I can appreciate that you will not be calling a bottom in housing prices. That shows wisdom to know that some formula is not going to indicate the exact point when confidence will be restored. On the other hand, I am amused that in your (seeming) belief that when we finally make that bottom, that the inflation rate will 3.1 percent. Do you really think this is a reliable number going forward, or are you just using this as an example because that is the historic value for some time period, and you are not wanting to make projections outside your niche?
I am just asking because it is obvious that inflation this year was much higher than that, and with the continuing negative surprises, it seems it is only going to get worse.

I used 3.1% because that is the average rate of inflation since 1983, and it is very close to the rate of inflation going back as long as records have been kept. It is certainly possible that we will see a bout with hyperinflation before this mess is over with. Right now, we are seeing deflation due to all the deleveraging. As the FED cranks up the printing press, they may overdo it and create a spike in inflation. Ultimately, the easiest way to stabilize the housing market is to allow wages to grow 5%-10% a year for a few years. Of course, once inflation gets going, it is very hard to stop.

Inflation doesn’t matter as much as wage inflation. I think we’d all be lucky to see 3.1% wage inflation.

I think we may be in for a period of wage deflation as money becomes tight for government and pressure will be on to cut health care costs, lower reinbursments lead to lower salaries.

I’m in a period of wage deflation right now (shakes fist at Boeing strike).

The only thing keeping us out of a hyperinflation is the fact that incomes have not inflated. 

If they do, our currency will become obsolete.

Count your blessings they have not.

If you missed this story, it pretty much sums up the whole situation in 12 minutes.

http://www.cbsnews.com/stories/2008/10/05/60minutes/main4502454.shtml

Rents are going DOWN!

Why?

Because our real estate dependent economy cannot support the number of growing vacancies.  This will expand in the coming years, as people look to start over in more affordable communities.

I will not write a post saying “the bottom is here.”

Why not? Jim Cramer already knows the date of the bottom: June 30, 2009.

If you ring a bell at the bottom, maybe you can be on TV too!

The financial gurus and so-called “advisers” are the modern day soothsayers.  Cramer is the money-evangelist of this decade. I wonder how much “Cramericans” have lost already?

Article in today’s wsj editorial page:

“Not Everyone Should Own a Home”.

Finally someone has the courage to say the obvious in print.  Too bad it is not on the editorial page of the USA Today where the campaigns could use it.

I long for a leader in this country to look us in the eye and tell the truth.  A “wartime” leader who is willing to concede that we will all have to sacrifice if this country is to regain its footing.

http://online.wsj.com/article/SB122325772150706655.html

A friend of mine owns a few appartments here in Jacksonville Fl.  He normally has 95+ % occupancy rates.  However in the last year this has fallen to 85 % or so…  he says his normal customers are staying home instead of finding an appartment.

Our modern day “leaders” will never use the word “sacrifice”. They consistently recite the mantra “we are Americans and always get through the bad times”. We DO get through the tough times, but only after making many sacrifices. We made it through the Depresion and WW2, but our nation had to pull together and sacrifice. We are not going to make it through these times just because “we’re Americans”, we will only make it through if we are willing to suffer adversity, come up with a gameplan, pull together as a nation and hold the line during the battle. That is what I would expect my leaders to tell me.

One important consideration is how wage inflation will change going forward.

1984-1998, it was 3.2%

1999-2007, it was 2.7%

So during the past huge economic boom, wages actually slowed their increase 0.5%.

All indications are that the next few years should show even more slowing.

What do the projections look like using 4%, 3% and 2% wage inflation?

U.S. Wage Inflation 1984-1998
Source: U.S. Bureau of Labor Statistics
1984 = 3.50%
1985 = 3.50%
1986 = 1.6%
1987 = 3.60%
1988 = 4.0%
1989 = 4.8%
1990 = 5.2%
1991 = 4.1%
1992 = 2.9%
1993 = 2.8%
1994 = 2.5%
1995 = 2.9%
1996 = 2.9%
1997 = 2.3%
1998 = 1.3%

1999 = 2.2%
2000 = 3.50%
2001 = 2.7%
2002 = 1.4%
2003 = 2.2%
2004 = 2.6%
2005 = 3.50%
2006 = 3.2%
2007 = 2.9%

Good article. Let the good times roll until the reaper knocks on your door at 3AM, then start barricading the doors instead of fixing the original problem.

A Battle?
A War?

Cool.

Let’s INVADE and ANNEX MEXICO…

Think about it.

(1) Once Mexicans become US citizens we will solve 90% of our immigration problems.
(2) Lower taxes on tequila and Pacifica beer.
(3) Real cool beaches down south.
(4) Once we fix their water systems we’ll be able to drink the water without Montezuma taking his revenge.
(5) We’ll get lots and lots of oil.
(6) One third of the US already speaks mexicanpish .  So what’s if it comes one half?
(7) Building intestates in Mexico will help our economy.
(8) The teamsters won’t complain about Mexican truckers.. instead they’ll unionize them.
(9) Most mexicans will be happy to be part of the USNA.
(10) Our politics will be more interesting.  Think Obama, McCain and Don Panchito.

Ole….

I just wanted to stop by and say THANK YOU for taking all this time in posting this valuable information.  Could you believe I’m actually starting to understand some of this! 

I hope everyone’s off to a wonderful week!

I’d like to see a chart that shows home prices, DTI ratios, underlying inflation and average home prices.

IMHO if the builder had not been inclined to build McMansions and instead focused on the 1700 sq foot homes for entry level and 2500 sq foot for upmarket prices would not have escalated so fast.

I saw over the weekend that Lennar is returning to building smaller homes.  This is good for affordability.

Perhaps the homeowners that are most risk are the once that bought the biggest houses during the bubble.  Those who bough smaller might be able to manage.

OOOPS…that should say: 

I’d like to see a chart that shows home prices, DTI ratios, underlying inflation and average home SIZES…

IR,
With all the parallels to the Great Depression being drawn, I’ve been mentally comparing life now to life then.

It seems to me that, objectively, our quality of life easily higher in 2007 than it was in 1928. The relevance of this for housing is that it makes me wonder about prices and valuation in the context of underlying utility, rather than market valuation.

In essence, what I’m wondering about is putting historical price and income ratios in context.  For example, in the 1960s, the marginal tax rate at the top was REALLY high….does that have implications for DTIs? Is a better measure debt-to-DISPOSABLE-income, or is DTI better because of the tax benefits of mortgages? In the more modern context, were people paying 4.1*income at the last bubble, but getting a “better” or “worse” house than 4.1 will get them in 2010?  Or does none of this matter for the math to work out, so it’s all just angels dancing on the head of a pin?

I think I’m on topic here because it seems to the fundamental point of this topic was the underlying causes of prices, which I find very interesting from an academic standpoint.

It is nearly impossible to measure the debt-to-disposable-income because of the myriad of changes to the tax codes and the different rates. In theory, higher marginal tax rates coupled with the home mortgage interest deduction would make houses more desirable, but there is the offsetting impact on disposable income to deal with. Many of these rules and ratios were thrown out during the bubble. For lenders these constraints stopped them from originating mortgages and making money. For borrowers, they could supplement their disposable income through mortgage equity withdrawal, so extremely high DTIs were no impacting disposable income. That is one of the reasons the crash is going to hit the economy hard. People became reliant on MEW, and now that they actually have to make these huge payments from their incomes, they have little or no disposable income. The end of MEW and the borrow-and-spend lifestyle is going to prompt a great many “walk aways.”

Irvine Renter,

So when do you think it will be the best time to buy a house?

2010 holiday?
2011?

I suspect there will be a *real* wage deflation overall where people are actually making less than what they’re making before. Whoever currently has no debt (including mortgage) and is sitting on a pile of cash or liquid investment that’s not dropping like crazy (such as MM/CD or investment grade bonds) will be ahead of everyone else who’s just trying to make ends meet.

Even I didn’t foresee this huge credit crisis where the yield spread has increased dramatically to the point where it doesn’t make sense for new money to be piled into stock market or risky investments when you can get the same return (8% pretax) on tax-exempted money market funds.

Companies and individuals with jobs, I’m afraid, will spend the next decade trying to pay off this yield spread that will not subside even with a pending rate cut by the Fed.

You don’t have to worry about the housing price Mike. As far as I can tell, the housing price will end up like the Nikkei or Nasdaq index where it will stay down for a while. IR’s analysis would be right on the money except for a fact that inflation is no longer a factor due to wage and asset deflation. Hence, I doubt the 2006 price will be seen again in 2023 as predicted by IR.

But then again I may be wrong.

That is my guess right now. We will be close enough to the bottom by then that precise timing isn’t going to matter a whole lot.

And the government wants everyone to have free healthcare???

Dear Mr. Bernanke,

Time to raise rates.

Sincerely,
A guy that wants a premium for taking the risk to lend.

Yeah but you also predict a slow rise so that 2006 price will be seen at 2023.

I really doubt that (meaning I don’t think we’ll see 2006 price even on or after 2023).

I also believe that banks will no longer lend buyers offering prices that they feel are not warranted even if the offer prices are way off the seller’s LOL asking price (i.e. offering $400k on a $500k asking price). Perhaps I’m really negative now but it just doesn’t make sense for banks to take on depreciating assets as collaterals anymore.

When people either move in with friends or parents, the number of people per household rises.  Nothing stops the number of people per household from rising substantially, and thus creating large vacancies rate for both owned and rented units.

I hate to tell you this.  When you look at academics who are able to tell you what the real data is, and what is really going on, they often completely mangle what you should do about the problem.  It is easiest to get the data right.  It is harder to interpret its causes or meaning.  The hardest thing is to make recommendations about how to make things better.

While it might take until 2029 to get to the same price level, people who bought at the peak and did not lose their homes would have amortized some of the loan sooner.  They might get out of underwater status a few years earlier.

That is so true. I was amazed as I went through the academic literature by how many academics looked right at the data, created graphs clearly displaying a bubble, and yet they completely missed the big picture. Some of the papers written at the peak that claim the price increases were justified by fundamentals will make for amusing historical reading. I hope the authors did not need their credibility for future publication.

Great blog.  It would be interesting to see similar charts for different metro areas.  Somewhere like Vegas might not get back to “even” until 2040.  Somewhere else, like Portland or Charlotte,might recover in 2015.  (All dates pulled from backside for illustrative purposes.)

Excellent segment—thanks for the link.