Falling Home Prices in U.S. – How far?
by Glen Hiemstra on 19/12/08 at 3:34 pm | 
In the fall of 2007 I spoke to a housing conference, and argued that the issue about to confront real estate in the United States was not so much the sub-prime mortgage debt crisis, though that was going to be huge. Rather, I suspected, the underlying issue is the severe mismatch between how much houses have come to cost, and how much average people earn. This problem is not going away, and is not part of a normal business cycle. In the U.S. we have simply built too many houses that cost too much.
Prices are coming down of course, and have been for 18 months. How far must they decline to reach a reasonable balance? While for my own benefit I would hope it would not be much – I will be the victim of home equity falling as much as the next person – but I do think that a 20% decline may not be enough.
Here is recent evidence from one of the premier real estate blogs that I know, the Irvine Housing Blog. The writer tracks what is happening with home prices in Southern California mostly, with many sad examples of sales at liquidation levels. A couple of blog enries ago, he produced this chart, suggesting that prices may have to come down nearly 50% in order for prices to match actual economic realities.
Housing Prices Likely to Fall
Click for Larger Image
Read the whole entry and see what you think. Not out of the woods yet.
Print This Post
Wayne
Dec 20th, 2008
Glen,
I am a former Real Estate Broker and have long followed the Texas Real Estate market. I would not be surprised if we see a 50% drop in the Austin area.
During the S & L crisis about 20 years ago, I did a study for my employer and found that Austin residential real estate prices plunged over 47% and the over all rental market dropped over 50%. For several years there were stongly positive cash flow rental properties on the market that could not be sold at any price. My wife and I did very well during the next ten years just on the basis of this study.
During the last 10 years it has been impossible to purchase any form of rental property that actually worked from a positive cash flow viewpoint. So we have been out of the market.
I havent done it yet, but I think it would be very instructive to do some real research on that era and the S & L crisis. This situation is obviously worse and likely by a very significant amount. But I believe that such a study could give us a measuring stick to work with.
regards
Wayne