80% where??

[mking]

Hi

Wife and I are trying to time a house purchase. Been renting since 9/07. Have a chunk saved for a down payment. Looking in the Renton area, work in Bellevue. Renton over Bellevue vs Newcastle b/c of the dramatic price differences.

When we decided to rent vs buy, a starter home (3 bd, 1 bath, 1000 sq ft more or less) was $300k+ in most of Renton. We are looking for a much bigger house, but the starter home will be useful for discussion purposes.

Average household income in this area (according to Zip realty) is $62k. Three times average income is about $185k, so houses were overpriced. If a $300k house dropped by 40% it would be $180k, which is about 3x average income. I can even see an overshoot, say a 50% drop over even 60% drop for a foreclosure that got trashed.

But an 80% drop across the board, the average starter home is now $60k, less than the average annual income. I can understand that the average annual income will drop some in a recession. But that 80% off figure suggests average annual household income would need to drop to $20k. I think two people working minimum wage would have an annual income of about $30k. I dont see 80% drops across the board. What am I missing?

[ira s]

mking,
I'm not one who agrees that we'll see 80% declines, but I sort of understand the argument. Something like:
The economy is not just going to see a few more job losses but that there will be much more massive unemployment, that rents will crash as well as home prices, and that credit won't be eased much, that prices will continue to decline but lending standards will be very tight, and voila!
'Course there's Renton and there's Renton. There are some parts of the Renton area which have seen a lot of houses and townhomes built recently, and they're not selling. And the Renton school district is considered waaay worse than Bellevue's or Issaquah's, so the house prices in Renton will almost always be behind Bellevue's, although there are parts of Renton in the Issaquah and Kent school dsitricts, both better than renton's.
Still, unless you think it's likely that we'll have something like Japan had here, a long, slow steady severe decline, then I think it's not likely we'll an 80% decline. Of course it's possible. It's also possible that we're only a year or less away from hitting bottom.

[rose-colored-coolaid]

Another issue with the 80% drop theory is it disregards the role that high inflation will play in the endgame of this recession.

http://articles.moneycentral.msn.com/In ... ation.aspx

That $60k average wage will rise, it just won't buy nearly as much as it does now...

[sniglet]

No surprise, but I am going to take the other side of this argument. I think it is highly likely that Seattle area real-estate prices will drop some 80% (on average) from peak values before we see a bottom to this depression.

I doubt very much that the government is going to be able to inflate their way out of this mess. Just look at how innefectual the inflationary efforts have been to date, and policy makers have been pulling out all the stops for almost 2 years now! Japan's government has kept interest rates at 0% for nearly 20 years, and has been spending like a drunken sailor (the nation now has a debt equivalent to 70% of it's GDP), yet that hasn't stopped asset price collapses there (stocks, real-estate, etc). Why will things be any different in the US?

There are numerous examples in the world where property prices have dropped significantly in modern history and I don't see why the Seattle area is "special".

On top of that, I firmly believe that ALL of Seattle's major employers will be significantly reducing their staff considerably over the next few years (far beyond the lay-offs that have already been announced), as the global depression grips even harder. With massive lay-offs rolling across the region we just aren't going to see wages increase, and the pool of employed people capable of buying a home will only get smaller.

To get a good understanding of the case for deflation, check out my in-depth podcast on the subject.

[rose-colored-coolaid]

Read Jubak's article I posted above. He makes a compelling argument why only a nation with the combination of 1) staggering debt and 2) a world reserve currency can inflate it's way out of debt.

Whether or not they can pull it off in a controlled fashion is an entirely different question, but it's become blatantly obvious that it is very much in the federal government's best interest to spur inflation to a 4%-5% range for the next several years while modifying entitlement programs to be less inflation adjusted than they have in the past.

[WestSideBilly]

[Mama]

[rose-colored-coolaid]