Saturday, November 15, 2008

How far out of whack did prices get?

How far out of whack did prices get? And how far do they still need to fall?

I've posted many charts and graphs in the last year showing how far out of whack prices got. Those charts all show the median priced home was between 2.3 and 3.2 times the median income over the last 40 year. Today I did a little number crunching using the NAR's median price numbers and the California franchise tax boards numbers.

In 2001 the median family income in the IE was $51,036 according to the tax man. The NAR data shows the median priced home in the IE was $135,940 in 2001. That gives a ratio of 2.66x the median income. That's right in the middle of the average long term range. If only it had stayed there!.

2002 was when things became unhinged and 2003/2004 was when it really went off the charts. By 2006 the median priced home in the IE was $415k but the median income had only risen to $53,508. Bringing the ratio to 7.75x the median income. Riverside was actually higher than that. Our median peaked at about $465k putting Riverside closer to 9x the median income.

Currently the median priced home is around $225k for the IE. The median income is probably less now than it was in 2007 due to all the job losses. But using the 2007 number we still get a ratio of 4.20x the median income. That's still about 36% higher than in 2001.

You can see why I believe homes will come down to 2001 prices. That's where we fall back into the traditional ratios. Prices are very likely to overshoot on the way down. They may fall back to 1999 prices. Who knows for sure. When it comes to the future we are all just guessing.


ButterMonkey said...

X, how long is it taking us to tick backwards, on average, per bubble year. What I mean is, my target neighborhood is just barely getting back to 2004 pricing. Should we expect it to take another 2 years to get back to 2002 prices or does this seem to be happening more quickly lately?

golfer_X said...

Prices are moving down faster than I expected then to. Price movement in real estate usually happens slowly. The problem with your target area is that it is an older area and there aren't many sales. Areas like that tend to lag behind. The prices will eventually fall into line with the surrounding areas but it can take a while.
My target areas are tantalizingly close to my target price but now I'm actually having second thoughts about buying. This whole economy has me a bit spooked. I'm thinking I may wait to see which way it goes.

Oldtimer said...

Prices were artificially inflated by lax credit practices that are no longer available. Sharp price declines reflect the cold turkey effect of buyers suddenly only paying what they can afford.

The guy from foreclosure radar (O'toole?) was on the radio and made a good point. Like cars, people don't focus on price, they focus on payments (i.e. 28% of gross income gets me what sized loan?). His point was that the payment on a $600K loan at a 1% teaser was about the same as a fully amortizing fixed rate payment on a $300K loan.

So, overall, I'm not sure how much further prices will fall in the IE. That said, some neighborhoods are going to do a lot worse than others. Tracts that were built in '04-'07 will get killed, whereas older tracts will correct more slowly. Maybe in a few years they will have corrected by the same amount, but I expect newer tracts (esp. in distant locations) to overshoot on the downside. Older tracts with few distressed homeowners will probably not overshoot.

ocrenter said...

x, more and more I'm thinking nominal 2000 pricing as the easiest gauge. why? because inflation adjusted 1997 pricing turns out to be basically the same as nominal 2000 pricing.

at least that's true for the few examples in various san diego neighborhoods of my interest. it should apply in the IE, may be worth looking into.