Tuesday, November 25, 2008

Housing Market still has nowhere to go...

...but down.

UPDATE: I just realized the chart I had uploaded to Blogspot was not the one I wanted. That one was hanging on my pegboard. So I have just scanned it and posted it in this article. The original chart, which is older and used different criteria, actually gives a worse result. I have appended it to the bottom of this article. Shalom!

This is a rough and very generous trendline. First off, as you can see for yourself, it ignores the mini-hyperinflation of the mid 1890s caused by a currency panic in 1893. Secondly, it ignores the deflationary effects of the years from WWI to WWII (which include, of course, the great depression. Finally, it presumes that housing values have been more or less undervalued for most of the post-wwII era. Even with all that very excessive generosity, the trendline still shows that in spite of adjusting for inflation, the median value of an average existing home should be about $125,000 or so. Let's say 130,000 for good measure, since this chart only goes to 2006 and it's now almost 2009.

However, in this chart provided by the US Census Bureau, the median home value as of September 2008 was $218,000 which is a lot more than the trendline shows it should be.

Granted, that does not mean that all houses will or should lose $80,000 in value in order to be at market equilibrium, because these are averages for the whole nation. As has been seen in other articles, homes values near established rail/subway transit lines and in walkable urban neighborhoods have actually gone up, even since this crisis started. Obviously, they are in far higher demand that places way out in the 'burbs that requires hours to commute and multiple tens of gallons of gasoline each week. Your individual neighborhood has its own unique characteristics that may put it above the trendline, too.

But the market as a whole has a long, long way to drop.

The sad fact is that the average American salary can no longer afford a $218,000 house - much less the nearly $300,000 average that appeared at the height of the housing bubble. This page at the census bureau gives links to average incomes by state according to the latest data, and some year-to-year averages.

In my state, for a one-earner household, the average is about $35,000 and for two-earner households the average is still only $68,000. Here are some other stats:

New York
Total: 64602 +/-548
No earners (dollars) 27047 +/-643
1 earner (dollars) 44803 +/-627
2 earners (dollars) 83447 +/-752
3 or more (dollars) 103046 +/-994

New Jersey
Total: 81823 +/-755
No earners (dollars) 34647 +/-1,260
1 earner (dollars) 55008 +/-1,001
2 earners (dollars) 98145 +/-1,081
3 or more earners 117404 +/-1,945

Total: 65761 +/-393
No earners (dollars) 30341 +/-777
1 earner (dollars) 45604 +/-605
2 earners (dollars) 79835 +/-670
3 or more earners 98121 +/-1,293

In order to afford an average house in your area, above $300,000 most likely, you would need 3 or more adult wage-earners, which is why multi-generational living arrangements is starting to make a big comeback. Even a reasonable fixed-rate mortgage for a mere $110,000 house requires about $50,000 in income, meaning the vast majority of traditional households (that is one works the other doesn't) were actually never able to afford a house in the first place, and could only do so by way of financial shenanigans like flaky ARMs and other teaser options. This whole problem started back in the 80s when a mandate was put forth by Congress to get people into home-ownership by whatever means were necessary. But since that time, the globalization scam took hold and people's wages have gone down. This ugly end was therefore pretty much inevitable. People couldn't really afford to buy a house, but banks gave them mortgages anyway.

I personally don't think that the powers-that-be want to see housing prices fall so far - but there have been analysts warning as early as 2005 and 2006 that we could see a 40% or more drop in housing prices from the peak. From about $300,000 to $125,000 just happens to be 41.6%. So if it does happen, it will be a simple market correction, even though the effects of it will be devastating for most people's equity.

With wages continuing to fall, not only can people still not afford mortgages, but the whole idea of home ownership is going to have to be re-evaluated in light of the fact that financing for people with average wages and average incomes just isn't available at for-profit mortgage banks and may never be again, since we seem to have no plans to rebuild our manufacturing infrastructure which gave people living wage employment for so long. The problem, then, isn't going away. If housing prices fall to where people can actually afford to buy a house, the prices will be very, very depressed from their peak and continue on that way for years to come. And if prices don't fall that far, the situation will be even worse since the market will over-correct due to lack of buyers.

So here we are. Which way it goes is anybody's guess, but things can't go back to the way they were. That's just an unfortunate fact.

Appendix - the older chart, which gives an even worse result, which I had originally posted by mistake but will leave here for your reference.