But Hank the Bank said they just solved the problem with foreclosures...

We have Hope now.

Time to relever and buybuybuy?

We mortgaged overvalued homes at 13 to 14 x income, and now it's all caving in. Hoodafrickingknowedit?

Bruce Willis, the wealthy actor, or Bruce Willis, the dude I went to high School with?

Let's not forget the credit card bills associated with decorating those homes: not only were they overpriced, they were oversized, too.

Back in the early days of the housing boom you had what I liked to call "Ricola!" homes where they were so cavernous and empty that you could yodel in them like a Swiss mountaineer. That phenomenon disappeared when people started borrowing against the homes in order to furnish them...

I'm so glad that the leading business journal figured out that affordability matters. Otherwise, we'd all be ignorant of that fact.

"Seems from the graph they have been well above that since 1975."

Nobody knows when a bubble will burst only that it will burst, and all bubbles end badly. Looking at the graph it appears as if Cali has been in a bubble for a long, long time. Much longer than just 5 years or so.

"This points out the mistake many homebuyers made during the boom - they only looked at the monthly payment, and not the price."

I can't tell you how many realtors told me to do this when I bought a home. It was a surefire way for them to lose my business. I mean can you imagine any other transaction where people would tell you with a straight face to forget about price?

I have friends who are under thirty with three homes. Do people know what kind of leverage that is? It silly. There is no room for error as we are no finding out. The US economy is an overlevered piece of sh$t

"The last time that the index was at or below this level was during the Severe Recessions of 1974 and 1980"

This confirms what I've been thinking for a while. A lot of what we're seeing in the equities market is a persistent belief that this will be another mild mid-cycle slowdown, and the short-bus riders (stock investors) can hardly be blamed for this sanguine view.

All recessions during the Greenscam era have been short and mild, lasting a matter of months and then off to the races. So the next time you hear someone on CNBS talk about a second-half rally and end to the recession, don't be surprised. They have been conditioned like Pavlov's dog.

They don't realize that this is the end of an era, and the beginning of something altogether different. Business investment recessions caused by over-investment have nothing in common with cascading cross-defaults and debt market implosions.

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trauma,

True, and I think the comparison between a lot of realtors and a car dealer isn't too far off. Then again my final one was as professional and as helpful as can be.

I have a question regarding banks and mortgages. When someone sells his home for less than what he owes on his mortgage, does his bank give up their lien on the home or do they still keep a lien on it for the difference the old owner still owes them? If so, I would think this might prevent the sale closing in the first place.

Does anyone know how this works? I imagine this situation will come up a lot in the coming year...

I mean can you imagine any other transaction where people would tell you with a straight face to forget about price?

Happened to me at the car dealership.

My daddy taught me that I should always have top payment, price, and term in mind when evaluating a loan (always going for the lowest possible rate). Then he derived and taught me the equation for figuring out payment, term, or price based on rate and on the other two variables. sigh

iTod,

That's a funny argument. At the end of the day, a house (like any other asset) should be valued based on the cash flow it can produce. That will be directly related to local salary levels over the long term - whether the buyer is local, or is a foreign investor.

It is just absolutely ridiculous to compare Arizona house prices to NYC salaries. On top of it, most of Arizona is an uninhabited desert. There is basically unlimited land. NYC is land constrained.

Another 40% in california falls in line with my Super Unscientific But Pretty Nifty LA price projection based on the case-shiller data. Updated with the Nov 2007 numbers:

LA_nominal_nov07 on Flickr - Photo Sharing!

I've been pretty surprised by how the index is following the projection so closely. Who knows if it will continue... but if it does we're looking at median prices of $270k in LA in 2013.

It's actually refreshing to see a number like "another 40%" appear in the mainstream press after the litany of "it'll remain flat" and "it might go down, but only 5 or 10%" calls.

Actually, you see a lot of commercials on TV ready to sell you some groovy device your 7-yo will be totally wowed by -- for only 4! LOW! PAYMENTS! of $30. Makes it sound like $30, somehow, not $120.

Imagine a home purchased at 13 times income, with a 10% down payment. Say the homeowner switches to a 30 year fixed rate loan with a 6% interest rate. Just the P&I (principal and interest) would equal 84% of the homebuyers gross income!

I believe homeowner is misspelled. That should be hopeowner.

EL: I don't think anyone is suggesting that price-to-income ratios in CA are going to fall to 3 anytime soon, if ever. But it's ridiculous to suggest that 11x is sustainable. Sure, different markets will adjust differently, but the whole state on average is going to come down significantly.

"My understanding is that most govt. data on household income is survey-based"

I really hope someone can clarify this, since it is really key in understanding this situation, whether one talks about debt/income or house prices/income. Where do income stats come from and how accurate are they? Do they capture cap gains, business profits, options, income hidden from the IRS? My suspicion is that there is somewhat more income out there than the official #s say, but I have no idea how much. Bueller? Bueller?

Dav: I have created a similar excel graph based on Case Shiller for South Florida and it compares closely to yours for California. I found that for prices to normalize it would take a complete rollback to late 2000 prices and perhaps lower to account for the overhang in the market and the credit crunch in lending. This would equal at least a 50% reduction for the tri-county areas of Dade, Broward and Palm Beach from the peak of June 2007.

MW

"You can't compare prices to the average income, especially in California. Homes are being bought by the 10% who can afford it, not the other 90%."

Then there is the other extreme. My wife is from a town of 20,000 or so in Indiana. There are tons of houses below $ 50,000. A couple of associates at Wal-Mart making $ 15,000 a year each can buy a house for < 2x income. A nurse and a teacher making $ 40,000 a year each can buy a very nice house for 2x income. Now farmland, is another story...

"ATTH is right. You can't compare prices to the average income, especially in California. Homes are being bought by the 10% who can afford it, not the other 90%."

Don't be an idiot. This is a Bob Toll kind of "RE is only for the wealthy like in Europe" quote. No housing market ever had a foundation of the top 10% being the only ones that buy.

Have you ever heard of first time buyers being the basis for a healthy RE market, the same ones that let all other buyers move-up? That is a principle that has been the foundation of housing for, oh say, hundreds of years!

CA, including the "it's different here" Bay Area will return to fundamental value. The only question is how long it will take and what will the collateral damage be.

I just did a post with many examples of home price declines of 30-60% here in San Diego.

These are all from 11/07 to this month, so may not be showing up yet in statistics. They also include unsold REOs at 50% of 2004-2006 prices.

What really struck me as I looked at the data was that while there are still tons of properties listed at bubble prices, the transactions that were actually closing were:

(1) in stable high-income neighborhoods
(2) are REOs and short sales priced 15-30% below other listed properties and 30-60% below bubble prices.

have a look:
San Diego real estate market in freefall; Banks dumping REOs 30-60% below bubble prices « Greg’s Law & Economics Blog

halbhh: I am not sure of your point, however, I fell certain that no one would choose to invest in a losing investment for the next ten years. I understand the concept of having a home is a psychological phenomena, but pure economic reality will show that the Real estate market has been severely changed as a result of the excess and abuse. We can't deal with an inventory of 2 million + too many homes in the US. The population that can actually afford to own is approx. 65% of the national population. The rest were all imitators who never could afford a home let alone one in an inflated environment.

Perhaps the government will resort to bull dozing 2 million homes to level the market again and then yes, perhaps people will stop sitting on their hands and consider investing.

Seb, AoTC, and Thomas,

Your point is not new.

We all know the bottom 25-30% don't buy a home. We also know that prices are stickier on the high end for obvious reasons.

Statistics ARE not meant to be interpreted based on an individual basis.

The NYT shows that the P/I statistic is STILL grossly abnormal. The decline in prices are just getting started. The only debate is how much and how much impact on the greater economy.

Seb,

You gave stats awhile ago about affordability in Charlotte. They were flawed because the source was housingtracker which includes non-SFH properties.

Median household income Charlotte-Gastonia-Concord, NC-SC $50,367

Average SFH Listing Price for 2007
$293,859
(GCAR stat. They do not provide median.)

These stats suggest that P/I ratio in Charlotte is ~6x. I suspect this is a gross deviation from the historic mean. Also I was shocked to find that there is a 9.5 month supply of houses in the Charlotte area.

Should be: The decline in prices is just getting started

sfvrealestate- Exactly.

I'm going to be honest and say that this problem may have maxed the attention span of most of 300 million in the U and 7 biullion world-wide who don't read this thread. They are eagerly awaiting something new in the way of crisis/entertainment/wonderment. I would try to predict it, but it is of course unpredictable.

Now it is getting to be time to enjoy a cocktail and dinner in my home, the current (and future) price of which I don't know and don't care all that much about.

"This is called being "house poor". (Owning a home, but not exactly enjoying life)."

I thought the expression was "house rich, cash poor". Wouldn't house poor imply not enough house?

Expect condo prices in downtown Chicago to crash--especially for all the new "soft loft" stuff they've been building in the South Loop.

I'm still scratching my head as to what is going out here in Oak Park. The "rent-vs. buy" matrix doesn't hold that well because there's very few high-quality renting locations. Old, refurbished condos: not selling at $170K, mainly because of lack of parking. The townhouse market tanked ($650K-->$400K) and so did the new condo market ($450K-->$300K). I just bought into an apartment--> condo conversion which was sensibly priced (I think the sellers were trying to get ahead of the curve. Originally built as condos but the Village supposedly wouldn't let them sell upon construction and insisted on two years renting, trying to smooth out the market.) Most of the single-family houses seem to be holding their value pretty steadily at $700K--$2M--I've heard that people priced out of the Gold Coast and Evanston have "discovered" Oak Park. Aside from the fact that you go 10 feet and trip over yet another Frank Lloyd Wright building....I don't know if we even HAVE any land that doesn't fall in some Historic District.

Parking's the major problem around here.

15% at a minimum, and more likely another 35%. As for the comments about Orlando. It is among the most over inflated markets in Florida because of the high ratio of investors to users.

If you believe that Orlando has bottomed, then please go ahead and buy. It ill be interesting to see how you react when in 12 months you discover that the property you purchased is worth 30% less than you paid for it. Enjoy the interest burn and pray for a repeat of housing demand that returns you to the froth of 2001-2007,"NOT".

What do you think the result will be from 2,000,000 people walking away from their homes as they simply stop paying their mortgage.

Quick question out there for anybody with the info.

I hear about Cali, Florida, AZ and some other places. Nothing on the Land of Enchantment.

Has Albuquerque been overly bubblicious as well? How do the "values" here look?

Thanks!

I'm going to be honest and say that this problem may have maxed the attention span of most of 300 million in the U and 7 biullion world-wide who don't read this thread.

aheadofthecurve, I think you truly are here. People are going to get bored of this, and, frankly, the only people concerned are the people who are in the market either to sell or buy. In fact, I know quite a few long-time RE agents/broker-owners around here and they are advising people that if you don't have to sell...don't. Hence inventory reductions are people pulling and waiting this out for a couple of years.

Anecdotally I own a second house in a pricey Cape Cod area (trust me, it wasn't when I bought it). There is now 2 years of inventory on the market. Yet, things are selling and lately there has been a lot of activity there. Have prices rolled back? Yes, asking prices are probably around 20% off peak. But they move very little in negotiation. And last year the total number of units sold was about the same as in any other year.

Where I own my primary residence (in a moderately expensive zip code) there is about a year worth of inventory on the market. Prices are probably off around 10 to 15% from the peak. And three houses in my neighborhood have sold since the fall, at prices that I thought were not terrible. Again, 10 to 15% down from peak. The inventory just means people have a lot to pick from, so the price is the issue.

So not all areas are created equal. And things are still selling. Remember, this is considered a bubble area.

All I'm trying to do is see if the banks are ready to accept a price where rent and traditional mortgage are roughly similar and we're not there yet, apparently.

Ah, the holy grail of real estate investors!

The fact there are some knife-catchers in any given area is not proof prices can't/won't fall even further in years to come.

I think HARM, that my point is that people don't think of themselves as knife catchers. If you take my hood, houses don't turn over very frequently. Most of my neighbors have been here longer than I have, or nearly as long (12 years). So they buy in what is a solid neighborhood. In 15 years, this will all be history and the house will be worth what it is worth and for a lot of people nearly paid off.

So the decision to buy or not to buy, for normal people, is complex. Right now the mentality is "I'm not going to overpay". But what does that mean? It means the asking price better be around 20% less than 2 years ago, regardless of where it ends up in negotiations.

And pricing here is harder. Remember, I live outside of Boston. There aren't tracts of new homes with which to compare here. So the whole identical house in the subdivision problem doesn't exist here. And sq ft doesn't tell the story either, as location means more.

ipodius-Even the stock market is caring less and less. A couple of months ago some bank would announce a write-down and the Dow would drop 200 points. Now, it barely budges or even goes up, because the write down was "less than expected". There may be new crises awaiting, but they will have to be new, not more of the same to get attention.

Many of the people here quote census data and inventory numbers and yada yada. Folks, we are barely civilized primates. Our ancestors survived because they reacted emotionally; those who stood around studying the data got eaten. We carry the DNA of those who survived. The markets are driven by psychology, not by data. What is new we pay attention to; what is repeated follows the habituated neural pathways and is ignored.

Man that cocktail and dinner did me a world of good!

Even the stock market is caring less and less.

Yeah, you could've said the same thing late 2000. Didn't stop the downward trend to 2002 now, did it?

tj-YOU could've said the same thing in late 2000, but I didn't. I knew the market was enormously over-valued then and was out of it. Valuations are much lower now as are interest rates. I am holding a higher than normal amount of cash, but if the market holds the late Jan lows over the next 1-2 months, I will be looking to jump in.

jm-I was being a bit facetious regarding the town my wife is from, though what I said is true. I live in Upstate NY. I'm not sure that you can't get a decent house in Buffalo for $ 100,000. In my area (Albany) you can in a few places (Schenectady, Troy), though you would probably want to send your kids to private school.

@Darth Toll:

"They don't realize that this is the end of an era, and the beginning of something altogether different."

Namely, plunging ratings. No personal chef or private yoga instructor for Erin Burnett!

2kt-

Ha! You're right about the median. In the 60's, factory workers and barbers bought homes. I guess the equivalent today would be Walmart workers, etc.

When we get back to homes being cheap enough for a cashier to buy with a 20% DP, then we'll be on track.

The interesting thing is, inventory being what it is right now thanks to the home builders, it would probably make sense on a social level to just slash those prices to the point where those making under 25K could buy a home- I mean for real buy a home!- not this rent from the bank for a year or two then foreclose crap that we've been doing.

Which income? 44 million people in this country
make less than $18,500 per year, yet they are included in median income number of applied to home buyer pool? Why?

Man, you just don't get the point. "Which income" is irrelevant. The key is that the same numerator (median home price) and denominator (median household income) have yielded the same ratio (2.5 or so) over a time, period. When that happens, it actual means something.

If you can find a median homebuyer income going back as far as median household income then we could chart that and most likely it would show exactly the same characteristics... only at LOWER ratio. Why? Because the numerator would remain the same, but the denominator would of course be higher. Again, though, the change in the ratio over time would likely still hold.

Sebastian,

From here:

Realty Times - Charlotte, North Carolina Real Estate Market Conditions

I would have used median but the GCAR no longer provides this stat.

2kt-

The Federal Reserve got us into this mess. Hard to look to them as some kind of Font of Wisdom about what is a reasonable/sustainable sum for a person of a certain income to pay for a house.

Interstingly, they also insisted there was no such thing as a housing bubble up until about 6 months ago.

Judging by all the foreclosures, they were wrong about that.

Duh.

Come on, folks, don't be such wusses! Go out on limb with your predictions! House prices are not going down 50 % or 70 %, they are going down 800 % (or more). And stocks? Down 8000% at least!

Oh, and remember when I predicted snow last July? Well, guess what it's doing today? I'm a genius!

REOs in California selling 50% below peak values.....and heading toward early 1980s values...

if you live in a tract development plagued by foreclosures.....you are being dragged down into hell along with your neighbors.

get out while you can!
S