Why house prices have to fall

[barbarus]

Taken from an article quoting NAR figures.

"From 2000 to 2006, median family income rose almost 14 percent, to $57,612.
Over the same period, the median-priced existing home increased about 50 percent, to $221,900. By other indicators, the increase was even greater.

Of course incomes here are three or four times higher, but most Americans really do fall into the range quoted in the article.

Either incomes double or houses fall by 50%.

 

[clifp]

Taken from an article quoting NAR figures.

"From 2000 to 2006, median family income rose almost 14 percent, to $57,612.
Over the same period, the median-priced existing home increased about 50 percent, to $221,900. By other indicators, the increase was even greater.

Of course incomes here are three or four times higher, but most Americans really do fall into the range quoted in the article.

Either incomes double or houses fall by 50%.

Wouldn't a 36% increase in income work to keep everything constant? More likely 36% decrease in payments (which could be accomplish by a combination of lower house values and lower interest)
would return us to equalibrium. More probably we will see a smaller drop in house prices followed by a longer period of below average house apprections.

 

[chinaco]

Either incomes double or houses fall by 50%.

Or house prices could stagnate for the next 5-7 years (sideways).

I do not think anyone knows at this point. Either way, it is some sort of inflation or deflation.

One thing is obvious... the $ is worth about 60% of what it was internationally compared to the late 1990's

 

[amy5708]

Or house prices could stagnate for the next 5-7 years (sideways).

I don't think stagnation of prices would help the disparity in house payments as a % of income.

Disposable income is already ridiculously low for lending standards. The increase in home prices relative to earnings has lowered it even more.

 

[chinaco]

I don't think stagnation of prices would help the disparity in house payments as a % of income.

Disposable income is already ridiculously low for lending standards. The increase in home prices relative to earnings has lowered it even more.

I didn't say it would help.

There is much uncertainty right now.

The only people looking on the bright side now are speculators.

 

[dex]

What is NAR? Where can that 50% increase be found? It sounds high.

The median family income - does that include 1+ workers in the family or just one worker. It does sound high for all families so I'm guessing it is for all families - correct?

 

[W2R]

According to the U.S. Census, the median home price in the U.S. in 2000 was $119,600. The median home price in the U.S. in 2006 was 185,200. That would mean that the median home price increased by almost 55% during that time.

The reason the numbers are lower, is that the Census does not solely deal with home sales but includes other existing owner-occupied homes. The National Association of Realtors would be talking about median selling price for homes, I would suppose. So, the trends would have to be the same but the median is a little different.

The Census says that median household incomes increased from $48,451 to $41,994, an increase of a little over 15%.

I would just question the premise that median home prices are tied to median income, even loosely, and that prices would revert to some sort of proportion between the two. During various decades or even centuries, homes have been more affordable or less affordable (sometimes life is like that, whether we would like it to be or not). Also, homes 50 or 100 years ago did not have so many amenities like granite countertops and automatic garage door openers that are so common these days. I am sure I would recall that, had it been the case.

Slightly off topic: Here's a nifty table that I stumbled across when browsing through census.gov . This table is based on 2006 data and ranks the states by the percentage of homeowners spending over 30% of their income on housing.

United States and States - R2513. Percent of Mortgaged Owners Spending 30 Percent or More of Household Income on Selected Monthly Owner Costs

 

[tryan]

What is NAR? Where can that 50% increase be found? It sounds high.

NAR would be the National Association of Realtors .... 50% would be low in the Boston area. We appreciated more like 120% from 2000-2006. We're also DOWN 20-30% since 2006.

Wages used to drive everything (mortgages, rents ....); but it seems the FEDs cash-spicket of cheap money will need to turned down/off to get things back to "normal" (what ever THAT is).

 

[al_bundy]

According to the U.S. Census, the median home price in the U.S. in 2000 was $119,600. The median home price in the U.S. in 2006 was 185,200. That would mean that the median home price increased by almost 55% during that time.

The reason the numbers are lower, is that the Census does not solely deal with home sales but includes other existing owner-occupied homes. The National Association of Realtors would be talking about median selling price for homes, I would suppose. So, the trends would have to be the same but the median is a little different.

The Census says that median household incomes increased from $48,451 to $41,994, an increase of a little over 15%.

I would just question the premise that median home prices are tied to median income, even loosely, and that prices would revert to some sort of proportion between the two. During various decades or even centuries, homes have been more affordable or less affordable (sometimes life is like that, whether we would like it to be or not). Also, homes 50 or 100 years ago did not have so many amenities like granite countertops and automatic garage door openers that are so common these days. I am sure I would recall that, had it been the case.

Slightly off topic: Here's a nifty table that I stumbled across when browsing through census.gov . This table is based on 2006 data and ranks the states by the percentage of homeowners spending over 30% of their income on housing.

United States and States - R2513. Percent of Mortgaged Owners Spending 30 Percent or More of Household Income on Selected Monthly Owner Costs

Michael Milken of 1980's fame now has a non-profit institute and does research into social issues. he did one for housing and found that the percentage of income people pay for housing has averaged around 25% over the last few decades. it shot up to around 50% around 1980 and it was around 40% back in 2005 or so when the study was published.

chances are it's going to revert to the mean and the only way it's going to do that is if prices fall or if a lot of people's wages suddenly double in the next few years

as far as amenities, it's a non-issue since you have to be able to afford them to buy a house with them. cars also have a lot more features, but the percentage of income people pay for a car hasn't shot up like it did for housing

 

[rgarling]

Either incomes double or houses fall by 50%.

In general people in the US are willing to spend about 1/3 of their income on housing, which they purchase using leverage. This means that you're point is being exaggerating by about a factor of 3.

Things don't sound quite so bad if you say "Either incomes rise by 16% or houses fall by 16%".

Plus, if you look at the 2006 table (link posted by Want2retire), you see that that ratio changes by a factor of 2 depending on what state you live in (California ~1/2; North Dakota ~1/4). I suppose this means that for California you'd have to say incomes or prices would have to change by 25% and in North Dakota it would be 12%.

 

[W2R]

In general people in the US are willing to spend about 1/3 of their income on housing, which they purchase using leverage. This means that you're point is being exaggerating by about a factor of 3.

Things don't sound quite so bad if you say "Either incomes rise by 16% or houses fall by 16%".

Plus, if you look at the 2006 table (link posted by Want2retire), you see that that ratio changes by a factor of 2 depending on what state you live in (California ~1/2; North Dakota ~1/4). I suppose this means that for California you'd have to say incomes or prices would have to change by 25% and in North Dakota it would be 12%.

I think that possibly you misinterpreted what was being tabulated. It just ranks the states by the percentage of homeowners paying over 30% of their income on their mortgage. It doesn't say anything about what the median percentage of their income paid on their mortgage would be.

 

[al_bundy]

don't forget that in california in the last few years between 50% and 75% of all new mortgages every year have been ARM's, I/O, negative ammortization and all the other revolutionary financial products. so that figure means people are probably paying 50% of income based on teaser rates. let's see what happens to home prices when most mortgages in california are your plain 30 year fixed

 

[ziggy29]

Plus, if you look at the 2006 table (link posted by Want2retire), you see that that ratio changes by a factor of 2 depending on what state you live in (California ~1/2; North Dakota ~1/4). I suppose this means that for California you'd have to say incomes or prices would have to change by 25% and in North Dakota it would be 12%.

Not necessarily. That would possibly be true if cost of living in non-housing areas was also twice as much in CA as in ND. (The COL is clearly higher in CA, but not *twice* as high in non-housing areas.)

In other words, maybe the income needed to "afford" a mortgage is more a function of how much income is left after the mortgage is paid than it is a function of a straight percentage. I would think someone earning $200K per year could afford a greater percentage of their income going to housing than someone earning $50K, for example -- they could afford MORE than 4x as much house.

 

[rgarling]

I think that possibly you misinterpreted what was being tabulated. It just ranks the states by the percentage of homeowners paying over 30% of their income on their mortgage. It doesn't say anything about what the median percentage of their income paid on their mortgage would be.

You are correct, I made that error; so my paragraph on North Dakota vs California is messed up.

 

[haha]

John Hussman, an economist and manager of Hussman Funds showed that incomes and house payments are in proportion, not incomes and house prices. So lower interest rates allow people to buy a more expensive house relative to their incomes. Likewise liberal mortgage terms of the recent boom allowed stretching to get more house.

We are the monthly payment society. People would buy cyanide if the payments were low enough.

Ha

 

[Walt34]

Maybe I'm too simplistic but I never got all worked up about house prices. If the price of the one I'm in goes up, they all go up. If it goes down, they all go down. I have to live somewhere and as long as it's better than under a bridge, quiet, and not in a combat zone I'm not going to get too tense about it.

Amenities like a two-car garage, screened-in back porch overlooking the creek and woods, and deck for the grill are nice, but nobody ever died because they didn't have those things.

 

[W2R]

Amenities like a two-car garage, screened-in back porch overlooking the creek and woods, and deck for the grill are nice, but nobody ever died because they didn't have those things.

That's good because I REALLY want a two-car garage, and don't have any garage at all. Not even a carport. But I do have a driveway.

My next house will have a two-car garage, but it's good to know I won't die for lack of one in the meantime.

 

[ziggy29]

That's good because I REALLY want a two-car garage, and don't have any garage at all. Not even a carport. But I do have a driveway.

My next house will have a two-car garage, but it's good to know I won't die for lack of one in the meantime.

We have a 2-car garage, but it is detached with no covered walkway access. We have to walk about 50 feet from the side door of the house to the garage door. On cold, wet days like this one, it can be a bummer, especially since the washer/dryer are out there, too and the walk can be muddy.

 

[Khan]

A washer and dryer in a detached garage? What genius thought of that?

 

[ladelfina]

Maybe I'm too simplistic but I never got all worked up about house prices. If the price of the one I'm in goes up, they all go up. If it goes down, they all go down.

That's ok if you're a current owner, and especially ok if you are looking for a similar house in a similar type area and you own your home outright. But you're kinda screwed if you are just starting out. If an entry-level salary meant you could afford the median house at $120k a few years ago.. those salaries haven't gone up to allow you to afford proportionally the exact same house at $185k.

Hedonic adjustments, sure.. but they don't add that much; we're only talking about the arc of several years where, as ha says, people were heavily encouraged to look at monthly payments rather than price.

Isn't the number of young adults living with their parents going up? If US house prices don't settle back to historical norms, it'll be like Italy!

 

[ziggy29]

A washer and dryer in a detached garage? What genius thought of that?

The house is a small one built in 1944. I'd be impressed if the architects were prescient enough to predict the future need for a "utility room."

If we ever added on a master suite to the back of the house, we'd definitely include a utility room. Otherwise we keep trudging to the garage, hoping to get laundry our done AROUND days like today, when it's currently 36 degrees, drizzling and muddy outside.

 

[DJRR]

Taken from an article quoting NAR figures.

"From 2000 to 2006, median family income rose almost 14 percent, to $57,612.
Over the same period, the median-priced existing home increased about 50 percent, to $221,900. By other indicators, the increase was even greater.

Of course incomes here are three or four times higher, but most Americans really do fall into the range quoted in the article.

Either incomes double or houses fall by 50%.

Looks pretty spot on to me:

Down payment - 5% = $11,095

30 year fixed at 5.75% = $1,229

Gross income = $4,800 per month

% of gross income = 25%

Taxes, insurance, pmi, etc. are all variable that will push the ratio up vs. higher down payments, lower interest rates, and tax deductions pushing it down.

I certainly don't think houses will fall another 50%. I think of it as houses becoming more fairly valued after a decade of little/no growth in the 90's. We did get extended, as always, but I think we have bottomed out in my market and will probably move sideways for a few more years.

 

[W2R]

The house is a small one built in 1944. I'd be impressed if the architects were prescient enough to predict the future need for a "utility room."

If we ever added on a master suite to the back of the house, we'd definitely include a utility room. Otherwise we keep trudging to the garage, hoping to get laundry our done AROUND days like today, when it's currently 36 degrees, drizzling and muddy outside.

Maybe you can build a covered walkway. Even if you had a utility room, you will still get drenched when unloading groceries in the rain, and such. I really hate that, especially when the wind is blowing. But at least in my case, I don't have to walk 50 feet in the rain (just 20 or so).

My next house will have an ATTACHED garage, with door opener too, and laundry inside. I might not die without one, but I will stamp my feet and pout.

 

[Midpack]

Taken from an article quoting NAR figures.

"From 2000 to 2006, median family income rose almost 14 percent, to $57,612.
Over the same period, the median-priced existing home increased about 50 percent, to $221,900. By other indicators, the increase was even greater.

Of course incomes here are three or four times higher, but most Americans really do fall into the range quoted in the article.

Either incomes double or houses fall by 50%.

As several have suggested, if you're a homeowner, this is somewhat irrelevant because you have a (leveraged, most likely) asset that is appreciating with home prices. But as others have said, if you're just entering the market it's going to be more difficult. Must be something to this rumor about generations that can't expect to do better than their parents - maybe we're there.

I'm sure many here would agree that it's a good thing we're not 20 somethings anymore. My parents had it better (in retirement) than I ever will with a COLA pension and almost free retiree healthcare, but I will probably be more comfortable in the years ahead than the generations that will follow. Too bad, but nothing (reasonable) I can do about it that I know of.

 

[jazz4cash]

John Hussman, an economist and manager of Hussman Funds showed that incomes and house payments are in proportion, not incomes and house prices. So lower interest rates allow people to buy a more expensive house relative to their incomes. Likewise liberal mortgage terms of the recent boom allowed stretching to get more house.

We are the monthly payment society. People would buy cyanide if the payments were low enough.

Ha

ding ding ding!

People don't care about the price, they care about the payment (unfortunately). Cheap credit is part of what pumped the prices up, and homes are bigger and fancier. You could see combinations of unconventional financing for people hungary for housing, but the easiest one is 40yr or more mortgage terms. Im looking for signs of seller financing too, and Ive found one or two.