Libercontrarian

Crushed between the wheels of capitalism and big government.

underwhelmed - My take on the housing crisis

What happened to home values, how they initiated the Housing Collapse of 2008, and what will happen…
 

I’ve been alive a while.

In that time, I’ve seen home prices skyrocket WAAAAAAAAAAAAAAAAAAYYYYYYYYY past the inflation rate for salaries.

My father used to make about $75k/yr in the early ‘80s working as a program manager for a satellite communications company. We bought our house at 248 Sand Dollar Road, Indialantic, FLA for $75k - a nice 4 bed, 2 bath ranch that was about 2300 sq. feet, five blocks from the beach, as well.

I would bet that the same position pays MAYBE $120k now, about a 60% increase in salary from 1983 to 2009 - annualized, about a 2% increase yearly. Inflation has been around 4% annualized until this last year. So right there, salaries aren’t keeping pace with housing.

The house just up the road at 158 Sand Dollar Road is on the market for $350k. This is a jump in “value” of 460%! If my father were alive today, to maintain the standard of living he had he would have to be making about what his house cost - $350k/yr. Who the hell has an income like that? Answer? NOBODY. Wiki reports it as less than 1% of the population.

All of this means the home values were artificially driven straight up to the moon by some market force, which had a far-reaching and gravely under-estimated effect on home values.

I noticed homes really start to increase in price (and a corresponding below-inflation-rate increase in personal disposable income) in the early ‘80’s. This corresponds to the timeframe for the Community Reinvestment Act’s (1976) side effects to be felt in the price of houses.

So the Federal Government decided to push unqualified people to enter the market. Naturally, that meant that a larger pool of buyers was competing for the same housing, which (surprise, surprise) artificially stacked values up by falsely propping up demand. Buyers who would have not come into the market at all, or buyers who would have used better judgement buying a home that would have matched their cash-flow were encouraged by the burgeoning market to “go out there and live the American Dream.” Even prudent buyers who purchased “just enough house” to get the job done still wound up overpaying for their homes, to their financial detriment.

The effect took a while for home buyers to realize, but for anybody who’s studied a little math, exponential growth can startle you with it’s cascading nature. We were in the “hockey stick” portion of the curve - and didn’t realize it. The market became a speculator’s game of “musical chairs,” with few sellers and buyers aware that the bottom would drop out as the pricing was unsustainable. Remember the oil speculators that were buying at $144/bbl this summer? They’re not doing too well with oil in the $40s, and the same thing happened to both speculators, real-estate professionals, and buyers in the housing industry.

Houses aren’t worth nearly as much as people think they are. The generalized notion I keep hearing from economists and real-estate professionals is that most homes are 15% - 18% over-valued. I have news for the folks who are saying this: I think that figure is the low-end of that range. I suspect the upper end of the range is closer to 60% over-valued.

We’re about to see a decade-long slide in housing values.

It will be unprecedented in economic history, and the economists will be scratching their heads about it for the next 30 years.

See what government meddling in business gets you? Unintended consequences.

And there you have it, my friends.

posted by: underwhelmed at February 18, 2009 00:19 | link | comments (2) |

Comments:

#1  19 February 2009 - 15:17

 

I think you're basically right -- maybe underestimating wage increases and overestimating inflation just a bit. And you might need to adjust the house price for product differences -- amenities added, mechanical system upgrades, etc. A newer car with air bags, navigation system, etc., is really a better product than an 80s car, and there are similar differences in housing.

I don't know about Florida, but housing prices here didn't really start to climb until the mid-90s. In fact, from 85-92, my home's value dropped significantly.

I hope you're wrong about how over-valued real estate still is -- unless by "upper end" you're thinking about really big bubble areas like California. The Denver area is closer to the low end, don't you think?

-- Richard

Anonymous

#2  19 February 2009 - 17:33

 

My example was only relevant to my father's home, and in no way would I perfectly extrapolate this experience to every location.

It's my generalized observation from being around several decades and watching the world change. YMMV - but you are correct in saying that there's been some deflation in various markets as regional economic factors changed the dynamic. I still believe that salaries lagged inflation, which lagged home prices by a large margin. The general premise holds.

One commenter at another site at which I posted this article noted that some of the blame for Mr. Housing Bubble could be laid at the feet of the Home and Gardens TV mania, an offshoot of British reality TV here in America.

I know my wife watched that channel with an obsession that bordered on "clinical." Doubtlessly, millions of Americans were similarly affected, some probably to sell their homes. With that show helping sellers craft their presentation, this may have given a boost to home values.

Still, the "creative financing" industry which came about as a result of Corporate America making lemons out of lemonade with the Community Reinvestment Act bears the largest share of the blame.

underwhelmed

Comments: