Dr. Housing Bubble 09/06/09

[Crewleader]

What Should a California Home Cost? Price and Income Ratios. Various Market Ratios to Determine Real Estate Valuation.

I want to focus our attention on housing valuation. For those calling a bottom, it is also implied that they believe that incomes have stabilized and that prices rightfully reflect the economic situation of the potential buyers. Why else would you call it a bottom? Yet very little analysis is done regarding housing valuation. There is much yelling and punditry about a bottom but little long-term analysis is given to support this argument. Given the amount of Alt-A and option ARM products in California, we have unique exogenous factors that will play a role in housing prices for years to come. We also need to examine the state budget deficit and the state unemployment rate that is now at 11.9 percent but most likely is over 12 percent and if we look at the more encompassing figure of U-6, the state is well over 20 percent.

First some very important historical data. Did you know in 1970 the median price of a California home was no different than a median price home nationwide?



I’ve reconstructed the graph above. The graph had data up until 2005 but I added the key points from 2006-09. During the height of the bubble in 2007, a California home cost nearly three times as much as the median nationwide home price. Looking at historical data it wasn’t always more expensive to live in California. And this isn’t a new phenomenon either. Florida had an enormous housing bubble in the 1920s that burst in epic proportions. The real disconnect in prices started in the 1980s if we look at the chart above. California in the late 1980s had another bubble. At this peak, the price of a median California home cost twice that of a nationwide home. When things settled down, a California home cost 57 percent more than the nationwide home price. That was at the trough. Assuming a similar trough this time, if the median nationwide home price were to stay at $169,000 then a California median home price would go for $268,000. Yet there are things that are different this time.

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