How to save the housing market

Posted: February 22, 2009 in bailout, capitalism, finance, foreclosure, greed, housing, waste
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Okay, in the past two years foreclosures have been at record levels, and people are losing their homes in droves.  In January of 2008, foreclosures were up 57% over the previous year, and the crisis shows no sign of slowing down.  Our usual responses to crisis have had no effect, but then, throwing money at a problem rarely solves it.  You need a plan first.

So, with more and more families facing foreclosure and homelessness this year, and housing prices continuing their downward spiral, what can be done to stem the housing crash and “save” the housing market?

I believe I have the answer.  Are you ready?  Four little words.  Just four.  Here they are:

Not a damn thing.

That’s right.  There is nothing that can be done to “save” the housing market, because any and all efforts we make today to “stabilize” prices are predicated on the ridiculous notion that current home prices are actually realistic.  They aren’t.  The fact is, in most markets around the country are still at least 50% over-inflated as a result of five or more years of “irrational exuberance.”  Please forgive the use of Alan Greenspan’s terminology.

Take Arizona, for example.  In 2004 I secured a mortgage of $142,900 for a 1400 square foot house, a little over $100 per s.f.  It seemed unreasonable then, since only four months prior, similar houses in the same neighborhood had been listed for around $125,000.  That’s a 15% increase in just four months.  Take it out a year and you get a 45% rise in prices in a year.

That’s almost what happened.  We lived in that house for almost three years before selling it.  In mid-2005 we thought about selling and were told we could get $225,000 for it if we’d done it then.  That works out to a nearly 60% rise in perceived value in a little over a year.  The silly thing is, we hadn’t actually done anything major to it in that time.  Just carpeting and a new sliding patio door.

At the same time, the average income in Tucson rose less than 5%.  You do the math and see if it makes any sense.  To me, that makes it a 55% disparity between income and housing costs.  And the truth is, housing prices in Tucson were already, on average, 10% higher than the average income could afford.

Ridiculous.

So there you go.  There’s not a fucking thing the government or anyone else can do to “stabilize” the housing market, because it’s been unrealistically hyperinflated for at least ten years.  The fall it’s experiencing right now is only the beginning of a long and painful decline, and any attempts to stop it will fail.  Like the stock market, there’s a long way to go before it hits bottom.

Am I being alarmist?  Am I being cynical?  Am I being unrealistic?  I think not.  If you start from the assumption that the affordable home price for a typical family is about 2 to 2.5 times their annual income, then in a place like Tucson, where average income is between $45 and $50,000, then the average home should cost $90 to $125,000.  So basically, Tucson has nearly stabilized.  Last I checked, starter prices there were in the $100 to $160,000 range.  Of course, unemployment is also at record highs, so…

But, if you look at, say, Delaware County in New York, where the average income is $32 to $36,000 and houses are still being listed for $200,000 and up, the decline hasn’t even started yet. Of course, Delaware County has its own set of problems, mainly inflicted upon it by New York City.  But the point remains the same.  The average family simply can’t afford to buy a house there.  Prices are outrageous.

And that’s not even the beginning of it.  Look around your own city, town, village or state.  I’m sure you can find examples of what I’m talking about.  Do the research yourself.  It’s not that hard to find.

You just have to be willing to look, and accept the truth.

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