Some common sense about housing prices

Here’s a good brief article that says some obvious things about the future of housing prices. These four paragraphs are the best writing I’ve read about housing in several months:

The Case/Shiller price index, a measure of home prices going back to 1987, shows California home prices still at about twice where they were at the peak of the last big housing cycle back in 1990. So just to get back to the top of the last peak, prices would have to drop another 50 percent. Interest rates at that time were substantially higher, in the range of 10 percent a year. If you take that into account and look not at sales prices but at the cost of paying mortgages, we’re still in for another drop of 30 percent. That’s if prices don’t fall below the last peak and interest rates stay at 6.5 percent or less. In other words, it’s a best-case scenario.

These numbers are so dire that they might sound like scare mongering, except that if you look through the recent sales listings at any number of online sites, you won’t have to search very hard to find price drops right along the lines of these numbers. This house in Riverside, Calif., for instance: bought for $586,000 in 2006, foreclosed on in November 2007, and now sold again this summer for $147,000-just 25 percent of what it sold for two years ago. And here’s another heart-stopping fact: Even that vastly diminished sales price was financed, according to real estate records, with a 100 percent mortgage. Good luck getting one of those now.

What this means for homeowners is that if you happened to buy at the peak of the boom, your house is unlikely, in inflation-adjusted terms, to get back to the price you paid for it for another decade at best, if ever. You may think that this goes just for the most inflated markets like the real estate speculation capitals of California and Florida, but that’s not true. Look at the historical numbers, and you’ll see that just about any coastal market is still priced 75 percent higher than it was in 2000. And even markets like Charlotte, N.C., and Cleveland have real estate prices twice (and sometimes three times) where they stood at the end of the late ’80s boom.  The bottom line is that incomes just haven’t risen enough to support this kind of increase.

Just a few days ago, Alan Greenspan, the pope of the economic boom, confessed that he had no idea that home prices would crash the way they have because, well, it had never happened before. Clearly, we’re past the point now at which anybody believes that. But the prevailing wisdom remains that if you hold on to your house for a long time, eventually you’ll do fine. Don’t count on that. Yes, markets come back, but a bubble is an irrational rise in prices, and once the balloon is pricked, it doesn’t magically inflate again. For a cautionary lesson, look to Nasdaq, the stock market on which most technology companies were listed at the height of the Internet and tech boom. Even before the market crash of the last weeks, Nasdaq hadn’t come anywhere close to getting back to its March 2000 top.


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