Pretty neat analysis. Seems like everything these days says now is the time to buy but I agree with this post that there is still more room for prices to fall. I still think buying houses is a huge risk at this point.

I agree. I’ve been pretty bearish on real estate since 2005, but you have to wonder if these folks hyping real estate as a “good buy” in 2010 somehow benefit from recommending it.

The best pro-real estate I’ve seen thus far was that when inflation occurs (due to quantitative easing), housing prices will skyrocket. Whether or not larger than average inflation, or hyperinflation, occurs, is still up for debate I suppose.

There’s an aspect to real estate that’s under-discussed. When you take all factors into account, it just about keeps up with inflation over the long term. Three factors:

1. adjust for size. i.e. don’t let the fact that in the last 30 or so years the median home has grown in size by about 1.5%/yr. The house measured is not the same house year to year, obviously.
2. Income tends to rise a bit faster than inflation over the long term.
3. A payment of say, $1000/mo will support a $136K mortgage at 8%, but $197K at 4.5%. So, with no change in payment, a buyer sees his potential for borrowing jump by 50% based on rate.

Now – when you normalize all of this, calculating the “hours worked” needed to pay for the median home, you find a nearly flat line at just over 40 or so hours of pay per month.

Given all of this, median pricing showed no bubble, in my opinion, the price bubble may not have burst were it not for the nature of the mortgages (liar loans, option ARMs, etc) which of course only helped drive prices up further.

Joe

Good stuff Matt. I’m still waiting for inflation to occur…seems like it’s going to have to wait until employment and some other economic factors start to improve.

Housing prices definitely will continue to fall. There is not enough underlying demand to support anything else!

As this chart illustrates, much of the increased demand was artificial, and the market needs to correct itself. This government intervention is only prolonging the inevitable, and making it worse as well!

But one of the fundamental components of the real estate market as it exists today is the repayment of a loan plus interest over time.

So when underwriting standards were lowered to meet a political agenda or a fee based Wall Street business model (e.g. securitization), you’re breaking that basic fundamental.

So median pricing bubble or not, the macro environment, sadly, is the bigger beast we have to deal with.

For the record, I’m not trying to argue or disprove your analysis (you’re always spot on), but just think cumulative effect of so many underwater geographic locations is a bigger concern.

Agreed. Government intervention is intended to pull the BandAid off slowly to alleviate as much short term pain (e.g. the delusion of recovering economy) as possible.

That is definately a eye chatching chart. You can talk and read figures all day but seeing like that says it louder. There is still a lot of inventory but prices are not falling of cliffs anymore.

Definitely! We can argue numbers all day long, but nothing is as eye catching as some good old fashioned “chartporn”.