Saturday, November 05, 2005

"Where ignorance is bliss, 'Tis folly to be wise"

These be the facts:
  1. House prices have been increasing 15-30% per year for the last four years or so.
  2. Affordability is at an all time low. So low in fact that people have had to resort to IO and ARM loans and other crazy things to buy a house. Affordability is so bad that some households have resorted to housing three generations under a single roof!
  3. Interest rates and the ARM rates are up like a half of a percentage and continue to rise.
  4. The mortgage related tax deductions are being considered for a major overhaul.
  5. Salaries and wages are essentially flat over the same period during which house prices are doubling and tripling in price.
  6. Every increase in interest rates lowers the maximum amount that an individual can afford to borrow.
  7. Lending standards are finally being reigned in.
  8. Officially acknowledged inflation has been more or less constant at around 2% even though the cost of everything (except for what goes into the calculation of core inflation, naturally) has been going up and up.
  9. The price of energy is going up and is not expected to retreat. We are told to expect a 70% increase in our natural gas bills this winter.
  10. The baby boomers are starting to retire and we are told that they will be wanting to unload their inflated houses so as to fund a luxurious retirement.
  11. Rents are so low that they cannot recoup mortgage costs.
So what is going to happen next?

Either wages/salaries increase relative to house prices so as to restore affordability, or house prices fall to the point of restoring affordability. I seriously doubt that we are all on average going to get a 200%+ increase in our salaries.

So unless you believe that we are living in another "New Economy" or "New Paradigm", house prices will fall.

So the real questions to ask are when will house prices fall and by how much?

If prices fall then they would have to fall by about 47% to restore affordability to its historic trend line.

3 Comments:

Blogger marin_explorer said...

One more statistic I'd like to add: Populations in Marin towns are flat or in decline. If prices increases are actually due to more demand, it's certainly not from people moving here.

Here's are some figures, showing 00-04 change:
Belvedere: -1.83%
Corte Madera: 0.79%
Fairfax: -2.24%
Larkspur: -1.87%
Mill Valley: -1.92%
Sausalito: -1.49
Ross: -1.55%
San Anselmo: -2.21%
San Rafael: -1.04%
Tiburon: 0.07%
Novato (the exception) 2.93% (due to affordability?)

And, they are building more houses in Marin.

Nov 5, 2005, 10:43:00 PM  
Blogger sf jack said...

"If prices fall then they would have to fall by about 47% to restore affordability to its historic trend line."

***********

So what does that say about Marin housing?

A deflationary period ahead?

The favorite line lately is "flat; it's gonna be flat."

OK - flat. For how long? In a low inflation environment it would have to be flat for a *very* long time to get back to the trend. A decade at least.

Does this then mean houses should go down in price?

Rationally - yes. But if I've learned anything lately, rationality has left the building.

Then again, maybe that same behavior will drive prices below trend.

Now - that would be interesting.

Nov 6, 2005, 7:16:00 PM  
Anonymous Anonymous said...

I was speaking with two families today who rent in Marin. One family is in non profit and the other is in medical services. Both families will never be able to buy a house. It is really sad because these are really good people.

What happened in Marin?

Nov 6, 2005, 8:19:00 PM  

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