Monday, April 23, 2007

What Goes Up.....

I wrote this April 23, 2007, but forgot to push the "post" button. [Alas, the Bubble Buster is gone, but Dr. Housing Bubble Blog is doing great analysis. Les Jones has a great chart of 1890 to 2007 housing prices]:

Housing prices are about to crater.

The Bubble Buster does a great service to present 1975 to 2006 inflation-adjusted housing prices and the [mortgage] "payment-to-income ratio" for a large number of US cities.

This history of out-of-control prices and out-of-control willingness to sign up for mortgages eating more than half of incomes in some cities is astonishing.

Interestingly enough, not every city has participated in each blowoff.

Let's start with the facts on my home area, Los Angeles. Look at the graph at the bottom.

As I see it, the key points for Los Angeles are:

1) Price: The inflation adjusted home price was $125,000 in 1975 vs $575,000 in 2006, and

2) Somehow, homebuyers have agreed to pay more than half of their incomes (at least until they default) on mortgage payments.

There have been three housing price peaks in three decades: 1980, 1989 and 2006.

1980 was mild, 1989 a mountain, and 2006 a volcano.

If the clean-up of 1989, lasted seven years until 1996, how long will it take until the new bubble pop hits bottom? 2013?

If the 1989 prices returned to pre blow-off level, shouldn't 2006 prices return to 1996 prices?

Insanely easy credit provided by government programs allowed land owners and the real estate/mortgage industry to dupe buyers into purchases they could never afford.

With nothing-down loans, why shouldn't those with nothing to loose sign on? They aren't irrational. There is a chance of an upside and no downside.

So, who loses? Whoever guaranteed the loan, the taxpayers.

Back again in 2011: I think the all measures to delay prices returning to historical norms have merely delayed the inevitable. The 1989 to 2006 correction took 7 years. Add a three year penalty this time for government delay. We arrive a correct real estate values in 2016.

You cannot stop the inevitable.