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Here is an example from the "real homes of genius" website:
In 1998 this house sold for $78,000. Sounds reasonable. 1 Bedroom, 1 bath, 551 square feet. In 2005, a year before the market peaked, it sold for $299,500. The current owner is trying to sell it for $349,999 (dropped from 370k). If they sold this house at 349k, the payments would be $2,465/month. Yet in the city of "Bell" california, the:
Average/Household Income: $41,464
Median Rent Price: $900
The price historically should be triple household income, or about $123,000. The fact that it hit $370,000 in a pre-crash economy shows the size of the speculative bubble. This house, with emerging India and China taking hold of the world's economic rein (they are still growing at double digits) will NEVER SEE $370,000 again.
In fact, it won't see $123k in a long time because of two things. 1) property values 'stabilize' to triple household income. That's after the crash panic. 2) Household income goes down in a prolonged, severe recession or depression as unemployment skyrockets. So say that 10% of the people lose their jobs, and wages go down 10% because of oversupply. Take that average household income to say, 32k, and this house will stabilize at 96k. Now that makes sense. But when that happens, the bank won't be able to give it away for the simple reason that PEOPLE BUY REAL ESTATE ON THE ASSUMPTION IT'S GOING TO GO UP IN VALUE. Nobody in their right mind would buy knowing that in a year it's going to go down in value - or they'd wait a year, right?
If you want to know what prices are going to be like in your neighborhood in about two years, take the U.S. census data for your city (google it) and multiply the average household income by 3x. Now take about 20% off that to reflect the glut in inventory. This is how you can find out what your house will be worth in 2010.
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So I DID google it....for Albany, GA the average household income is: $28,639 (as of 2003, the earliest data I could find). Multiply that by 3x=$85,917 minus 20% = $68, 735. So Fong is saying that your house (if you live in Albany) will be worth no more than $70,000 by the year 2010? Am I right on that? Does that sound right to you? I'm skeptical that things would get THAT bad...but then again, what do I know? What do YOU think?
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10 comments:
I am amazed at this mans knowledge and even a bit frightened. You see we live in FLINT. . . need I say more? There are, in just the township around our little city, over 1000 homes for sale, many have been for sale for over a year and I am sure there are many more to come. I was just sharing some of this mans info with my husband and one of my boys at the dinner table tonight. I guess if you know you are going to stay in your area now would be a great time to buy for the simple fact that houses are definitely CHEAP!
Yes, except that in a year the prices may bottom out even MORE and even though you might buy cheap NOW, it'll still be money lost whenever you try to sell in a few years...unless the market recovers.
its a very supply and demand economy...Next essay on Austrian economic theort1!
Short answer - NO
Real Estate markets are not the same nationwide. All of our "news" develops on the west coast or up north were the markets are that high. That house would be worth about $70,000 TOPS in da beny right now. Friends just built a 3000+ sq ft home here that would appraise for the same 350k - 400k that the 550 sq ft home in California is listed at. To me, it's apples and oranges.
I don't doubt that we may feel the effects, but I don't think it will be as severe as your Mr. Sunshine claims.
Of course, I no nothing about economics. I'm probably completely wrong.
I think what he's saying, if he's correct (and i don't know if he is or not) is that the AVERAGE price for homes in your area will be 3x the median household income, which could be correct - could it not? That if the economy stumbles, and stays deficient for a significant period of time, that the average price of homes in albany, based on the median household income, would be approx. $70k, wheras right now the median price for a home in albany is $100k (based on moneymagazine.com --> http://money.cnn.com/magazines/moneymag/bplive/2006/snapshots/PL1301052.html)
If a significant recession truly is on the horizon, that seems plausible to me.
Thoughts?
Missing link... What Gary leaves out of his equation is the makeup of the populations of China/India... They are still in the age of the very rich and the very poor with no middle class (i.e. consumers) The world needs the US economy for 1 reason... we buy most of the stuff that other places in the world make. What is hurting our economy now is (relatively speaking) we don't make anything anybody wants anymore...
Unions have brazened a manufacturing workforce into a mindset of entitlement (good pay, ridiculous benefits for subpar work) The slightly older readers of Tammi's blog will remember when foreign cars from Asia were junk. They took note, improved quality beyond US work and voila... Toyota is poised to take over for GM for largest car seller. All because GM is handcuffed with with a long string of UAW demands that has pushed them to a point that they are no longer competitive.
The Chinese are smart as well. They don't allow most US companies to expatriate (fancy word for take out) profits produced by manufacturing in their country. This ties up all those labor gains US Companies make by using their cheap labor to reinvest into their country. Smart!
Just a few housing thoughts... Fong's thoughts are no new ideas... For years the rule of thumb is housing costs should never exceed 1/3 of your income. A more conservative rule of thumb is 1/4. But banks (and the suckers who go to them) have loaned people way past these old rules. I was amazed how much the bank offered us last time we bought a house. I wanted to ask if they had looked at the same info I had given them or if they had mixed it up with Mr. DeVos. Banks giving away $$$ has caused most of this housing bubble. It allowed sellers to ask for the moon and buyers to be able to give it to them.
Enough for now... soapbox is tired....
Sorry, one more thought re: Chinese and expatriation... Mexico doesn't do this (see NAFTA) and that is why we can have our cake and eat it too as Americans...
Okay, so I think that Mr. Fong played a little switcheroo in the paragraph talking about 10% in layoffs and 10% salary declines. He stated that the average income for the area would then become somewhere in the range of 32K but by my calculations, a 10% drop would bring median income closer to 37K--this is a big difference. The house value would then drop to 111-something, instead of 96k.
Second, I am probably wrong in my calculations; I try to understand this stuff by my eyes start to bug out, I hear voices and everything goes black. :0)
Third, Rob, good points.
One other snippet, I saw a graph tonight of the areas that are being hardest hit by the housing slump and the foreclosures--they were all along the coasts of the U.S. Having lived in FL during the housing boom, I know how ridiculous homes INLAND were being priced, let alone along the beaches. Even though banks were lending outrages amounts, the average Joe still could not afford these "vacation" homes. I am of the opinion, b/c of this, that mostly the upper class will get hit by this the hardest and most of them can recover. Does this make any sense?
California and Florida...such crazy housing markets.
combining Rob's POV...Which is exactly correct with attempting to pay for global hegemony or more aptly named; global energy policy, has created what will become or has become a growing economic crisis...There is a very steep price for superpower status...Rome tried to maintain their empire and collapsed. Englands empire became too vast and they chose to "liquidate" and retreat to England. We cannot continue to prop up the worlds crisis' on our current tax structure. Also, you cannot dismiss our immigration policies
http://www.youtube.com/watch?v=n7WJeqxuOfQ.
and our educational system, social promotion, and brain drain. If the ecomomy is global, so than is education. This problem is almost 60 years in the making too.
In conjunction with Dan's comments about us "propping up the world's crises," I refer you to Cameron Conant's blog about our healthcare problems. One of the reasons for our pricey prescriptions is b/c we basically subsidizes many other countries shortfalls to adequately fund the full price of research, development and approval of pharmaceuticals. It's an interesting blog post that's makes such clear sense. We've personally been self-insured, insured with catastrophic only, non-insured and currently employer-insured but they don't pay for routine stuff which is what we use most. It frustrates me to no end. Ugh, just read the blog post and maybe I'll write my own blog post instead of using your comments section. :0)
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