Tuesday, August 21, 2007

Return to historic costs/income

The OC Register's Lansner on Real Estate blog is reporting (hat tip Lander):

O.C. real estate consultant John Burns [link added] is telling his clients: “For prices to return to their historical median ratio of housing costs/income, national prices would need to revert back to mid-2004 levels. This would be a 14% correction in price, assuming stable mortgage rates (an iffy assumption at this point). This is not a projection - just a calculation for your information. ...

And here’s a look at the top markets in the U.S. and what period’s price level would return these towns to Burns’ median affordability equilibrium.

(This list is ... Last time at median affordability: Region)
2003 Q3: Chicago, IL; Edison, NJ; Los Angeles; Minneapolis, MN; Oakland; Riverside-San Bernardino; Washington D.C.
2003 Q2: Miami, FL
2003 Q1: New York, NY; Orange County; Sacramento
2002 Q2: San Diego

So what would those numbers be? I plotted lines on the DataQuick monthly median prices, above, and sketched in what such 35-40% declines would look like if finished by the end of 2009 (a quite arbitrary choice). Although: should the line rise with income growth, not be horizontal?

Here's another view, with Los Angeles (3Q'03) and the United States (2Q'04) plotted on the most recent S&P/Case-Shiller graph.


idiocracy said...

well when you're done licking your chops and the real estate bubble has burst and dragged the economy into a terrible recession, will you be happy then? i think not.

Mikey said...

I think you raise a good point.

The economy is hosed either way, though. Prosperity built upon debt will never last, so to have expected otherwise is just denial.

There are so many other cross currents (our twin deficits, retirement of the baby boom generation, rising health care costs, rising energy costs, crumbling dollar)... you name it, we're pretty hosed as it is. Pay down debt. Build up your credit rating. Maintain job skills, foreign language skills, yadda yadda.

There is something on this board and on many others that does bother me. I sense people cheerleading for someone else's demise. That's f----- up. Grow up, folks. It's been nutty, and lots of people you know are going to be hurt.

What will be, will be. When you're the one with the wads of cash in your wallet, just remember to give back.

Anonymous said...

"well when you're done licking your chops and the real estate bubble has burst and dragged the economy into a terrible recession, will you be happy then?"

Isn't the definition of recession when the other guy is out of work?

Anonymous said...

Happy? No. Relieved? Yes.

See, I've been watching this crap play out for two years, jumping up and down and yelling that the boat's sinking while everyone around me kept swilling those neg-am, option ARMs on the deck of this financial Titanic.

Thank god the MSM is finally acknowledging that what's been going on over the past five years is, indeed, just another bubble, like tech-stocks and tulips, sustained not by fundamentals (rents, salaries, you name it) but by crazy credit instruments. At some point maybe they can

Bubblewatcher said...

(sorry about that)...
at some point maybe they can also admit that over-cooked housing prices are bad for a stable, growing economy.

The sooner this bubble bursts completely, the better.

Mr.Mortgage said...

Lose an arm and a leg:Get an option arm today!

Mr.Mortgage said...

Westside Bubble!
Can I get an add on the blogroll. I tried emailing yesterday with no response. Cheers and keep up the great work.


Westside Bubble said...

Mr. Mortgage, you've been on my blogroll since last week, but was I confusing to alphabetize you under "T" for "The Great Loan Blog"?

You deserve another main post; the blogroll is getting too long for a new listing to get noticed.

Westside Bubble said...


It's not about cheering someone's downfall, it's meant as seeking return to normalcy and affordability.

The period of neg-am, no-doc, 100%+ loans drove prices up beyond what people could prudently afford. I and others are seeking a return to prices based on a reasonable multiple of incomes.

Yes, transition may be painful. But that's a result of the bubble's excesses.

Mr.Mortgage said...

I agree with you concerning people cheerleading the downfall of home owners and the mortgage/banking industry in general. I think it is very short sighted to think that this won't ripple through to somehow affect everyone throughout this country and globe since the world is flat now. I think people were angry about being priced out of the market and the unbelievable consumerism that resulted from mortgage equity withdrawal. I am reminded of that old cartoon of the small squirrel that doesn't save nuts for the winter and tries to get help from the prudent furry friends in the forest. They help him. I don't want to live in a world where we don't care at all about the person next to us at the grocery store or in another country. We are all connected. The jealousy and anger will subside when people hear that their buddy lost a construction job or a friend lost an analyst job at a home builder. I have a unique perspective in that I do 300k loans and 2m loans. Believe me everyone is concerned about this situation. No one wants a federal bailout but people recognize that people will have to work harder/smarter and save more. The excess of easy credit is over. Parties over back to reality. The strong survive.

Anonymous said...

If there is a recession, I (and many others) will probably suffer. I see no other possible end game though. Maybe if prices keep rising 10%+ a year, we could reach housing prices of $1M to live in the ghetto? Good times. This has to be corrected - either quickly or over the next decade. As a bitter renter, who is priced out of the market where I want to live, I vote for quick and painful.

I will rejoice in seeing overly smug homedebtors suffer. Sorry about that. It is human nature. They gloated at their fantastic gains during the boom and their fantastic financial insight. I don't recall much charity from them during the last 5 years. I won't be able to avoid gloating when reality sets in.

srla said...

Those of us who recognized this bubble four years ago (or more), then were shocked to see how long it lasted and to what lengths the Fed, the NAR, and the entire real estate and mortgage industries went to deny its existence while simultaneously working to extend its length - naturally we are relieved that the bubble is finally bursting. We warned back then of the dangers of such idiotic policy, and we knew that the longer the bubble was sustained, the harder a hit the economy would take when it fell.

But all along, nobody would listen. Most people mocked the very notion of a bubble, and next to no one would acknowledge the dangers of such hyperinflation of housing prices, well beyond levels warranted by supply (which was increasing) and income (which was stagnant).

So now that, suddenly, everyone else is coming to this realization, stop whining! You too should have seen it coming years ago.

Those of us who actually SAVE money were reamed by the Fed's policies for several years, during which interest rates for savings dropped to 1/2% or less! And they still remain lower than inflation rates, on average. In addition, many responsible people - people who refused to lie about income or take out fatally flawed loans they could never afford in the long run - these people have been priced out of the market for years.

So we've been financially damaged while many fools have been rewarded and have pulled out thousands in home equity loans. Of COURSE we are happy to see those fools begin to pay for their behavior.

And while we too fear for the economy, we saw the crash coming, we knew it was inevitable, and our warnings were mocked. So now, again, we must suffer because of the foolishness of others.

And WHO should be complaining?