The bad news first: The US coasts and their insane home prices. The main driver of the credit crunch is the housing price collapse and the subsequent foreclosures and bad loans that go with. To find when the housing price collapse and hopefully the credit crunch that came with will bottom/end should be near the time that housing prices become AFFORDABLE again.
Lets talk about affordability. I will use West Palm Beach, FL as a gauge of the coastal housing crisis. In July 2006 a median priced home in WPB was $392,000. The median income for a family in WPB was $52,000 per year. That means the average family had to pay almost 8 times their income for a median priced home in the city . Historically, families can comfortably afford on a long term basis only a 3 to 1 ratio of home price/to household income. This means that the median home price in WPB has to come down to about $155,000 to reach the long term average for housing affordability. As of 10/2/08 the median home price has come down to $323, 000. This means that West Palm Beach has a further 50%+!!! to come down to historical price affordability, making the peak to trough a ~65% decline. Given the fact that home prices raced ahead of the historic mean to the upside the home price collapse should fall below the historic mean of home prices. Prices that over shoot the mean on the upside typically do so on the downside as well. I would guesstimate that the median home price in WPB will fall to around $140,000 before this is all over which is a retracement to 100 on the Schiller housing index based below. At this rate I guesstimate, depending on how fast the velocity on the down side comes, that we will see home prices bottom around 2012 for West Palm Beach, FL.
Bottom line, it's going to be ugly and painful for homeowners. The wild card even in stable markets is JOBS. When layoffs are done en mass i.e. Detroit then look out below.
The good news: The Heartland did not participate (as much) in housing's irrational exuberance and the folly of believing in a never ending gravy train. For this example I will be using Dallas, TX. The median home price in Dallas, TX in July 2006 was around $150,000 as of today it is $170,000. The median annual income for Dallas households is about $60,000. Is your mind all ready comparing WPB's numbers to Dallas? I bet so. Given a 3 to 1 household median home price/to median household income you will find that the average Dallas resident can afford a $180,000 home comfortably. This means that Dallas home prices are, on average, roughly priced %5 below the affordability line. I think that the huge housing bust in Texas in the 80's, the tight belt mindset of the average Texan, and cheap endless land help Texas stay affordable.
This is great news for homeowners in Dallas. Since many large corporations are located and have been relocating to Dallas for it's lower costs and well educated populace the job market should stay healthier than the coasts. The Burnett Shale will also contribute to DFW's economic growth.
According to Zillow.com my home town Coppell has actually had rising home prices throughout all this credit mess, YEEHAW. I predict that DFW's home prices will slowly rise over the next few years as Americans search for affordability. Of course, the wild cards are the credit tap being totally shut off and job losses.
For a historical perspective on national home prices see below:
The bailout may help to reinflate the housing bubble via loose lending but all this will do is delay the inevitable. Home prices have to come back to their historical affordability sooner or later. I fear the bailout is like stepping in on the Beanie Babies price crash, everyone knew those beanie babies weren't worth what people were paying, it's a matter of time until intrinsic value comes back.
I pray that home prices on a national come back to affordability without too much pain for hard working Americans. Hopefully, we will collectively learn from this mess...
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