Just curious. If you’re still out there – A mere one year later, do you still think prices will not reach 2003 levels?

http://www.economicforecaster.com/uploads/visitors/forecasttables/Annual%20Forecast%20(0906).xls

However, your extrapolations seem to rest on income growth remaining constant: If so, rents rise.

But, I remember after the tech bust that the tight rental market loosened up, and there were reductions in rent all over the city.

That is, IF we start encountering significant job losses again — certainly conceivable in a credit-crunch, post-bubble world — rents may fall as well, meaning home prices will have to fall even further to reach historical balance.

Hold on to your hats, folks!

I checked and it says:

RENTERWISHFULTHINKING.COM is available!

Old-timers always say it’s all about jobs so if you want that house at 2002 price levels you want to see some big unemployment numbers in the next few quarters but if 7-8% unemployment happens you might want to double-check the quality of the neighborhood before you sign

http://www.redfin.com/stingray/do/printable-listing?listing-id=1321331

However, the pricing history in redfin appears different. It previously was listed at $529K, with a sale price of $490K in Sept 2005. Now it is listed at $410K with a sale price of $324K in 05. Same pictures, so I am not sure why the numbers/sales history would change that way.

Cost of capital on a $324K loan would be around $2K/month, and with taxes, insurance, and condo fees, the $1650/month rental still generates a loss of at least $800/month. The $410K listing has been active for 35 days, it will be interesting to see what happens.

Listing:
http://www.redfin.com/stingray/do/printable-listing?listing-id=1149913

Listed at $300K for 106 days. Redfin doesn’t show a purchase price, so I assume that $300K is pretty close to their break-even sale price.

Rental:
http://seattle.craigslist.org/see/apa/528239868.html

Trying to rent it for $1400/month. This one is a lot closer to covering their carrying costs than the last one, but still falls substantially short.

The cost of capital on the $300K is around $1,800/month. Taxes are around $225. If condo fees and insurance are another $200, then the total carrying cost is around $2,225.

That means this ‘landlord’ is losing around $825/month, or $10K a year on this property, not including depreciation of the property itself. The market value of the property is somewhere below $300K, or it would have sold by now.

I find these numbers very interesting. I think we are just starting to see the first wave of condo owners who have been unable to sell at break even, and are discovering that they if they try to rent the place out they will lose money every month. How long can these folks hold out before they pack it in? How will all these condos coming on the rental market impact rents in the area?

Lower than renting, yes but that’s no reason to spin this over and over again.

No bubble here in 01-03 any way you slice it. We lost 80,000 or 100,000 jobs and a like number of population – but no houses. Pure supply and demand issues.

While I disagree with the characterization of “hyper-inflation” rather than simply high inflation, he lays it out pretty straight and simple.

takenroad,
Interesting that the change in slope of the lines on your graphs happens in 2002. Why 2002? Any ideas?

The federal funds rate hit a low between 1-1.25 from 2002 to 2003. This started the bubble. It began to run out of steam until Greenspan actively encouraged pushing suicide loans in 2004, which is when the bubble really picked up steam since this wildly increased both the pool of borrowers and the amount of money they could finance. I think the capital gains change is what really spurred the part-time flippers into action and made people see housing as a way to make a quick buck and not a place to live.

One of my theories has been that the tax law change exempting $250k/$500k of cap gains on sale of your home contributed to the run up in real estate prices, and kept stock market returns below what they otherwise would have been. That tax law change happened in ‘97, I think. Interesting that the change in slope of the lines on your graphs happens in 2002. Why 2002? Any ideas?

Joel said,
I don’t think there is any more money surrounding boomers than any other generation. The national savings rate being negative for the first time would point to vast increase in credit, not real wealth.

I think this is a big reason why people believe the bubble prices can continue, they are confusing wealth with credit and assume that since they see a lot of wealthy-looking people, there are a lot of wealthy people. The statistics do not bear this out. Your neighbor with two new BMW’s, $800k house and a new boat may be wealthy, but more likely they are drowning in debt and will be bankrupt in a year or two. The credit explosion was not limited just to housing, credit cards and auto/boat loans have also been securitized in a similar way. This is why you started getting 10, 20, 100 credit card offers in the mail every day and no money down, 0% interest car loans in the last several years. I don’t remember getting the flood of offers like that 8-10 years ago, but in the last 2-3 its become ridiculous. People are not wealthier, it was just an illusion until the cards started falling down in August.

In looking at the data spreads is seems as though housing prices have deviated much further from their expected trend than rents have. While rents may go up a bit to return to the trend line, houses have a long way to fall. Thus I’d have to disagree with your projection of only a 12% drop in nominal prices over the next few years. Inflation won’t be significant enough once the coming recession sinks in to make up the difference. But time will tell, eh?

I think the flow of money surrounding the Baby Boomers has more to do with this housing bubble than we have considered so far.

Oh yeah, boomers’ “wealth” has a lot to do with the housing bubble, which must be why percent equity dropped by so much during the bubble. They had all this money lying around, but instead using it to pay for their house or buy stuff, they took out huge mortgages and home equity loans. And then when the payments started to go up they used that money they didn’t use before to help go delinquent on their loans in ever increasing numbers.

I don’t think there is any more money surrounding boomers than any other generation. The national savings rate being negative for the first time would point to vast increase in credit, not real wealth.

I think much of the change since early 2000s is the historically low interest rates.

I bet if you plotted Rent Vs Mortgage payment you’d see less of a difference (but not gone).

There was an article, possibly on Calculated Risk, that examined the impact on housing prices when you factored in the exotic loans. It basically showed that the mortgage payment : rent ratio was staying similar but the buying power of the mortgage payment grew exponentially with ARMs, I/Os, and other suicide loans. Not surprising but it was very well done.

Someone else may recall seeing it… I’m guessing in October or November.

In addition, the average rental rate can increase faster than the rate that individual renters see. That is because older, low rent units are torn down and replaced by luxury units.

I bet if you plotted Rent Vs Mortgage payment you’d see less of a difference (but not gone).

“If you’ve read the book “the Next Great Bubble Boom” (Harry Dent)… his premise has a lot to do with demographics and in particular the movement of wealth that followed along with the Boomer generation. I think the flow of money surrounding the Baby Boomers has more to do with this housing bubble than we have considered so far.”

If I remember correctly, this idea has been discussed here several times earlier on in this blogs history. I think it’s reasonable to suspect that as the bubble took shape and home prices were on a steep increase from year to year this also drew investments from those folks with a good deal of money to invest – to buy, for example, several investment properties. Certainly this must have appeared to many to be a sure-fire investment.
But most of the evidence to explain the bubble has pointed to lax standards in financing of home purchases – investment, or otherwise, and it seems likely to me that this lack of prudence / standards on the part of banks also had a big effect on investment purchases. As a result it enabled many such a boomer investor to purchase a considerably greater $ value of property he/she would normally have been able to buy (after all, if it’s a sure-fire thing, why stop at what you can conservatively afford?) As a result stagnating or falling prices will put many of these folks in trouble also.
Otherwise this would be an argument against increasing foreclosures and losses by banks (as much of the losses would be absorbed by these wealthier investors who paid mostly cash – meaning they loose their investments, and since they were such a considerable part of the cause for the run-up, future foreclosures and bank losses ( and a resulting rapid increase in housing supply) is mitigated – as would be the incentive for banks to revert to very traditional/strict lending standards.
No I think the reckless financing by banks is the driving factor here, and a slide in in RE values won’t be mitigated much by said boomer investments – just look at the the staggering losses that have been posted by banks.

NY has rent control which throws the numbers right out the window; very hard to compare a rent control city to a non-rent control city. SF also has rent control.

patient said,

Nice post! Since we are throwing out wishes mine would be to see a graph that compares median monthly income with the monthly cost of the median home calculated on a 30y fixed with the approximate avg. interest rate on a yearly basis. On the other hand why bother, I think we know the result. A big diversion starting around 2002 as the bubble builds…

Patient – that is pretty much the analysis I did here – disposable income/Ten-year bond yield compared to home prices. That ratio is a good proxy for the sort of affordability metric you are thinking about – and the results are similar (though the disconnect really starts in ‘04)

U.S. house prices “likely would have to fall considerably” to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists.
.
The study, which doesn’t necessarily reflect the views of Fed policy makers, suggests prices would have to fall 15% over five years, assuming rents rose 4% a year. House prices would have to fall further if the adjustment took place more quickly…..

“I am not selling anything”.

She was rude and interrupted too, and the host encouraged it. Watching Fox always makes me feel frustrated for the poor smart people who have the misfortune to be invited on there.

The same number always comes up — 30-40% over valued.

What an amazing coincidence, eh?

One thing that is curious to me is that I remember rents dropping for a couple of years when the bubble was building up steam (around 2001 – 2003). We were renting an apartment in Redmond for $1000, and 18 months later were paying about $200.

I remember why this was – at the time, buying something the same size basically cost a similar amount of money to renting, so people were buying in troves and the rents dropped to try and make up for that.

Once affordability dropped I think that rents went back up again. But the graphs don’t show any of this. Maybe I was observing a micro phenonenon and the graph is the macro?

Re: the Fox piece with Peter Schiff and that RE floosie: is this the best that RE bulls can do?! Talk about being out of your league! This is Fox News though, where being loud and obnoxious is a substitute for any subject background/knowledge.