"Prices would have to come down from peak to trough about 40 percent to be back in line with income the way they were in the late '90s"
- Christopher Thornberg, February 2008
February 19, 2008
HousingPANIC Quote of the Day
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19 comments:
i'd say a bit more than that !
And so they will
back in line with incomes in the late 90's? You don't think that the tech boom had already inflated the costs of housing in the bubbliest areas?
Going back to the point of pre-tech-bubble pricing sounds more rational to me.
1993 prices here we come!
maybe even less with the upcoming redepression.
Now we're talking.
I definetely agree with this post.
When I see prices down by 40%, than I will buy.
Danny
Late 90's ... that was the time of the tech and stock bubble wasn't it ... try early 90's for a period that didn;t ahve a huge ass bubble.
Cool.
Cow_tipping.
But in the late 90's we carpenters, plumbers, electricians, roofers, siders and landscapers had jobs.
I see it overcorrecting.
The overshoot will take it past that. I live in the Bay Area of California.
All I do is calculate my current rent versus after tax saving cost of owning. Its been 50% in the Bay Area for a while. Meaning a 50% drop in my current home value is necessary in order to make owning and renting costs equal.
Or you can go back to 1990 or what ever and apply a CPI inflation calculation to predict what a home should be worth based upon inflation. Guess what? Once again, my home needs to drop by 50% in order to get back in line with inflation.
Do the income/interest rate calculation based upon historical norms Guess what? 50%.
Its all 50, 50, 50%, no matter how you slice it.
But that could never happen in the Bay Area of California? Not really? Hhahahahahahaahahahahahahaahahah.
That's what they are all thinking.
Had a real estate agent neighbor across the street tell me she thinks the market should hit bottom in 6 months then its back to the races. I think she really believes it.
When prices/values drop 50% in the Bay Area, you are going to have one ugly hang over. And I will be singing Dixie baby.
We're looking for a home in MN right now and we went to an foreclosure open house in a 'burb.
Sold in 2005 for $435. Currently opening at $285. That's a little under 33%.
Awww, yeah, keep it coming.
I am expecting 40-50% in my town in Orange County. We are about 15%
into it already.
We're screwed.
40% drop? Come on, we're not going to give away our houses! They're worth what the realtor and appraiser says they're worth, not what the peon buyers think they're worth!
I'd say that the whole percentage drop thing is the wrong way to go.
For one, once true panic kicks in, in a year or so, RE will no longer be seen as an asset class but as an albatross.
Once the negative mindset kicks in, the only numbers which will matter will be the average mortgage to the average rent payment ratio which has to be within 0.9 to 1.2. Now, here's the problem, given the sheer volume of units out there, rents will also be depressed so the cost of ownership will also continue to go down until the traditional valuation of 20% down and 0.9-to-1.2 mortgage/rent ratio is reached. I suspect that what this means is that condos in let's say Boston, which sell at $480K (currently rents out at ~$1400 per month) would have to go down to $280K which would make the mortgage payment approximately $1600K with ~20% down, ~8% interest.
Now, if pressure on decreasing rents increase, so that the $1400 per month becomes $1100 per month, then the price will need to come down to $212K for the unit which is now approaching a 60% haircut.
"All I do is calculate my current rent versus after tax saving cost of owning...my current home value"
Which is it? Do you own or rent?
Over what amount of time does your calculation take place? Where I live I calculated break-even at 30 years, assuming middle-of-the-road digs and normal inflation, and at 45 years having a million more owning vs. renting.
"then the price will need to come down to $212K for the unit which is now approaching a 60% haircut"
That's a full blown depression scenario because I don't think Boston area condos have been at that price for well over twelve years.
I'd say that the typical Bostonian would still prefer to pay a slighter higher mortgage to rent index to own a piece of property which could then be subleased to a couple of Harvard or BU students for the academic year. True, it wouldn't really be earning any money for let's say a decade but at the end of that time period, it would have enough paid down so that it could be re-financed so that the owner could either make it his primary residence or a student haven which the area is famous for.
THe problem is prices are soooo high at the peak.
\
So a shitty 1959 3+1 sells for 900k at peak.
450k is still way way outta line for that home.
50% is minimum decline from peak. its in the bag.
Where I live, DC burbs, 40% won't do it. Unless you mean on top of the 10% or so that's already started in. I want 50-70%
Housing prices get cut in half during recession; but since this housing boom was the longest in history, prices will over-correct to the mean.
I'll venture to guess that prices will fall back to 1989 levels.
I know this sounds absurd, but I say this because US companies did not produce off-shore much in the 1980's. Off shore production didnt explode until 1997; accelerated by companies huge profits, along with IPO's and enormous stock option money that pushed house prices higher by the late
1990's all of which was helped by Clinton passing NAFTA and eliminating tariffs on imports coming into this country from China.
So, even if the US could manufacture again, how can US companies pay huge wages to US workers to support current house prices, when companies have been conditioned to pay pennies on the dollar to overseas factories to produce crap for us to purchase?
Something has to give...I dont see huge wages for American workers in the future, and my guess is that house prices will need to reflect real wages in order to absorb the amount of new houses and condo's built around the country.
For one, once true panic kicks in, in a year or so, RE will no longer be seen as an asset class but as an albatross.
Yep, its only now a matter of time!
Hmmmmm..... I would say then we must have only 5% to go to support this theory.(not!) Hey Keith, Riverside has now switched over to life support systems. We have just now reached a decrease in values of 35%!! I am not joking, this area is in full blown panic. The REO party has just kicked the door down and has started devouring anyone in sight. Listings are showing extreme downward pressure and it seems to get worse every week. The numbers I am talking will be proven in a month or so. The information that I have provided for this area has always been proven correct within a matter of weeks. We will be at 50% off $415,000 median home price by Dec. 2008!!!
ICEMAN
Anonymous Said;
"Which is it? Do you own or rent?
Over what amount of time does your calculation take place? Where I live I calculated break-even at 30 years, assuming middle-of-the-road digs and normal inflation, and at 45 years having a million more owning vs. renting."
I rent.
The problem is you are starting your inflation clock in 2007 after prices have increased at least 100% over just the past few years in most places.
You're plugging 4% (or whatever)into your rent/own calculator beginning in 2008. Thats foolish. What about the 20 or 30 or 40 or 50% drop that we are all saying must take place in order to get back to historical fundamentals?
The only way to use a rent/own calculator in 2008 is to go back to where your town prices were inline with inflation. You can go to the OFHEO site at www.housedate.info and look at the graph for your area. Take the price of your home in that year and adjust it to today by using an inflation CPI calculator to find the "TRUE" value of your home in inflation adjusted dollar. It will probably be "worth" between 30% and 50% of what you think it's worth.
Then plug in your interest payments and current rent payments and you will get a more honest answer.
If someone in Japan used a rent/own calculator in 1990, they would have found it much better to own. Unfortunately, the 4% per year inflation they planned on was not 4% x 17 years but a big fat ZERO% in 2007!!!!!!!!!!!!
Big difference my friend.
Or if this is all to difficult, just plug in ZERO% in the expected inflation value of your home and run the calculator. That is probably too generous but at least closer to the truth than the 3% you're mistakenly counting on.
Aloha
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