April 29, 2008
-- by Dave Johnson
We'll see a bottom when the average person can afford to buy an average house - and wants to. We are a long, long, long way from that now -- and keep in mind that we're about to see a big reduction in what the average person can afford as the recession takes hold.CNN's Money.com today: No brakes on housing prices8
As housing price losses extend, he said, the fall-off in demand for homes will deepen. And Schiff expects to see a national price decline of 30% - and by as much as 50% in the worst hit markets.50%? In my area a 50% drop from the peak would bring houses down to maybe $400K. Will the average person around here be able to afford a $400K house a year from now, after a year of recession and after a tightening of loan standards? Not a chance. The price runup here saw a tripling to quadrupling of prices. And then they build thousands and thousands of houses in areas surrounding the SF Bay. So prices will have to fall by more than 50% - and the recession will have to end, and loans have to be available, and gas prices will have to fall a lot so commuters can drive to these houses - before houses will start selling again. Sorry for the bad news.
Yes, I do understand the cascading implications of that. It means that pretty much everyone who bought a house (or borrowed money on their home equity) since about 2001 - at least in this area - is going to be owing more on their mortgage than the house is worth. In many cases they will owe a LOT more. And they will decide to either be "good consumers" and sacrifice to protect the bank's profits by making payments for 30 years on a house that is worth hundreds of thousands less than they owe (while their neighbors move in to the foreclosed house next door with payments that are less than half what they are paying), or they will make an economic decision to "walk away," giving the house back to the bank, and make a fresh start. What do you think most people will do?
Posted by Dave Johnson at April 29, 2008 4:52 PM
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