No Sign of a Bottom

One question that keeps popping up as the meltdown unfolds is: "When is it all going to end?" In truth, that question is almost impossible to answer, because it depends to a great extent on the actions of some key players, including the Federal Reserve and the Washington political establishment.

Even so, given that many of the current woes stem from the plethora of distortions that developed in the residential property market, it seems a good bet that a true turning point will only really be seen when home prices fall back to levels that have some link to economic reality.

In "Mind the Gap: Home-Price Downside," the Wall Street Journal's Scott Patterson highlights a statistic that suggests we still have quite a ways to go before we reach that point.

The economic balance hangs in large part on how much further home prices will fall. A look at one important measure -- the relationship between home prices and household income -- suggests we might not even be halfway there.

Over the long run, home prices and income should march along the same path. As households earn more, they can afford to pay for more expensive homes.

But the two can get out of whack. During much of the 1990s, incomes grew faster than home prices. The landscape shifted around 2000. From the start of the decade through the mid-2006 peak, home prices nearly doubled, thanks in part to falling interest rates. Over the same period, income per household rose just 26%, according to Moody's Economy.com.

In certain states, the disparity was extreme. Seven states, including California, Florida and Arizona, saw annualized growth in home prices outpace income growth by 10 percentage points from 2002 through 2006, according to housing expert Thomas Lawler.

The difference between income growth and home prices has started to narrow. Home prices were down 10% through the fourth quarter from their peak in mid-2006, according to the S&P/Case-Shiller national home-price index. But to bring prices in line with incomes, they will need to fall further. If incomes continue to grow in the next year as they have in the past decade -- probably an optimistic assumption -- it would take a 9% to 12% drop in home prices to bring the two measures in line with each other.

In states that saw bigger housing bubbles, the correction will be more severe, says Mr. Lawler.

It is also possible that home prices will overshoot on the downside, just as they did on the upside. Goldman Sachs economists say prices could fall another 15%. Merrill Lynch economists say they could drop another 20% to 30%. Both banks have been more bearish than others on the economy -- and so far look correct to have been so pessimistic.

Comments

[Al]

The concept that housing prices should be in line with incomes is important. Clearly things moved way beyond a respectable 3x median incomes. On the way back down, however, we have to keep in mind that recession will lower the median incomes. For instance, if median income is $60K currently, then the target median home price would be $180K. However, if median income drops to $50K due to the recession that we're not in (he he), then we're looking at $150K prices. Let the death spiral begin.

[Bruce]

Will someone please file and emergency injuction to stop the Federal Reserve.

stop the FedRes? lmao we haven't even had the first plague....

stop the FedRes? lmao we haven't even had the first plague....

[Cash and Goods in Physical Possession is King]

There will not be a bottom until the sheep get so discouraged and disgusted with Wall Street that the vast majority of them will be deathly afraid of both debt and trusting Wall Street firms and banks with their money. The majority of the investing public is already too young to remember the 1970s environment, let alone 1929 to 1950. Read some of Jim Grant's books on the history of credit in the U.S.

Multiple large players and a large number of smaller ones need to be allowed to fail and be liquidated. All of these excesses must be allowed to be eliminated through bankruptcy / default. Inflating through bailouts only buys time. This too must happen before we see a bottom.

Finally, all of the idiots, frauds, and criminals must be exposed as such and silenced by being exposed to the light and oxygen of reality. This also includes the role of the financial media in way too many of the lies and frauds.