortgage payments.
Read more.
www.housingnewslive.co...

Oct 13 02:18 AM

[JAMES CARLINI:]

OptimizedPrime --

Remember when all the experts on CNBC said that the sub-prime mortgage problem would never effect those that were paying their mortgages? The 1-2% subprime defaulters would not hurt the 98% paying their mortgages.

They were dead wrong. And house prices went down.

1) Sub-prime problems created drop in housing values.
2) Job loss created more mortgage defaults
3) Job loss also created a smaller pool of qualified buyers (If you fall from a $90K job to a $35K job -you aren't going to be looking at buying any big ticket items and hopefully can keep up house payments)

Having said all that, to say "a house is not an investment" tracks with what the "experts" are touting now - a house is only a place to live in, but no investment.

Someone who is young, employed and still has a lot of years left to work - buying a house cheap today might be a solid investment (especially with the incentives going on now) and if the dollar devalues due to them printing so many, a house could really be a solid investment.

Buy Low, Sell High - applies to real estate too.

As for what the "experts" are telling you to buy now (gold and equities), they are probably cashing out and buying real estate cheap at fire sale prices.

(From a commercial standpoint - several buildings have sold for 20% of what their value was. To the seller, that's a disaster - but to that buyer - that's a smart move.)

Will Gold go to $2,000? If I bought at $1,000 - I hope so. But if I bought it at $350 an ounce, I would be long out of it before it got there.

Oct 14 10:04 AM

[fwi:]

Optimized prime--great comments. My thought is that housing prices artificially look firmer because of the declining dollar. Also, houses were also viewed as credit card buying power for consumer nondurables and perishables. None of which have any (if they are still here) value. You cannot sell that trip to Antigua that you took on ebay.

Oct 15 11:51 AM

[Allan Frain:]

"Will Gold go to $2,000? If I bought at $1,000 - I hope so. But if I bought it at $350 an ounce, I would be long out of it before it got there."

Gold is for saving. What I bought at $261 I still have. Allocation is 100% physical and 0% paper. No margin calls, no defaults, no muss, no fuss. It dropped to $257 immediately thereafter, but in retrospect it didn't really matter.

Oct 15 02:39 PM