I was reading a post on Toro's blog regarding Ben Stein v Goldman
(fun stuff!), and I came across a very interesting chart which is
simply the historical ratio of median housing value vs median household
income.
As you can see from the mid/late 1970s to 2001/2002 the ratio was consistent in a tight range between 2.6x to 3.0x. Essentially this means the median home price in this country was 2.6x - 3.0x median household income. And it's been right around 2.8x for most of that time. That's 30 years....
Then
in 2002+, we had innovation.... great innovation... and 1% interest
rates. Easy money. No mortgage regulation. Happy times. And crazy
housing prices that detached from reality. In 2006 at the height of
'innovation' (where were these politicians one year ago? seriously), the
ratio went "off" the chart, it appears 4.0x. After the 'correction' we've had, that ratio has fallen all the way to.... 3.8x.
What
bugs me most about the 'plans' the politicians are doing is this will
only slow down (to some degree) the inevitable - prices coming to a
point average Americans can afford. Well I should not say that bugs me
the most - all of these bailout plans "points" bug me the most. But
this is one that the politicians don't get. Once again they sacrifice
the long term for short term. As with everything. (I will spare you
the soap box for the 100th time)
But let's take a back of
the envelope analysis and see where housing prices really need to fall
before they make sense with historical ratios.
In July 2006, at the height of insanity, the median price of a home was $230,200
It has already fallen in less than a year (October 2006) to $207,800
Pain over, correction done - time to party. Right? Wrong.
What are median incomes nowadays? As of 2006 the median household income was $48,201.
$48,201 x 2.8 ratio (historical average for past 30 years) = $134,962
Folks that is still nearly $73K away.... or a drop of 35% from October 2007 levels. And a drop of 41% from peak levels in July 2006.
Correction over? Not by a long shot.
Now that's assuming we return to historical norms.
I am fully confident that by the time this is all said and done, new
financial innovations will be introduced (along with bailouts) which
will keep prices elevated above where they 'should be' without the 'not
so invisible hand' propping things up.
So let's assume household
income rises 4% each year (I would argue this is generous considering
wage pressure coming as corporations see profits drop.)
And let's
assume inflation is imaginary (I mean, it works for the government) and
we are not paying 5-12% more for food, energy, et al and that does not
stress people's budgets - so therefore all this 4% yearly gain in
income will be diverted to buying homes and not paying for necessities
of life.
Then in 2008 median incomes will have risen to $52,134
And
let's assume instead of returning to the 2.8 ratio that is historically
where median house values vs income falls, but instead we can now
subsist at say 3.2x because of 'the invisible hand', this takes us to
2008: $52,134 x 3.2 ratio = $166,829
That's still a $40,971 drop in median pricing or just under 20% from today's levels.
And
again the above assumes we don't return to historical norms.... and we
have no inflation, and we have no pressure on household incomes from
growing credit card debt, and we don't go into recession, and people
don't start losing jobs, and ... and... and...
Well you get the
picture. 20% drops should be expected at a minimum. 35% would be
expected if all was fair in love and war. But I truly think the plan is
to get interest rates on mortgages back into the 5% world on fixed, and
some ungodly low number in adjustables so we can repeat this mess all
over again in a few years. All these bailouts and freezes again miss
the main point - homes in major urban areas are not affordable under
traditional mortgages to real people with real jobs and not in the
upper 5%.
Due to inflated pricing (that politicians want to protect)
people are forced to pay 40%, 45%, 50% of their income just for a roof
over their heads. So by "helping them" you are "destroying them". Slowly
but surely. But anyhow, that's small stuff - we have banks to bail
out.... that's the important thing.
Welcome to the jungle.
