Expat

How Will the Housing Crisis End?

Cool! You, my friend, are stinking genius. House prices will go up when people start paying more for houses. Say, that concept could revolutionize the Dismal Science. Could this be applied to other areas of the economy? Would the price of cars rise if people start paying more for cars? It's possible. We need to do some tests. How about the price of socks? Would it work for socks? If people pay more for socks, will the price of socks rise? Gosh, the possibilities are endless.

Now that pesky part about mortgages. You mean, if we let people buy homes they can't afford with loans that are sure to fail, more people will buy houses? Holy cow! You ARE really, truly a stinking genius.

And when people start buying houses (and, wait for it, paying more than the old prices, leading to, get this, higher prices...god, why didn't i think of this?), and when the stock of available homes reaches the equilibrium level of supply and demand, and then when we need more new homes to meet demand, why then (you are going to be astonished...I was) the homebuilders will start making money again. It's so simple. And their share prices will go up.

Dude, are you running for public office. Anything? Dog catcher? Clerk of the County Court? You have my vote. We need you. America needs your ideas.

I am awed. Truly awed by your level of outright stinking geniousity!!!!!!!!!!! (extra exclamation points to express my true awe)

Latest Case-Schiller Report Shows the Sky is Falling

I don't think the estimates make much sense when they are given in a vacuum. "Down 28% from the peak" "Another 10% to go" Blah, blah, blah.

The reality is that the US housing market is massively overpriced as measured against the only thing that matters, affordability. Ignore the wealthy who rarely buy as much as they afford (otherwise, Bill Gates would live in a one hundred million square foot sold silver home).

Median house price is now at $201k (I don't know why this measurement is used, by the way). Median income is about $49k. The long-term affordability ratio for house prices is about 2.8 times income. Consequently, the median house price should revert to about $137k, implying another 30% drop.

What does this 2.8 times income ratio mean? It's not a fantasy number pulled out thin air. It represents the ability of the income to service the loan at typical interest rates and lending conditions. It means you pay one-third of your income on your housing (ALL costs included) in order to remain solvent and save for retirement. It also assumes typical wage growth.

This ratio does not take into account 100% mortgages or option ARMS with teaser rates. It does not take into account the lending backlash as prices collapse (what was loose and easy on the way up becomes tight and restricted on the way down). It is also likely to be a mean-reverting ratio which implies that it needs to go BELOW the long-term average in order to balance out with the insanity on the upside.

Given the insolvency of our major lending institutions, the eradication of irresponsible lending, negative savings rates, widespread debt, record housing inventory, and the recession, we are likely to see the affordability ratio head down towards and below 2.5 times income.

Look out below. The median home price needs to drop to about $120k to signal a bottom.