For Housing Crisis, the End Probably Isn’t Near

[Sam Spade]

Torie - Two questions...

What are house prices like now in the area where you have rentals or where you own?  Also, what is the average salary of those specific areas?

[Sam Spade]

Gentlemen, prices are nice.  But in order to calculate what a "housing bottom" is, you have to at least have a guess at median income.  There's some historical benchmarks here.

[Sam Spade]

The reason why I am playing the numbers game here is because there is a relatively simple formula for determining major housing market price (not sales) bottoms after crashes.

You see, the average formula (in normal times) for median household income to median house price is roughly about 3.0.

However, major market bottoms in housing coincide with this figure reaching about 2.0.

So, if the median household income is $68,000 (as Beet says for 2007), then in a housing market bottom, the median house price should be around $136,000.  I believe the present median house value in the US is about $165,000.  Therefore, if wages have stagnated since 2007, that means we would have somewhere in-between 15%-20% more drop before the bottom.

Now, I don't expect wages to be stagnating or rising, I expect them to be falling.  A drop of 10% in wages would mean that housing prices would need to fall a further 25%.  A drop of 20% in wage would require a further housing price decline of 35%.  And so on and so forth.

I also note two other things in passing: 1) Given the size of this bubble and the government's continued attempts to keep it from complete collapse, it is quite possible in this housing bubble that the bottom may be at some point below 2.0 - in fact I consider that quite possible; 2) This will be an L-shaped housing crash - don't expect any type of quick recoveries or much at all - I grew up in Houston during the 1980s, the housing bottom there lasted nearly 10 years.

Also, I ask for local wages and local housing prices because different markets have different amounts yet to fall based on this figure, and especially since this is a "national housing market crash".

Although I am on the record predicting a wage crash of some sort, I'll ignore that for the time being and say that prices have, at minimum, about 30%-40% more to fall in the US before "bottoming".

[Sam Spade]

Also Sam why is there such divergence in housing markets across the country if you think it is so interrelated with income?

Because we're still dealing with contraction of the various housing bubbles in the various markets within the various asset classes.  Obviously, there are some housing markets where there was never much of a bubble to start off with, so there won't be much change there, but the variation was great.

As a rule, lesser properties with lesser owners (in terms of income, credit, loan type) tend to default first and then we go up the income line.  As Torie said, the rich are holding on, but not buying.  Certain areas tend to go first (California, Nevada, Florida - where the loosest lending was and second home exposure) and certain areas tend to go last (we've finally started to see the break in Manhattan housing over the last quarter, the area close to DC is being held up by government, for now, whereas the areas further away have already gotten killed, but that deals with factor #1 moreso).

Anyway, so the 2.0/3.0 figures are broad-based, but with a specific housing market you have to analyze that market first (and the neighborhood).  Or so is my point.

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Reasons
1) Property taxes
2) Lending practices - More important than you might think.  Texas has some of the strictest lending practices in the nation, if not the most.  It's always been that way, but the reqs got much more strict after the S&L crisis during the 1980s, which hit Texas harder than anywhere else.  None of that $40,000 income $400,000 loan crap there.  If you had $40,000 income, you'd be lucky to get $100,000 loan unless maybe you had stellar credit.  HELOCs weren't legal until 2000 and even then you can only get 80/20 loans.
3) Availability of open land for building.

There are some others that I've missed, but these are the big ones.