Falling Prices

Two good quotes from Wednesday’s news. The first from the NYT Op-Ed page:

While the bubble was inflating, self-serving explanations were offered for why traditional formulas of home valuation no longer applied. As it turns out, the laws are still in effect. These traditional measures, like the relationship between home prices, rents and income, indicate that prices need to fall at least 30 percent more nationally. The sooner this balance is achieved, the sooner lenders will again commit capital.

30%? That seems to be a common number being thrown about. As the quote mentions, historically, home prices have been tied to incomes. Makes sense right? Folks spend a portion of their income on housing, as they do food, electricity, transportation, etc. As incomes rise, people are able to spend more on houses and prices rise. Marketwatch published an interesting article noting that median home prices are currently 3.5x median family incomes, down from a recent peak of 4.2, but still well above the average of 2.8x seen during the period 1984-2000. And 2.8x is the AVERAGE, meaning there are times when the number falls BELOW the average, as in the 1970s, when the number fell to 2.3x median income. It’s another 20% down to 2.8x from 3.5x; which would be a 40% fall from the peak. Incomes could rise, though who thinks that’s likely to happen with the economy teetering on the brink of recession?

That brings us to our second quote for Wednesday, this one from the Journal:

Home prices in 10 major metropolitan areas in October were down 6.7% from a year earlier, according to the S&P/Case-Shiller home-price indexes, released Wednesday by credit-rating firm Standard & Poor’s. That exceeded the previous record year-to-year decline of 6.3% in April 1991, when the economy was emerging from a recession.

So we’re well on our way, with home prices down nearly 7% in the top 10 metropolitan areas as of October.

Anyone else remember the folks that said housing prices “never” decline? That immigration would keep housing prices going up? That, for instance, boomers retiring would always make Florida real estate a good investment? I do.

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