bostonbubble.com

[mgio]

How can real estate prices continue to outpace wage increases?

I've been told that when I buy a house, I can count on 6% appreciation over the long term. This is more than twice inflation. That much I can understand and it means that our society spends a higher percentage of our income on housing costs than we did in the past. But what bothers me, and I don't know the exact numbers, is that for the past 30 years increases in real estate prices have been higher than increases in wages. This means it's much harder for me to buy a house today than it was for my parents who bought their first (and only) home 33 years ago.

It seems like this trend must not continue. In fact, it CAN'T continue. If it were to continue indefinitely, it would reach the point where no one would be able to buy a house. Before that happened, only the extremely wealthy would be able to own and everyone else would be forced to rent.

Despite this, we see that home ownership percentages are at an all time high. Why is this? Well, it because it's much easier to get a mortgage these days and the amount of "novel" mortgages which do anything to get people into these high-priced homes has skyrocketed, especially in the past few years. I'm talking about 0 down, interest-only, 40-year, negative amortization, etc. mortgages. Now much of that has collapsed, at least for the subprime market, and I think we are going to see a major correction.

[jbw]

I honestly don't think a 6% appreciation will be seen for a long time. Most of the reports I'm reading from economists not paid by the NAR seem to project subinflationary growth in housing values in the long term. Especially since Bernanke is warning about rising interest rates. The Globe gives a weekly report on the median interest rate. A few weeks ago it was at 6.125, now it is 6.5. I also think that inflation will be on the rise. Salaries will hopefully rise with inflation and increase afforability.

[john p]

http://en.wikipedia.org/wiki/Household_income_in_the_United_States

scroll about 2/5'th down and check out the salary bubble in 1999.

http://investmenttools.com/median_and_average_sales_prices_of_houses_sold_in_the_us.htm

[AgentGrn]

It can't continue because in order for existing home sales to move, be it for an upgrade or whatnot, there needs to be a new buyer at the start of the chain so the next one can move, and so on, until the last person moves off the chain.

The astronomical prices, now combined with higher mortgage rates are going to force the prices to come down if people are serious about more ... or if they're required to do so.

Given the high cost of houses now, my wife and I are now considering looking at land in the next couple of years and building our own place instead. It depends on how this unfolds ... and it will, but the timing is always uncertain.

[mikeremote]

Hi mgio,
I agree with your premise that real estate prices must remain correlated to income over the long term. But keep in mind that over the past century American incomes have risen faster than inflation. So the real question is not how house values have risen in relation to inflation, but rather how they have risen in relation to real (ie inflation-adjusted) incomes. A good benchmark for housing affordability is to determine what percentage of median income would be necessary to make mortgage payments on a median-priced house. Note that this benchmark incorporates variables such as mortgage rates. By that measure (and many others) the US housing market and particularly the Boston housing market is still way overvalued.