I sure hope he's right, as should any sensible person in California. People need affordable housing, not an impossible-to-buy-into bubble.

Maybe greedheads think different.

Shorter Kevin Drum:

Wow, I hope that the dream of home ownership remains out of reach for everybody except for rich assholes!

Ethan: This has nothing to do with keeping home ownership out of reach. A 40% drop in home prices is really bad news for the economy on a lot of different levels. I'd really like to avoid a massive 3-year recession here in my neck of the woods.

Myself, I'd like a place I could pay off in 20 years with about 28% of my income.
When the average house needs an income of $110,000 to afford it, something's wrong.

Yes and no. There are a lot of sensible people who've spent the last few years in Cali just waiting to pounce on a $650k two bedroom house. We may finally get our chance. After watching idiots buy Escalade's with their refi checks while mocking us for renting, I'd say this news couldn't come a moment too soon.

So yes, a lot of people will be hurt by this. A lot of assholes. And a lot of people will be there to pick up the pieces.

Ghost town, Kevin? In SoCal? What's more likely to happen is you'll stop getting new neighbors every 4-6 months. And the neighborhood-destroying practice of 'property flipping' will come to an end.

On the other hand, I do agree that a 40% loss in price is potentially catastrophic from an economy and ordinary folks standpoint.

Yet from the other side again, if a family can get a home now for a reasonable price again, rather than hawking it up like some junk-bond leveraged buy-out, it could undo a lot of the damage done by the massively overpriced real-estate market.

Is it really going to be a ghost town? Perhaps the housing market is similar to the stock market.

Although it's not totally equivalent, stock prices drop based on what a buyer is willing pay and what a seller is willing to sell it at. I imagine the decline in housing prices is similar. However, where stocks are always owned, there's always the chances of foreclosure and houses defaulting to the banks.

The prices going down are what insures you that you WON'T be living in a ghost town. If people are less willing to pay for homes and prices DON't drop, that is when houses are left empty. It is the decrease in price that keeps people in the neighborhood.

If it drops 40%, we might be able to buy a house.

Heck, I'd even go for a condo, as long as the terms were right (and no one is living above or below me; I need my DDR and sunlight.)

There was no way apartments labeled 'condos' in the seediest end of our town were going to hold their $500 a square foot price.

This is what happens when we have created a bubbleised economy, Homes were artifically raised in price by some 72 tillion by greedy investors usind CDO's hedge funds could leverage 52 times what they actually held. Home flipping was profitable but thats coming to a screeching halt. The three flippers that have bought homes around me are stuck with them and now renting them out with little monthly, if any, profit.

Kevin,

any time you wonder why intelligent people don't trust progressives to run a government, or get excited about the idea of a Ron Paul, go back and reread the idiocy, proxy to moral evil, of what you just wrote, and the comments on it above.

We still need a real health care system and a lot of other progressive changes in this country, but it's fair to wonder who's going to get screwed and who's going to be the equivalent of the "fuck you all I already gots my house" contingent when we do ...

Where I live - a large Midwestern city - prices are down 15% in one year and reportedly headed much lower. We may be looking at the next Great Depression, compliments of the greatest bad check artist in history - George W. Bush!

As the payments on a home loan are twice what the market rent for the same is here in the SF bay area... That's not much profit.

One might even call it a loss.

Andrew: Maybe it might be because Kevin understands that as home buying prices drop, less people end up living in their own home under our current libertarian utopia of housing.

It's the opposite of rental prices - when rental prices fall, people spread out; when they rise, people double up.

But buying a home is predicated upon credit and future value. Without future value, there's no credit, and no credit means no home.

So yeah. I couldn't buy a house now if I wanted to: No bank will give a loan if they think the prices will fall further.

CA house prices have long been totally insane. A drop of 40 %? Sounds right to me. No one that I know would EVER consider moving to CA to take a job. The change in lifestyle to live in CA would be ridiculous.

The last 8 years will be considered a moment of financial, political, and moral insanity in 3 years. The high point of the Conservative Revolution has been the greatest disaster in American history. Conservatism is an internally contradictory "philosophy", and we will all pay the price for the insane stupidity of Bush and his controller, Rove.

I hope that a HUGE number of "flippers" get SERIOUSLY BURNED. The property speculation craze has done incredible harm to the inflation-prone areas like CA. If a huge number of flippers lost a huge amount of money, that would be very nice indeed.

A 40% drop? Since the economists comparing home prices to incomes and rental prices have estimated that both Southern California and Florida are over-priced by about 40%, that seems quite reasonable.

I'm not sure about prices in San Francisco. High as they are, how do they compare to incomes and rental prices?

But what's happened over the last two decades is that to keep the economy pumped up, consumption had to increase. Since wages didn't go up and the second household resident went to work in the 60's and 70's, the banks had to get laws changed to make second mortgages and refinancing easier. This has been fed policy since the S&L disaster.

The financial people and their tame politicians have been, as the British say, too clever by half, and proud of their cleverness. Now the bill is coming due and can't be put off any longer, even by the most clever of the financial people.

Only the upper middle class will have enough money to continue to pay their mortgages and up-keep, and a lot of people who are upper middle class today may not be next year.

Welcome to the results of the Reagan Revolution. This is the conservative paradise. Boom and Bust. Governments exist first to provide social stability. Guess why conservatives hate government? Boom and bust is NOT stability, but it is the conservative dream.

A 40% drop in Southern California and Florida home prices is pretty realistic. Enjoy the "bust."

Have to say I agree with the "correction is overdue" crowd. Yes, I own, yes it is fun to be sitting on over $500K of property, but who can afford these prices? And comparables in Silicon Valley are double.

As far as how low will it go -- I suspect in "interesting" places like San Francisco, Boston, and New York, maybe not that much more. My neighbor's a mortgage broker, never did sub-prime, still getting business, either trying to do deals to get people out of trouble, or (now) helping people from other countries buy property. If you combine the dip in dollar values, with the dip in the dollar, they are seeing some serious and interesting revaluations. Someone buying in Euros, sees all the dollar corrections, plus (approximately) another 13%. The Australian dollar has gained 15% in a year. As long as the volumes stay low-ish, foreigners will pick up some of the slack.

I sure hope the rest of the country is doing better than Southern California:

I don't.

Makes me wonder. I haven't read the specifics of some of the latest mortgage rescue initiatives and likely wouldn't understand the minutia if I did. However, the one I heard this morning on NPR has me puzzled. The government is trying to get banks to forgive everything owed beyond 90% of the value of a home. With the depreciation we're seeing what financial institution is going to be receptive to that? Admittedly their options are limited and none of them are good but this scheme seems doomed to die in the crib.

The problem is that once the correction is over middle class Americans still won't have the money to consume the world back to prosperity. America is no longer the golden goose. That is going to lead to instability in China and India.

As banks struggle to deal with non-performing residential real estate loans they are going to have less money to lend to well qualified small and medium size businesses. At a minimum that means small and medium sized business wont have the funds needed to expand as quickly they might to take advantage of export opportunities that have arisen as the dollar has fallen.

Doom and gloom everywhere you look.

The neighbors who will be losing their homes will have significantly worse problems than Kevin's dislike of living in a ghost town.

There should be about a 38% drop at back to the normal inflation curve... probably be a bit more from 'overshooting' on the way down.

There is an excellent 'must read' article (linked below)... from Harpers.

It absolutely hits the nail on the head and explains our current economic situation in very clear terms. Should be a headline post.

Buford sez: GO READ IT! (you too Kevin)

http://www.harpers.org/archive/2008/02/0081908

When the average house needs an income of $110,000 to afford it, something's wrong.

You'll need more than that. I thought the rule of thumb was don't buy anything greater than 2.5X your salary. You can't buy a fixer upper shack for 250K in So Cal.

Buford,

Create a new green bubble to save our asses from the housing bubble. What a concept!! Everything is smoke and mirrors.

This is just reality-based analysis. Don't you remember Bush's aide in 2004: "We're an empire now, and when we act, we create our own reality."

The Admin is creating new realities as we speak, so no need to worry.

I'm sorry for my friends who have lost equity in their homes. I have no sorrow and feel no pity for the greedy bastard speculators that inflated housing prices here in California.

I hope values fall even lower.

It looks like foreclosure arsons are on the rise. I was wondering when this was going to start getting some serious attention.

Why is a decline in prices in So. Cal. a problem? They were horribly over-priced, and many young people were unable to buy houses. If prices come down to more reasonable levels (measured as a multiple of earnings in the area), that would be great. Period.

"that would be great. Period"

Except for the poor buggars who bought during the bubble... and those who were looking at their home equity for retirement, and the coming economic collapse and the wars that will follow... and...

The real lesson here is that the effect of total deregulation is boom followed by bust.

Actually, 40% may be too low of an estimate. In Bakersfield some homes have dropped to 50% and we're nowhere near the bottom yet. Expect this to continue through 2009.

In SouthernCal I'm noticing corporations buying homes in residential areas and turning them into half way houses.

Also, I would think with such a weak dollar value there would be a rush of foregin buyers coming in to take advantage of the firesale prices. Must be they don't like getting stripped search by the airport police.

Also not great if you want to be able to move. Orlando price drops have been similar to CA's. Now I am stuck here for the foreseeable future unless I take a loss on my house. I was not a speculator, just came here for what I expected to be 5 years at the most for a good job. I bought a house instead of renting because I have 2 big dogs. Now I probably will never break even on my house.

I think what Kevin means by ghost town is a neighborhood of empty 'rental properties' and foreclosed houses from people walking way because they are now upside down on their mortgages.

There is an upside for people who could not afford homes at the inflated prices. But as one poster said, the mortgage market for those people is probably dried up too.

"Myself, I'd like a place I could pay off in 20 years with about 28% of my income.
When the average house needs an income of $110,000 to afford it, something's wrong."

Posted by: doug r on March 14, 2008
------------

This is a great way of looking at it.

What is the median income?
What's the median home price?

Using doug's simple math, does it make sense?

Though, you might want to consider a 30-year mortgage time period. I think that is/was more standard.

If incomes are at $50,000 and you hope to use no more than 25% of your income that's $12,500/yr for 30 years which is $375,000 for a home price (excluding interest costs). what's the median house costing these days?

If you go up to 40% of income then it's $20,000/yr * 30 years ==> $600,000

Can people get good housing for these prices?
what about people at the lower end of the pay scale?

If you make $25,000 and pay 33% (1/3rd) of your income for housing then it's $8,333/yr * 30 years ==> $250,000. Can they afford that?

If not the prices have to drop or you'll have massive problems, despite mortgage lenders and real estate brokers having to do without a new Mercedes-Benz every year.

The Laffer curve suggests that as home values fall, you actually have more equity.

Also not great if you want to be able to move. Orlando price drops have been similar to CA's. Now I am stuck here for the foreseeable future unless I take a loss on my house. I was not a speculator, just came here for what I expected to be 5 years at the most for a good job. I bought a house instead of renting because I have 2 big dogs. Now I probably will never break even on my house.

I've got the flip side of that problem. I'm in the Midwest and lost my job when this mess started last year. Got two good job offers-one in Boston and one in Los Angeles, but nothing worth a damn here. Even though the bubble was more modest in the Midwest, potential buyers are sitting on their hands waiting it out and the market is flooded with foreclosed property. Instead of people defaulting on $400K, they are defaulting on $125K. Mortgage rates are going UP not down because the lenders are afraid to make loans since there isn't any bottom seen in the market yet.

Prices in that area should fall around 60% from their peaks.

When house prices are out of alignment with median income, this is inevitable.

And good riddance to idiotic prices and the idiots who pay them.

Prices in that area should fall around 60% from their peaks.

When house prices are out of alignment with median income, this is inevitable.

And good riddance to idiotic prices and the idiots who pay them.
Posted by: Mike on March 15, 2008 at 4:18 AM | PERMALINK

How compassionate of you. Liberalism is an oxymoron.