I have been reading these blogs lately. There was a link in Money magazine from a few months ago (I’m just catching up on some reading). For several years now, I have been saying that the appreciation in home prices in most of the metro areas in the US is not sustainable, and that prices will come back down to reality. A lot of my friends disagree with me. I would have never given this much thought, except that I lived in the Twin Cities metro area for a few years, and commuted 60 miles one-way because I could not afford a house where I worked.
There are a few reasons that I agree with AFB and think housing prices are going to equalize:
- ARM’s – A lot of people that have these are going to see their first adjustment in the next few years. It is going to be very painful for some of these people. My assumption is that the inventory of homes on the market is going to go up, a lot. Some of these will be foreclosures, which usually sell cheap.
- Median Price/Median Income ratio – This ratio is at 10/1 in LA. The rough guideline is that you should not go much above 3 when buying a home. Ratio’s as high as they are are not sustainable.
- Interest Rates – It is safe to say these are going up. Those $300K+ middle class homes are going to be a lot less affordable when the rates hit say 7.5-8%. If you didn’t have to sell, it wouldn’t matter, but some people will have to move, and will need to do what it takes to get their homes to sell.
These are pretty simple reasons. Additionally, as reported in the Wall Street Journal today, Robert Shiller, the Yale economist who wrote the book irrational exuberance and predicted the dot-com crash and the run-up in housing, is predicting the same fate for the housing market.
I think that right now is probably a very bad time to buy a house in just about any metro area (with the exception of Texas, seriously affordable). If I were planning to move, I would hold off for about 3 years.
Just my $0.02.