The current real estate bust may last a bit longer than people hope…
An article I read recently from the International Herald Tribune. It was titled “Soft landing unlikely for the housing slump” by David Leonhardt of the New York Times. It made so much sense that I’m wondering when the next “opportunity” to buy. Despite all the efforts of the Federal Reserve in the United States, there’s one unescapable fact and it’s something I’ve been preaching to my students: prices of real estate have outpaced incomes. Let’s be frank, but if you don’t have the money to pay for the housing you buy, you simply will have to give it up to foreclosure or sell it to some Joe or Joanna quick enough that they don’t realize they’re going to have the same problem soon. It just took a matter of time before the current Ratio of Median House Price to Median Household Income got too high. It’s at…
…over 4.0 and close to 5 times (median house price over) the median household income. Since “the 1960s through the late 1990s in the United States, the median home cost roughly three times the median household income. ” With the recent numbers starting from a little before the year 2000, it has climbed to about 4.5 times the median household income. You can only artificially support the prices of the homes with other forms of long term financing options and other creative forms of financing these expensive real estate purchases.
It’s sort of like credit card debt. If you start building the debt to an amount higher than you can handle the monthly payments or can’t earn enough income to pay off the entire balance, you will eventually default on the debt unless you’re able to grow your income high enough to cover it. However, not everyone can beat the odds. Life is a zero sum game where some are gaining and others are losing. So, even though some are able to leverage their abilities and finances to buy more and more real estate, there is some Joe or Joanna who can not. Thus, the crash…
We’re going to either have to see income drastically rise or prices drop heavily in order for buying to pick back up, at least on a national basis. There will be places like Seattle, which was mentioned in a previous post, that are still relatively appealing and perhaps the income in the local Seattle area is higher than the national average. My personal belief is that Seattle and the Northwest unless we have another ice age soon will be one of the most attractive areas to buy over the long run due to the beauty, the fact it is so clean, the entrepreneurial activity and the weather even though people complain about the rain. Seattle simply has the best summers in the world maybe equaled by two other larger metropolitan areas of Portland and Vancouver, B.C.
Nevertheless, let’s see
**statistics are from Freddie Mac; Office of Federal Housing Enterprise Oversight; Bureau of Labor Statistics; Moody’s Economy.com; and the National Association of Realtors.