Tuesday, March 30, 2010

Beleive it or not, a Realtor wrote this

In 1996, unemployment was low, the economy was booming, stocks were rising, and the future looked bright. Email and the internet were just starting to make their ways into homes around the country. Optimism was high as an economic revolution was brewing.

Is there any reason why homes today should be worth twice as much as in 1996?

Graphically, prices were heading right back to 1996 until the government decided to spend trillions of dollars to prop them up.

Consider what’s been done to halt the collapse of home prices. Our demand for homes has been artificially boosted with low mortgage rates and tax credits, and our supply of homes for sale has been cut drastically by all of the foreclosure prevention efforts.

For some perspective, check out the original Case-Shiller graph that shows home prices, adjusted for inflation, for the last 100 years or so. Note that the numbers are slightly different because this chart includes all national data, not just large cities.

Looking at long-term trends, we each must fall into one of two camps. Either you believe that, eventually, home prices will revert back to their relative historical norm because people can only pay so much of their monthly income for housing. OR, you believe that this time really is different; that people going forward will be willing to pay relatively more each month for shelter than for the last 120 years.

I don’t see how this time is different. I don’t know why, socioeconomically, people will pay more of their monthly paychecks for housing over the next 120 years than they did for the last 120. Sure, you can make a case that a particular neighborhood or town has become more desirable, but that is irrelevant on a national scale.

In short, if you believe that the economic growth since 1996 was robust enough to justify the doubling of home prices during that time, then perhaps home prices are now at the “correct” levels. But if you believe that most of the economic growth since 1996 was built on bubbles and debt, then it’s hard to find a reason why homes should be twice as expensive.


Whoddathunkit??? A Realtor that's not full of it. Although in 1996 prices were pretty depressed in Southern California. That was at the bottom of our last crash and many including me think prices were probably a bit undervalued in that time frame. But two or 3 years later prices had recovered to what I would consider normal levels. So what should the median be today based on a "normal" market. In the year 2000 the median price in Riverside was $150k. If we add a decade of normal appreciation the median today would be approx $200k. And remarkably enough that's right about where we are today. However taking into consideration the terrible economy, the high unemployment and the government intervention propping up prices it's probably safe to say we are currently overvalued given the economic conditions. Maybe we should go back to the bottom of the last bust (1996). If we do that we find the median was around $120k and with normal appreciation that would give us a median of $181k today. Not a great deal of difference between the two, primarily because of the additional 4 years of appreciation. So, are we at the bottom? by all indications in most areas of the IE we are, or damn close to it. The only question is how long will prices remain low. Personally I don't think they are going anywhere but sideways for a while. Small normal gains are possible but with the current economy I don't see it happening (assuming the government stays out of the mix). So if you are gonna buy, you better plan on staying a while.

I got the median numbers from the California Association of Realtors and the "normal" appreciation I used was 3%.


FairEconomist said...

Extrapolating what the price decline *would* have been in the absence of intervention, I get a current price of about 110% - about 35% below the current price. By that standard, the effect of the current intervention exceeds that of any previous bubble. So, while I agree the intervention was counterproductive, I don't think it's accurate to call it ineffective.

Oldtimer said...

X, I think you nailed it on the historical numbers. '96 was probably below normal in the IE, '00 was near-normal, and the years between '00 and today included a debt fueled bubble and its aftermath.

One other factor that is a bigger deal in the IE than most markets is that the average home size went up significantly. In 1996, the average new home built in Corona was probably around 1800 sf. In the last 10 years, that swelled to something like 2500 sf.

Price per foot would probably be a better proxy.

golfer_X said...

Totally agree, I was actually talking about that very thing with a friend last week. I said the same thing, that houses today on average are quite a bit bigger so it makes sense for the median to be a little higher than it otherwise would be. It will be interesting to see what becomes of all those huge homes in 10 or 20 years. I mean really, who wants a 5000 s/f house. The only reason they built them was to maximize profit. And the only reason people bought them was to live the MTV Cribs dream. Well, now those folks have to furnish, clean, heat, cool and maintain those monsters without the expectation of cashing out when they sell. I sure as hell wouldn't want one of those things.

FairEconomist said...

My brother and his wife bought one of those monster McMansions, about 6000 sq ft (not in CA, though). I visited last week and, sure enough, my sister-in-law was wishing for a smaller house for exactly those reasons. They can't sell, of course, because they're underwater (even though they're not in one of the bubble states), so they're waiting for prices to recover. I don't anticipate updating my address book anytime soon.

Oldtimer said...

I remember seeing a tract in Moreno Valley advertising 7-8 bedroom homes a few years ago. Think about that. A master bedroom, a guest bedroom, a mother-in-law bedroom, kid #1, kid #2, kid #3, kid #4 and kid #5. I know of only a few families that would fill that house.

My guess is many of those giant homes in low-cost areas will become multi-tenant rentals. Not a good thing if you bought the more modest 4 bedroom for your family across the street.

golfer_X said...

There was one tract with a 4500 s/f house that could be configured up to 11 bedrooms in MoVal. Group home? Ugly ass house too!

Mariluci said...

I think you need to factor in women in the workforce and dual income households. That is a pretty signifcant change.

golfer_X said...

That changed happened about 4 decades ago. By the 80's most middle class families were dual income.

The Yen Guy said...

You relate: "Maybe we should go back to the bottom of the last bust (1996). If we do that we find the median was around $120k and with normal appreciation that would give us a median of $181k today."

I ask why should any appreciation, normal or otherwise, be expecte ... Yes prices will be going back to 1996.