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Bob Vila · 08-23-2007, 01:42 PM

Quote:

The Dangerous Disconnect Between Home Prices and Fundamentals

Jul 09, 2007 -- Today's home prices can best be described as a recession in the making, but are most often referred to as a bubble. Prices have grown so much in the last decade that they are now completely disconnected from the fundamentals that have historically ruled the real estate market. Today's prices are not sustainable and the graphs and analysis below demonstrate why.

By Ben W. (bdarbs)

The Disconnect Between Wages and Home Prices

Price increases are nothing new, since home values tend to go up over time. What makes this housing bubble different (besides the fact that it is the largest bubble in U.S. history) is the dangerous disconnect between home prices and the basic fundamentals that typically rule the housing market.

For example, increases in home prices typically keep pace with increases in wages. But this has not happened. National median home prices have increased by more than 45 percent in the last decade (when adjusted for inflation). Average wages per worker, on the other hand, have only increased by 10 percent in the same period.

As a result, for almost the first time ever, individuals who are making the median household income cannot afford to buy a median priced home.

In order to qualify buyers for loans, lenders loosened credit regulations and encouraged risky mortgage products like interest-only loans, negative amortization loans and ARM loans. This made it easier to get a mortgage, but admittedly much harder to keep it.

In recent years, a large portion of the buyers bought out of their price range. In many cases, their loan qualification was based on a teaser rate and/or an interest-only mortgage payment. Now that the interest rate is due to reset on these loans, millions will not be able to afford their mortgage and will likely lose their homes to foreclosure.

The Disconnect Between Rents and Home Prices

Also disconcerting is the disconnect between rents and home prices. At one point, the only thing that stopped most people from buying versus renting was lack of a down payment. Sure, it cost a little more each month to buy - but not much.

But thanks to the housing boom, everything has changed. Home price increases have far outpaced rent increases, rising 45 percent in the last ten years. In the same time period, rents, like wages, increased by only 10 percent.

Nationally, it now costs 60 percent less to rent than it does to buy. But for some reason, this hasn't stopped people from buying. Between 1995 and present day, the homeownership rate has soared. In contrast, the number of people who rent has declined for the first time since WWII.

Since we already know that rising wages and lower home prices were a factor, the increase in homeownership can be easily traced back to the lenders who loosened credit and mortgage lending restrictions. Thanks to these lenders, buyers who would have never stood a chance of getting a mortgage just a few years ago were now being approved for outrageous amounts of money.

(Of course, there is one other thing that may have encouraged people to buy during this time rather than rent: low interest rates. In a move that has been heavily criticized by some, the Fed began dropping interest rates after the bursting of the tech bubble. Low rates made it easier for people to qualify for high-priced homes, and also encouraged buyers to 'act now before it's too late'.)

The Disconnect Between Home Prices and Home Sales

Although the disconnect between home prices and home sales was not present during the housing boom, it most certainly is now. The public has either lost interest or simply can't afford to buy into the current housing market. Home sales have slowed nationally, and are down significantly in cities within California, Florida, Nevada, Michigan and Ohio.

As a result, supply has now exceeded demand in most areas. It would take several months, and in some cases years, to sell all of the homes that are currently on the market. Yet, home prices are staying level for the most part - for now. If sales do not pick up soon, home prices will most definitely begin to fall.

Why is the Disconnect Between Home Prices and Fundamentals Dangerous?

Just ask Japan. The country experienced a similar housing boom in the 1980s and is still reeling from the damage caused when the bubble burst.

Almost every circumstance leading up to the Japan housing crash has been present in the U.S. during the last decade:

* Historically low interest rates
* Housing touted as a 'can't miss investment'
* Average home prices doubled
* Average home prices in the six largest cities tripled
* Lenders offered bad loans
* Government acted as a partner to industry
* Home price increases far outpaced wages and rents

After reaching peak values, Japanese home prices declined by an average of 40 percent. In the country's largest cities, the declines were worse, averaging 65 percent. Homes in Tokyo lost 80 percent of their value and are still on the downward slide to this day.

Japan home prices declined by an average of 40 percent

If you are wondering what will happen in the U.S. when the disconnect between home prices and fundamentals finally becomes too much and knocks the knees out from under the housing market, take a look at the chart above.

The changes that have occurred in the U.S. housing market in the last decade aren't much different than the changes that occurred in Japan's boom market. Home prices have doubled nationally. Prices in bubble states like California--where some of largest cities are also located--have almost tripled in the last 7 years. When you compare the U.S. chart (shown below) with the Japan chart (shown above), the similarities are clearly visible.

Note: We are compiling the data for the six largest U.S. cities to also include in this graph, so the graph below currently only represents the U.S. national average home price (equivalent to the bottom pink line in the Japan graph). We expect to have the new graph up soon, so please check back.)

U.S. housing market in the last decade is very similar to Japan

When the crash occurred in Japan, prices fell to pre-boom levels. It is not at all unreasonable to think that home prices in the U.S. are about to do the same thing.

What do you guys think of this article? I personally think we're in for some drastic times up ahead. I mean, Countrywide Home Loans is now looking to credit to fulfill mortgage requests....

Silverchild79 · 08-23-2007, 01:52 PM

I hope it's true, the only people who can afford to buy a house in Oregon anymore are from California

and if it happens, I'm buying a house like woa

B16 · 08-23-2007, 02:02 PM

Do you have the original link to this?

reckedracing · 08-23-2007, 02:03 PM

i've been waiting for the bubble to pop
its gotta happen sooner or later
i think the #1 cause of the "bubble" is the low interest rates
i already see homes sitting on the market longer and longer and more foreclosures are coming through

totalburnout · 08-23-2007, 02:19 PM

Quote:

Originally Posted by Bob Vila

What do you guys think of this article? I personally think we're in for some drastic times up ahead. I mean, Countrywide Home Loans is now looking to credit to fulfill mortgage requests....

They borrowed 31billion as of the other week.

In terms of the "bubble bursting", the article fails to show how home prices have doubled over the past years, so even if you sell at $40k less in today's market, than you did in yesterday's market, the average home owner has still seen a ~100% increase on rate of return.

Lamen's term, if you bought a house four years ago and you sell the house now, you're still far ahead of what you were when you purchased the home.

The people losing out on the real estate market are those who bought the house in the recent past with plans of flipping the homes for a quick sale and quick profit. Those people will have to find ways to pay for the mortgages that they didn't expect to have for an elongated period of time or sell for big losses.

In short, those with get rich quick schemes that involved investing all their money into today's real estate, should have taken a look at where the economy was heading and how the economy could not withstand the housing boom for an extended period of time.

We'll hit a short recession until people get back on their feet and learn that they can't have the latest and greatest thing in terms of going from new home to new home in a short time span and everything will be back to normal.

pissedoffsol · 08-23-2007, 02:20 PM

i don't think it will happen here.

simply put, people won't sell it for a loss unless they absolutely HAVE to move.

if the market crashes, i'm not selling... thats for sure. its just like the stock market. I'm down 30% the past two weeks because of everything dying. i'd be stupid to sell my stocks off for less than i paid for them. i just have to wait it out and hope it recovers (which it already started to do yesterday).

everyone keeps talking about low interest rates.

sorry, they are gone.

you missed the boat on those 3 years ago.

i'm up a full percent on my house vs what i got the mortgage for my condo on just under 2 years later.

pissedoffsol · 08-23-2007, 02:21 PM

Quote:

Originally Posted by totalburnout

The people losing out on the real estate market are those who bought the house in the recent past with plans of flipping the homes for a quick sale and quick profit.

its the flippers who tried to make money and sucked who are screwing up the market. i heard somewhere that 80% of flips in georgia are being foreclosed on.

totalburnout · 08-23-2007, 02:24 PM

Quote:

Originally Posted by Silverchild79

I hope it's true, the only people who can afford to buy a house in Oregon anymore are from California

and if it happens, I'm buying a house like woa

Buying a house like woa with what interest rate?

The time to buy is now or in the near future when houses start dropping price and interest rates are still decent. Interest rates are only going to increase from here, as they've already started to slowly increase.

If you don't have the money to play right now, then you're sitting this one out.

totalburnout · 08-23-2007, 02:28 PM

Quote:

Originally Posted by pissedoffsol

i don't think it will happen here.

simply put, people won't sell it for a loss unless they absolutely HAVE to move.

if the market crashes, i'm not selling... thats for sure. its just like the stock market. I'm down 30% the past two weeks because of everything dying. i'd be stupid to sell my stocks off for less than i paid for them. i just have to wait it out and hope it recovers (which it already started to do yesterday).

everyone keeps talking about low interest rates.

sorry, they are gone.

you missed the boat on those 3 years ago.

i'm up a full percent on my house vs what i got the mortgage for my condo on just under 2 years later.

In line with what I said in my prior post. Those who are in it for the long haul are the ones who will make it just fine and still come out ahead of when they went in.

Those who are getting divorced and have to sell off a house, have to move and sell a house for work, or planned on flipping a house are the ones who are going to be biting the bullet and selling for losses.

Also, people may not want to sell for a loss but many will be forced to sell or be foreclosed on because they bought outside of their means and didn't lock interest rates in while they were low and they could. This is why I was advocating to you to buy a house well within your means.

The earth isn't going to explode and America isn't going to fall, but many people who weren't smart with their finances are going to lose their shirts and take big losses from their poor buying decisions.

I didn't understand three years ago when everyone was saying it was a buyer's market after the initial price increases. Thats like looking at Google's stock and saying because its successful right now that its a buyer's top choice - clearly it was a top choice years ago and now its starting to even out.

These stragglers are the ones who missed the train but were still hoping and jumping at the tracks. Now they're all out in the cold with their finances blowing in the wind.

Silverchild79 · 08-23-2007, 03:11 PM

Quote:

Originally Posted by totalburnout

Buying a house like woa with what interest rate?

VA loan for the win

B16 · 08-23-2007, 03:20 PM

Quote:

Originally Posted by pissedoffsol

i don't think it will happen here.

simply put, people won't sell it for a loss unless they absolutely HAVE to move.

if the market crashes, i'm not selling... thats for sure. its just like the stock market. I'm down 30% the past two weeks because of everything dying. i'd be stupid to sell my stocks off for less than i paid for them. i just have to wait it out and hope it recovers (which it already started to do yesterday).

People are having to foreclose because they simply can't afford the house. Of course you wont sell because you can afford your loan. I think so far there have been something like 800% more foreclosures than last year.

Shit, I hope prices come down some soon. My wife and I make great money together and can't afford shit out here.

Silverchild79 · 08-23-2007, 03:26 PM

It's bound to happen everywhere one way or another, if nothing else the dieoff of the boomers over the next 15 years will cause prices on allot of stuff to fall

totalburnout · 08-23-2007, 03:31 PM

Quote:

Originally Posted by Silverchild79

It's bound to happen everywhere one way or another, if nothing else the dieoff of the boomers over the next 15 years will cause prices on allot of stuff to fall

Are you figuring 3 or 4% annually for inflation?

The fact that people are living so much longer and have to spread their money over a much longer time span is one of the reasons why things are more expensive, but not the reason.

You won't be seeing any price decreases in normal market goods for quite awhile, especially after we pick up after the blip in the stock market.

I just wish that all this happened three years from now, when I'll be older and more well prepared to capitalize. If I had a $30,000 bank roll, I would have went nuts buying stocks when the market dropped the other week.

pissedoffsol · 08-23-2007, 07:52 PM

i bought a little bit.... my bank roll is tight with my house clsoing coming up, so i couldn't really do anything.

ideally, i could have taken my 10 grand i got lying around in my check book for my closing costs, and dump it all on something thats down hard core and pary it comes up and pull out a couple days before my clsoing

but if i lose that money, i'm screwed. lol so i didn't

totalburnout · 08-23-2007, 07:54 PM

Quote:

Originally Posted by pissedoffsol

i bought a little bit.... my bank roll is tight with my house clsoing coming up, so i couldn't really do anything.

ideally, i could have taken my 10 grand i got lying around in my check book for my closing costs, and dump it all on something thats down hard core and pary it comes up and pull out a couple days before my clsoing

but if i lose that money, i'm screwed. lol so i didn't

Thats definitely risky.

Thats the same reason why I won't take the ~$5k sitting in the bank right now and throw it into the stock market. Its a long term move, not a short term move.

B16 · 08-23-2007, 08:13 PM

Should have thrown it all into VMWare when they went IPO, sell it tomorrow :P

Slammed89Integra · 08-23-2007, 11:48 PM

A guy at my school(complete legend in business) took out a humongous student loan and bought some google at IPO. Fucking lucky.

My dad actually has about 300,000 in equity in his house, so he's looking to upsize while the market is dying. Most comps in our area are right around 500, and he bought his house for 200 years ago, so he can literally go buy a house for about 650-750 and pay the same mortgage rate even with the upsized house.

Personally, I know he makes well enough to keep the house he's living in, and just buy a nice rental house to sit on for a while. I'm not sure why he doesn't, but hes a very conservative person. For the first time in his career, he started personally running two crews, and subcontracting out to his brother, and cousin as well, so he's going to run into some serious money.

But what's funny is, even though the market is bout to go to shit in the NW, customs are going up like crazy. But they don't take out loans for houses. We couldn't be more swamped and I'm leaving in september so we're looking for help desperately.

totalburnout · 08-24-2007, 12:32 AM

Quote:

Originally Posted by Slammed89Integra

A guy at my school(complete legend in business) took out a humongous student loan and bought some google at IPO. Fucking lucky.

Wreaks of illegal if it was a federally subsidized loan. Student loans are supposed to be applied *ONLY* to school related costs, otherwise you need to take out personal loans. If the loan wasn't federally subsidized than the interest rates are on par with personal loans and any person could have done the same thing as this guy, given a strong credit history.

Intelligent move regardless of how he materialized the money.

08-23-2007, 01:52 PM	#2
Silverchild79 WAR FORREST!!! Join Date: Nov 2002 Location: Albany, Oregon Age: 28 Posts: 6,413 iTrader: 0 / 0% Rep Power: 125	I hope it's true, the only people who can afford to buy a house in Oregon anymore are from California and if it happens, I'm buying a house like woa __________________ The Truth About Barack Obama http://www.conflictingviews.com/t3032/#post57889 http://www.conflictingviews.com/t3033/#post57922

08-23-2007, 02:02 PM	#3
B16 Super Moderator Join Date: Sep 2002 Location: yay area, CA Age: 30 Posts: 6,693 iTrader: 0 / 0% Rep Power: 85	Do you have the original link to this? __________________ 2005 Mitsubishi Lancer Evolution 8 2004 BMW 325i 2000 Mercedes Benz ML 430 1994 Honda Civic Del Sol VTEC (race kaa)

08-23-2007, 03:26 PM	#12
Silverchild79 WAR FORREST!!! Join Date: Nov 2002 Location: Albany, Oregon Age: 28 Posts: 6,413 iTrader: 0 / 0% Rep Power: 125	It's bound to happen everywhere one way or another, if nothing else the dieoff of the boomers over the next 15 years will cause prices on allot of stuff to fall __________________ The Truth About Barack Obama http://www.conflictingviews.com/t3032/#post57889 http://www.conflictingviews.com/t3033/#post57922

08-23-2007, 08:13 PM	#16
B16 Super Moderator Join Date: Sep 2002 Location: yay area, CA Age: 30 Posts: 6,693 iTrader: 0 / 0% Rep Power: 85	Should have thrown it all into VMWare when they went IPO, sell it tomorrow :P __________________ 2005 Mitsubishi Lancer Evolution 8 2004 BMW 325i 2000 Mercedes Benz ML 430 1994 Honda Civic Del Sol VTEC (race kaa)

08-23-2007, 11:48 PM	#17
Slammed89Integra Senior Member Join Date: Oct 2002 Location: Washington Age: 21 Posts: 6,932 iTrader: 0 / 0% Ride: 2007 Scion TC, 2005 Suzuki GSX-R 600 Rep Power: 96	A guy at my school(complete legend in business) took out a humongous student loan and bought some google at IPO. Fucking lucky. My dad actually has about 300,000 in equity in his house, so he's looking to upsize while the market is dying. Most comps in our area are right around 500, and he bought his house for 200 years ago, so he can literally go buy a house for about 650-750 and pay the same mortgage rate even with the upsized house. Personally, I know he makes well enough to keep the house he's living in, and just buy a nice rental house to sit on for a while. I'm not sure why he doesn't, but hes a very conservative person. For the first time in his career, he started personally running two crews, and subcontracting out to his brother, and cousin as well, so he's going to run into some serious money. But what's funny is, even though the market is bout to go to shit in the NW, customs are going up like crazy. But they don't take out loans for houses. We couldn't be more swamped and I'm leaving in september so we're looking for help desperately. __________________ When this is all over I think we should get an apartment together.

08-23-2007, 02:03 PM	#4
reckedracing TTIWWOP Join Date: Dec 2002 Location: 845 Area, NY Age: 28 Posts: 14,031 iTrader: 0 / 0% Ride: 1990 sohc vtec-t hatch, 1994 Bagged S10, 1991 Lifted Mazda Rep Power: 203	i've been waiting for the bubble to pop its gotta happen sooner or later i think the #1 cause of the "bubble" is the low interest rates i already see homes sitting on the market longer and longer and more foreclosures are coming through

08-23-2007, 02:20 PM	#6
pissedoffsol RETIRED Join Date: Sep 2002 Location: Retirement Home Age: 28 Posts: 49,974 iTrader: 2 / 100% Ride: Electric Scooter Blog Entries: 1 Rep Power: 529	i don't think it will happen here. simply put, people won't sell it for a loss unless they absolutely HAVE to move. if the market crashes, i'm not selling... thats for sure. its just like the stock market. I'm down 30% the past two weeks because of everything dying. i'd be stupid to sell my stocks off for less than i paid for them. i just have to wait it out and hope it recovers (which it already started to do yesterday). everyone keeps talking about low interest rates. sorry, they are gone. you missed the boat on those 3 years ago. i'm up a full percent on my house vs what i got the mortgage for my condo on just under 2 years later.

08-23-2007, 07:52 PM	#14
pissedoffsol RETIRED Join Date: Sep 2002 Location: Retirement Home Age: 28 Posts: 49,974 iTrader: 2 / 100% Ride: Electric Scooter Blog Entries: 1 Rep Power: 529	i bought a little bit.... my bank roll is tight with my house clsoing coming up, so i couldn't really do anything. ideally, i could have taken my 10 grand i got lying around in my check book for my closing costs, and dump it all on something thats down hard core and pary it comes up and pull out a couple days before my clsoing but if i lose that money, i'm screwed. lol so i didn't

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Disconnect between home prices and wages