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Are U.S. Home Prices Reasonable?

People have come to buy more house than they need or can afford. Suburban development policies have encouraged the up-sizing of homes as they sought values which would result in taxes to cover services, primarily the expansion of school systems.

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.