Maybe houses were UNDER valued?
OK, I thought that subject would get your attention!
The reason I'm asking this question is that I see estimates of future declines built on previous specific years. Someone estimated a 50% or more decline based on a return to 1997 prices with 4% annual growth. Others estimate declines built on 2000 values.
Why 1997? Why 2000? What is so special about those years?
What if housing was actually *under* valued during those particular years that you're comparing against?
At this point, I'm sure a number of you are angrily wondering why some perma-bull is justifying current silly prices. Well, I'm not. I think prices are way beyond what they should be right now, but I find it hard to judge where they *should* be.
For what it's worth, I think prices will decline for a few years and will drop in 20-25% with half of that coming from inflation. But, who knows...
The reason I'm asking this question is that I see estimates of future declines built on previous specific years. Someone estimated a 50% or more decline based on a return to 1997 prices with 4% annual growth. Others estimate declines built on 2000 values.
Why 1997? Why 2000? What is so special about those years?
What if housing was actually *under* valued during those particular years that you're comparing against?
At this point, I'm sure a number of you are angrily wondering why some perma-bull is justifying current silly prices. Well, I'm not. I think prices are way beyond what they should be right now, but I find it hard to judge where they *should* be.
For what it's worth, I think prices will decline for a few years and will drop in 20-25% with half of that coming from inflation. But, who knows...
Comments
Seattle was one of the cities most juiced up by dot com wealth and people were buying like crazy, vacancy rates were ultra low and rents were jumpin', so it's doubtful that homes were undervalued in 98-00.
I also believe there were law changes in mortgage interest deductions in 1997. Someone in the know, please chime in. If this is the case, that would have made housing cheaper for most people, and therefore also made them "under valued".
The reason I use 1997-1998, is that that's the time that housing prices started deviating significantly from the slow linear increases of just a 1-3% increases above inflation, and the ratio of price/rent and price/income started getting out of whack.
In other words, housing prices, though fluctuating year to year, generally stayed in line with fundementals over the long-term...
... until the mid to late 90s.
We've seen prices nearly triple in 10 years, with no underlying changes in anything to justify it. Even if you have no statistical background or data other than that, any moron can see that's a bit odd.
I bought a house in 2003, which I could now rent for about the same money as my mortgage payment was, which BTW was a fixed mortgage. (Yes, that includes taxes, deductions, etc. Doesn't include maintenance, but I'm just going to cancel that with principal.)
Considering that rentals seem to be under reasonable demand (I just rented a house, so I'm well aware of the market - they're not cheap or not hugely expensive), it seems to me that prices should revert to 2002 prices as I'm imagining that they'll undershoot just a little. In addition, with interest rates at about 7% (+- 0.5%) I think that I'll be able to buy a place for about the same payment as in 2003, inflation adjusted of course.
My experience may be a little local (Issquah) so I'm not sure how Seattle or other areas would fit in with this. Perhaps Issaquah is special?
I'm not saying that prices are going to fall to 1997 levels.
My guess is similar to yours. I could see a fall back to 2003 levels over a period of 4-8 years, which would still be a substantial haircut - as much as 40-50% depending on location and style of housing stock. Then a flat market for another 4-8 years allowing inflation and income to slowly bring prices back into line with fundamentals.
I think that in a rational market rents should be at a premium to mortgage payments. If you were choosing to become a landlord even in 2003, if you assumed little appreciation, your rentals wouldn't cash-flow, if you took into account lost opportunity costs of the money down, maintenance and management costs.
All you have to do is scan Craigslist and Redfin to see people buying a place and then renting it out for about 60% of what their monthly nut must be. Pure genius.
I'll move up to my dream house as soon as these geniuses are out of the market one way or another, and people realize residential investment is a fools game.