Using a phrase like “too expensive” would seem to be subjective. But compare median house prices with median income (via Patrick). If people’s incomes aren’t climbing, how can they afford so much more house? (Click on the image to see a larger version of the chart….and the back button to return to the post)
This is a very common argument peddled by housing bears. Home prices have to fall to re-establish their historical relationship with median income. (I’ve made the argument myself on this blog). Then I went back and looked at interest rates:
Maybe I’m missing something here, but it strikes me as obvious that house prices relative to income were lowest in 1982…interest rates were 18%!
With a fixed rate 30-year mortgage of 18%, a $2000 monthly payment will buy $132,000 worth of home. Cut the interest rate to 6% and the same $2000 payment will buy $334,000 worth of home.
In this example, home prices may be higher, but the total cost of the home purchase–using only price and mortgage interest as inputs–is the same.
While I agree overall that house prices have to fall, I’ve become skeptical about conclusions drawn from the first chart above. The fundamental flaw–you probably know where I’m going with this–is that it is based on a home’s price, not the total cost of home ownership.
So an important consideration has to be, where are interest rates headed? If mortgage rates stay around 6%, then objectively-speaking, house prices should remain well above the “historical” relationship with median income since below “average” interest rates would support above “average” prices.
And yet I certainly wouldn’t argue that low interest rates will keep prices from falling farther nationally. In those markets with exploding inventories (the Inland Empires and McHenry Counties and Sarasota) prices are sure to keep falling until inventories have returned to normal.