As someone who plans to buy my first home around 2011 or so, I hope Alex Tabarrok is wrong and the housing market still has a lot of correcting left to do. I imagine that many of my more settled readers, though, are hoping that he's right. (Megan weighs in here.)
« Censorship | Main | Iraq in 2008 (And Beyond) » Was There a Housing Bubble?13 Feb 2008 06:43 pm Comments (16)
Ross, median housing housing prices are normally about 2.8 times median income. When they get out of line, as they now are, the prices revert to their median level. One of the brightest economists on this is Jeremy Grantham, a large-scale investment manager from Boston, who is quoted in a recent issue of as follows: Profit margins, the great prop to the market, surprisingly defied the laws of gravity for three years in the developed world and, particularly, in the emerging world and even in Japan. That was because the global economy was stronger than any corporation counted on and, in the U.S., consumption was always higher and our savings rate was always lower than any corporate economist would have suggested, going into negative territory. But there are a few near certainties in this business — not many, but a few — and one of them is that abnormally high profit margins will go back to normal. The timing is unfortunately shrouded in fog. The other near certainty is that house prices will go back to a normal multiple of family income. In the end, we, the people, have to be able to afford the houses and they are affordable at something around 2.8 times family income. When they peak in Boston at 6 times and nationally at 3.9 times, you know you are in for tough times. Housing prices most probably have a long way to go down in the country, particularly in the Boston area where I presume you would be buying. 
In the above the Grantham quote came from Barrons
> Housing prices most probably have a long way to go down in the country, particularly in the Boston has the high-end brands in three of the world's key growth industries: higher education, biotech, and medical care. All three are pulling people here from everywhere, which if you live in Boston (as I do) you will have plenty of opportunity to confirm for yourself. Plus the dollar is going down. Result: the local real estate market has just flopped around for the last years, going nowhere, and certainly not down. I don't need to stretch for a reason why.
Count me as someone who's rooting for the market to drop more, a.k.a. a renter.
I believe that Tabarrok has published the Dow 30000 of the housing crisis. You can always count on corporatist libertarians to bring the crazy.
Ross- You really need to keep up on your inbox. A drop in housing prices is now a Bad Thing That Needs Congressional Fixing and Harbors The End of Our Economy. Before a house gets affordable for you HRC will freeze interest rates and restrict affordable housing options for you.
I don't know the answer to Ross' question, but the logic of that Grantham quote seems overly simplistic to me. Given the increasing divide between rich and poor, and the finite amount of real estate in established cities, it seems quite possible that established neighborhoods could absorb a higher *average* price to income ratio. Then again, since Ross is a Sam's Club Republican, he might not mind living out in the exurbs, where Grantham's argument makes more sense.
As someone who hopes to own a home someday in his life, I hope the days of good-credit free, collateral-free, big down payment-free, and essentially responsibility-free mortgages for all return. Otherwise it's the YMCA for me.
Freddie says: "Otherwise it's the YMCA for me." It's fun to stay at the YMCA... but I hear they won't let you have a big TV in your room there.
Don't worry, Ross, he's wrong--rather, the data are misleading. The Chicago area didn't have nearly the bubble runup of other big cities, but the combination of too much new construction, plus tons of incentives by builders and sellers (not calculated in the data either) and similar factors have driven down real prices in the nicer 'burbs by as much as 20% on the lower end already, and more at the higher ends. And nobody's buying. My neighbor's house was listed at $349K, now $299 and no takers--around the corner a big beautiful house was listed for $579--475--425...and now is in pre-foreclosure for $377K judgment. A $1.3 million mansion on the river that we looked at for fun over the summer is still begging at $799K. When you're ready to buy, do your homework on local values but more important, remember that on a 30-yr mtg you're paying about 125% of the purchase price in interest. My wife and I bought well within our means (only 2.2x annual income), and we're overpaying our mortgage by 15%/month. That knocks 7 years off our mortgage, and saves us more than $75K in interest payments. That's a much bigger deal than your home's "value" per se (though of course be prudent and aggressive when you're ready to buy). Moral: too many people get hung up on a home's "value", particularly bubble babies who flipped their way into million-dollar exploding option ARM mortgages at 8x their income, but you'll never regret being SMART, no matter what the market does. Thanks for letting me ramble. Nice site.
Actually, I just bought a home and I hope the market stays low. I'm not planning to sell anytime in the next decade, and I'd like my tax assessment to stay nice and low until I'm ready to move.
I had the exact same reaction to Tabarrok's article as Ross. Eric Janszen's piece in the February print edition of Harper's is much more cheerfully compelling. Subscriber-only link here: www.harpers.org/archive/2008/02/0081908
I'll be happy enough if my house's value levels off about where it is, or even a bit lower (it ballooned up fast - real fast - after I bought it 4 years ago. And the prices had already started to jump at that time). Looking at the sales data of other recently sold home in my area, the values seem to have peaked somewhere around October. It's a somewhat sought-after area for middle class types, because it's a fairly green and quiet neighborhood, but with fairly easy commutes to both DC and Baltimore. Hopefully that offers a bit of a floor. "Don't worry, once all these foreclosures are done and the undesirables are back in the ghettos where they belong there'll be more affordable housing for the RIGHT sort of people, if you know what I mean and I know you do." - TheRacistsWhoLoveRoss'sBlog (aka TheBannedMoeLarryAndJesus aka MoeLarryAndJesus) Aww, looks like somebody got their widdle feewings hurt. Baby gonna cwy?
> Boston has the high-end brands in three of the world's key growth industries: This is a perfectly good reason why median incomes should be higher, it's not a very good reason for why affordability should be out of line with historic averages. The current deviation from historic averages seems more due to expectations of future gains and the previous availability of creative loans. With those conditions absent I think an adjustment is coming.
2011 will be too late, start saving to buy in 2010.
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Don't worry, once all these foreclosures are done and the undesirables are back in the ghettos where they belong there'll be more affordable housing for the RIGHT sort of people, if you know what I mean and I know you do.
Posted by TheRacistsWhoLoveRoss'sBlog | February 13, 2008 7:19 PM