Housing on the Slide 13 comments
September 11, 2008
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Calculated Risk has a good post about home prices, looking at prices from several different angles. All angles suggest that prices have a ways further to go before reaching "normal." Of course, there's no reason to expect any time series to get back to normal, but it's a good first guess.
Why should housing prices be above their long-run normal ratio to something (rental rates, income)?
- Low interest rates are a good argument for asset prices of all types to be high, relative to rental income and household income.
- There's maybe a tax argument. (If I own a house, I can finance my car with a deductible home equity line; if I'm a renter, my car interest is not deductible.)
- Land scarcity with a rising population. I think that housing per se does not appreciate, but rather the land under the house appreciates. The exceptions would be in no-growth communities.
In my judgment, that's too weak a foundation for today's home prices being as high as they are relative to the long-run norms. But I'd be happy to listen to other reasons.
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This article has 13 comments:
I don't believe there is any reason to believe it. In fact, I'd expect that the new wave of spec $ won't be enticed to the joys of r.e. mgmt till prices are at least .90 of rental income. Why commit $ if no reward?
The maximum home price to income is about 4 times income. When you do the math, using 28% of income as the maximum a responsible lender will loan you'll see that home price at 4 times income works out.
What about the other variables? If home prices are below the maximum home price to income level of 4 to 1, the other factors, supply and demand, job growth, etc. now influence the direction of home prices.
In many areas of the center of the country including Texas, home prices remained at levels less than 4 to1. In these areas, home prices have the potential to rise. It doesn't mean they will rise, only that incomes won't be the limiting factor. Consider the other factors.
You can check out the income level to home price ratios with the Ceiling tool here. UsHousingMeltdown.org/....
The author brings up a good point about the land values. Land is the component of housing that is the most volatile. In high cost areas, land is often the most expensive component of housing and can comprise 60% of the total cost of a house. Building materials and labor are much more stable. The point is, if you want to get an idea of future home prices, look at land costs and the price scenarios of new supply coming to market. If new supply is coming to market at prices lower than comparable properties, expect downward pressure on prices. If new supply is coming to market at prices above comparable properties, prices have potential to rise.
Land prices in bubble areas are down 30-80% from 2006 levels. Meanwhile, the costs of the structure including labor and materials is down about 15% from 2006.
There is a replacement cost tool where you can get the building costs for four different quality levels of houses. Basic, Tract, Custom, McMansion. Add the cost of building the structure to recent land sales and you've got the price scenarios of new supply.
UsHousingmeltdown.org/...
Very simple, but I love how academics with no real skin in the market like to rehash textbook rhetoric.
Supply and demand don't mean much if people can't qualify or are not willing to purchase. The fact is, 80% of all homes are purchased with a mortgage. The ability to get financing is crucial to the support or non-support of home prices. A lot of people would like a Ferrari, but
either can't afford it or are not willing to pay the price.
So, if you are not an academic, you must copy and paste research/posts you read all day and try to pass it off as your original thought. Not a bad racket for those without credentials.
And, I am not in the real estate industry from the standpoint that I took a correspondence course, got licensed, and sell people illusions… but basically make money off people like you without you knowing it… so please keep up the good work!
Rent control and the continued threat that governments will impose artificial restraints on home prices as they have on rents.
The new concept of short term jobs and worker mobility which causes people to move around the country seeking new jobs or promotions within short time spans which discourages home purchases unless they come with the kind of "automatic" profits of the immediate past.
The drive towards private schools and the continued decline of public education and neighborhood schools which makes long term home owning less attractive.
"Catastrophic" rises in energy prices which make heating and cooling homes very expensive in places with very hot and very cold climates.
The rising crime rate and illegal immigration which makes home owning in large urban area very unattractive.
These and other factors make owning a home with a picket fence, a doghouse and neighbors who become lifelong friends seem like a distant dream of the 1950's.
I seem to be on a political rant this morning but I think it is financial suicide to ignore politics.
The takeover of Freddie and Fannie should remind us of the power of politics and that Republicans are no safer than Democrats when it comes to "government intervention and control."
In this post, as well as you others...you utter profanity, you shout down real attempts at dialogue, and you offer NOTHING to the conversation.....ever.... there are plenty of websites for venting... SA is for real discussion...
The problem in using "fundamentals" as described here and in other posts is that it is assumed that there are some constants in the valuation process.
When Fannie and Freddie began their guideline expansion program in the late 1990's, "fundamentals" got tossed out the window. At its extreme, F/F were allowing a 100% increase (30% ratios to say 60%) in the general leveraging of income... this process in effect distorted the metrics everyone keeps harping on.
In the purchase side, TOO many borrowers could qualify for TOO much money...and the the lid came off of value ....
On the "renting side"... TOO few tenants, and EZ mortgage money for investor purchases distorted the rent to PITI ratio ....
For metrics to perform consistently, there really needs to a consistent and level lending playing field...if you combine the expected variables... income...credit ... savings.... supply of housing ... interest rates, etc., with expanding and contracting underwriting criteria...you get a very toxic mix...
Even the current mortgage "tightening" is toxic...the mortgage and real estate market right now is as manipulated, arbitrary and dangerous as was the market in 2003-2006... this is not good.
If housing were truly disconnected from the economy, like many mistakenly think it is, then the current market would not even be a discussion thread except for those filled with too much angst.
However, as I have indicated elsewhere in posts...housing and the economy are linked arm-in-arm...ask Robert Shiller to explain it to you ....
I have had discussions with others in my area of AZ and we have discussed the idea that a more European" attitude towards home ownership may develop in the US... a mindset where home buying is delayed, for some of the reasons by carey_jim.... although I am not sure immigration is on that list.... but, yes, there is a chance that the market may look different when things stabilize...
Check for yourselves: Article published on this website on 7/31/08 entitled Real Talk on Housing. Check the posts from 11:31 AM to 1:43 PM. RE Broker and Believe it or Not are posting to each other complementing one another while they resort to childish name calling on everyone else. Another example, article published on 7/24/08 entitled “Foreclosures Still on the Rise”. Beginning at 4:29 PM you’ll see a number of posts from RE Broker and Believe it or Not. Same pattern. Here are the links.
seekingalpha.com/artic...
seekingalpha.com/artic...
This poster needs to learn some manners. He has a clear pattern of childish behavior and resorting to name-calling and insults that have nothing to do with the article.
It has been suggested by one of the readers to remind Believe it or Not to take his medication. This could explain his hostility and why he talks to himself. Or perhaps, he talks to himself because he is so rude no one else will speak with him. Or it’s because he’s really a real estate broker and business is not too good at the moment.
JohnP... your econ/housing analysis is good. Now why you would attack my style is beyond me. And "right" is an assumption... look up the mechanics of shorting... try applying you sound analysis to instruments instead of hard assets.
The prospects for income growth over inflation for most people today is slim. That's why I believe a more conservative 3X income is prudent.
Now plug that into the home price number and see what is affordable.