MHA: Making Homes Affordable.

There are only two ways to make homes affordable in America. 1) Get the government out of the prop-up business and let housing prices fall to where they become affordable. And that is a long fall still; 2) give all Americans a one-time payment of approximately $200,000 as a gift from Santa (or may from Mister Blankfein, if he wants to participate), or a permanent salary increase of about 200% — this might be more tricky since 20 million Americans would have to be given a job first, and then a raise.

Maybe just letting prices fall back toward actual salaries is the better idea. How much will prices have to fall?

Well, historical average gains in housing are 2% -3% per year.

From 2001-2007, some housing markets gained 200-250%.

Math suggests these gains from 2001-2007 should have been 21% at the high end.

200% minus 21% suggests we should see a pullback in housing prices of much more than 30%, if we are returning to the averages.

A $180,000 house that appreciated by 200% from 2003 to 2007 would be valued at $540,000 in 2007. A decline of 30% (considered steep by most) would bring the price down to $378,00, a loss of $162,000.

But, considering that the house ’should’ have been selling (by historical norms) at $201,000 in 2007, instead of $540,000, that is a discrepancy of $339,000 NOT $162,000. This house, in fact, needs to decline $177,000 more.

The housing market is NOT the stock market. Housing MUST BE BASED on affordability factors (salary being the prime issue, interest rates also, to a minor extent). Housing appreciates 2-3% a year BECAUSE this is historically what salaries appreciate. This isn’t rocket science.

- Michael Clark

Related Posts:

• Think about it. Historical average gains in housing are 2% per year, 3% tops.
• Let’s try to put things in perspective here, using the NASDAQ as an example:
• Housing will come down to 50% of what it was at the peak.
• The next Black Swan will show up in the bond market.
• As China’s bubble market burst, U.S may begin it’s pullback like 1930.

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