The worst housing crash since the Great Depression just got worse. What happens when home values pop in other bubble metro areas? New home sales fall 82 percent from peak versus 80 percent during the Great Depression

This is likely to be the first ever global economic disaster caused by real estate sponsored by big banks.  During the Great Depression real estate values collapsed as the economy contracted and millions lost their jobs.  That is the typical pattern of real estate bubbles bursting.  Something in the economy creates a vision of a new paradigm and money starts flowing into real estate as a consequence of this euphoria.  This happened in Japan as their economy and stock market frothed over with mania.  There is no time in history that the entire world from the U.S. to Canada to Australia to Spain to China suddenly went into a massive trance and believed that real estate suddenly would carry the weight of every single economy forward.  Of course what we are seeing is the unraveling of this system.  The bubble has burst.  Yet the banking system that relied on real estate as their game of choice in the casino cannot come to terms with reality because it would render them insolvent (which they are by the way).  So instead, the charade continues yet the public is catching on to this mass deception.  What happens when the worst housing crash since the Great Depression gets worse?

Deepest fall in new home sales ever

new home sales

There is little demand for new home sales because the public with weak incomes and an economy that is still struggling has little appetite for overpriced homes.  Even if the appetite were there, the incomes are certainly not.  The juice that kept the game going was debt.  As we have seen with the debt ceiling bread and circus we might be reaching a limit in regards to what we can take on without adding on subsequent real growth.  I know when the contraction started occurring some could not envision the correction lasting longer than a year or two.  People have been conditioned to quick changes and have a hard time realizing that the housing market of the 2000s was a historical mania.  That is it.  It is done for a generation just like Tulip mania or any other mass delusion.  The fact that home prices are now inching closer to early 2000 price levels simply does not jive with the religion many believe.  During the Great Depression, new home sales fell 80 percent from peak to trough.  In this crisis we have fallen 82 percent.

The chart above is rather startling but makes sense given that we have 6 million homes lingering in the shadow inventory.  The way banks are leaking out inventory we are bound to have a lost decade (or two) in our books.  Unless something radically changes the policy is to bleed the productive economy for the ill-gotten gains of the big bankers running this country.  This is why after trillions of dollars funneled to the banking sector little has been done in terms of boosting incomes or home prices.  Where do you think the money went?  It certainly didn’t go to adding jobs:

civilian population employment ratio

This is a troubling chart.  The civilian employment-population ratio is a better measure of employment success in our economy.  We are now back to early 1980s levels.  What is more troubling is the jump from the early 1950s on had to two with the rise of two income households.  The two main driving forces for this reversal are a poor economy and demographics.  How can people look at these trends and think things will reverse?  Even if things do change the demographic change is built into the system.  Some point to wealthy immigrants as the catalyst for rising home prices but we are unable at the moment to provide quality jobs to the masses of the unemployed.  Unless we find an age reversing pill this trend is sticking around for years.  There are limits in life even though Hollywood and Wall Street would like to convince people otherwise.

Bubble still going on in many U.S. areas

The general collapse in home values has left many believing that the housing market has reached a trough simply by default.  That may be the case in many states where home values never really had excessive bubbles yet many highly populated metro areas are still in significant bubbles.  When these bubbles burst financial losses will be large yet again and you can expect the financial system to dig deep into the pockets of struggling Americans.  What happens when these places pop as they will?  Let us look at some of those overpriced regions:

most overpriced metro cities in united states

Source:  Fiserv

This data is current and you can see even after major price corrections these areas are overvalued.  On both coasts, these bubbles still rage but California is still the leader in bubble metro areas.  Folks are delusional thinking this is sustainable.  These bubbles will pop.  It can happen quickly or drag out for years.  The above ratios are flat out unsustainable.  Just take a look at the median home price to median income ratio.  This will pop.  In addition, many of these areas have high unemployment rates.  Take a look at San Diego that nearly has a double-digit unemployment rate for the county.

What is important to also note is that these prices have already fallen by 10, 20, and even 30 percent in many cases from their peak.  They are still inflated.  The shadow inventory in these markets is dramatic.  At a certain point reality will need to be faced and when that day comes, you will see prices moving lower.  That is the only way out or we can grow household incomes and double it in the next few years but do you see that happening?  I would love to see evidence that our financial system would reward productive behavior instead of putting all the money into the hands of the banking system that largely operates like a vampire on the productive side of the economy.  We do need banks, but investment banks should be spun off and allowed to make their own non-systemic destabilizing bets.  At the moment the financial system is simply looking for ways to pilfer funds from the majority of Americans.  If they could find a method to profit from slamming Americans lower they would do it.  Many a hedge fund made billions by gambling and speculating on the failure of American homeowners.

So what happens next?  It is an interesting side note that during the typically hot summer selling season with mortgage rates at all-time lows that home sales are weak.  Why?  At a certain point it boils down to income.  Many that have their brains cleansed by the 1984 media machine think that just because many people have luxury cars or dress a certain way they are wealthy.  They are not. The data does not back up this phony studio set and many are starting to realize that the financial Wizard of Oz is more smoke and mirrors than anything real or tangible.  Certainly there is tremendous wealth in the country but not enough to support entire metro areas with inflated prices.  Just because the mainstream press isn’t reporting this next bubble bursting doesn’t mean it won’t happen.  Heck, they didn’t start talking about the most obvious housing bubble in generations until it blew up in their face.

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69 Responses to “The worst housing crash since the Great Depression just got worse. What happens when home values pop in other bubble metro areas? New home sales fall 82 percent from peak versus 80 percent during the Great Depression”

  • Dear Dr. Housing Bubble,

    Wonderful job, as usual. Your comments on the the banks and main stream media and their role in the financial meltdown are right on the money, so to speak. What it all comes down to is sustainable income to pay the mortgage, and not manipulation of payments or facts. This party is not done by a long shot and anyone considering buying in CA right now should have their head examined. The water has not even reached the promenade deck of the Titanic yet, so there is plenty of room for prices to fall and to head for the life boats.

  • Basically you’re stating what most of us who live in the Bay Area have known post-bubble: The bubble hasn’t deflated here. For example in the East Bay neighborhood I live in prices were around $600k or so for anything decent during the bubble. Post bubble? Its still around $500k-$550k. So in other words- big whoopti-do. The prices are still as far as I’m concerned ridiculous. I’m saying this on behalf of my wife and I who make close to a dual 6-figure income. Yet even so, buying a house would eat up an uncomfortably large proportion of our incomes.

    The problem with the Bay Area- and probably other bubble areas too- is that there is still too much of a mindset amongst the general population in these areas that somehow the prices are justified: Most would eagerly and happily buy the absolute most expensive house they could possibly afford- if they could get approved. Most of these people would never dream of stepping a toe outside the narrow confines of the area. They are enamored and charmed with the Bay Area. Indeed- its special here and as far as their concerned the bubble prices are just part of the game.

    So even though we can use mathematical analysis all day long to point towards a severe fall in prices, those numbers can’t compensate for the human element tied to house buying. Most of it has little to do with math and finance and everything to do with raw emotion and psychology.

    Another thing to consider is that the bottom of the prices in the Bay Area is basically inaccessible to ordinary buyers. Homes that are remotely affordable are almost entirely bought by speculators. That leaves only the medium priced houses- aka- the 500k houses left. At some point I imagine speculators won’t see the money they expected to make on their houses and start to back away. When this happens it could put downward pressure on prices further.

    Let me put it this way: The bubble popped in 2006 for all practical purposes. In that time prices have remained at ridiculous levels. In the back of my head I can’t see the Bay Area returning to any level of sanity- mainly because of the people who live here and are so incredibly eager to shell out the bulk of their incomes for houses. I will never do that and thus I don’t see things ever being acceptably priced. So I guess its Texas here we come. I’ll give it a bit longer but I’m sort of tired of the high cot of living.

    • Well said, Edvard, I see these fools up here in the Bay Area touting how prices in the top neighbourhoods haven’t declined, or have gone up. Yet they don’t realize the macro conditions.

      Companies are supposedly flush with cash right now. That’s true, but they are also flush with debt. You know the story from the rest of this economic cycle, only it hasn’t really hit fully there, and so companies buy up high tech to stay competitive.

      Once business nose dives further, and it will, that cash will be hoarded even more. And tech buying will be stretched out. IT budgets get cut, and the staff is expected to do more with less.

      Add into this Obama’s latest expansion of hi tech guest workers, and wage pressure is downward.

      Compounding all of this is the fact that most homes in the better areas weren’t bought with a special ARM package. The main destruction has been in the areas which did do the subprime type of financing.

      All of this supporting the illusion that the high end is invulnerable. It’s not. I’ve grown tired of the various groups touting “we’re different”. There hasn’t been one which is, and they all eat crow later. Without exception.

    • Edvard
      Great point. I live in the South Bay Beach area in LA and the exact same thing is happening here. All of Doc’s analysis makes sense, but none of it holds true to my area.

    • I am a renter and one of the working poor in Palo Alto, and have been afraid to even think about buying since 2001. Townhouse prices in mid-town softened since the peak by about 10%, e.g. a $750K townhouse off of Loma Verde would have sold for $850-900K three years ago. My neighbor just bought a 2×1 condo just on the Mountain View border, paying $425K on a $480K listing, that was bought for $580K two years ago! So the prices are definitely softening here on the Penninsula, and I expect will go further if we have a Double-Dip with tech layoffs like we did in ’01-02.

    • Edvard – you are right about prices up there – I follow the markets closely (San Carlos, Cupertino, San Ramon, San Jose, etc.) and have multiple family members who are WAY overleveraged up there in those areas. Two families bought near the peak…one for $950k and that place is now worth about $800k…and the other for $1.1M and that palce is worth about $850k, using close comps only hundreds of feet away within both cases.

      However, you are under a false illusion that “the Bay Area is indeed different” due to peoples’ psyches up there. That is what the tulip purchasers said, too. And people in Japan on the way up with both of their bubbles (stock market, real estate). Honestly your feeling that way is understandable (and frustrating, I know), but goes to show you how strong that attitude can be…even you, a DRHB reader and of sound mind I presume, are still strongly affected.

      I’m glad to say Dr. Housing Bubble is correct; the Bay Area bubble will have to correct over time. If it happens over the long run and there’s some inflation it may not feel like a crash, however, valuation metrics that have been the case for hundreds and hundreds of years (i.e. that wages pay mortgages)(refererence the Europe housing study covering hundreds of years) will not just go off the ranch…and not come back. I’d be open to that idea only if you could explain what will FINANCIALLY sustain the bubble up there. Peoples’ strong bullish opinions alone will not keep it inflated; long term mean reversion will prevail.

      – Tom in San Diego

      P.S. Hey Doc! Keep up the good work!!

      • Recently moved to the bay area from Seattle due to job change. Just closed on the home in Seattle and been looking for last 6 weeks in San Ramon area. Homes priced right in low to mid $700k moves fast but most home priced above $900k languishes. Suspect there are many strategic foreclosures in the pipeline as many who paid $1.1 mil+ are under water since theses homes are going for low $900s. My new employer granted me extension relo benefit on purchase of a new home till end of 2012 and plan to make low ball offers this winter and thru out next year.

        As for bay area prices – I lived thru LA’s 1991 to 1995 downturn. Price headed down for 4 years and my friends kept on buying thinking it was less than a year ago price. Many of my friends were distraught to see the price fall further. In those days one had to put at least 10% down. My wife lost her downpayment (plus 6% fee and other home improvement) and was distraught having lost most of her savings. That said it was no where like where it is today with overleveraged to hilt and the price appreciation from 1988 to 1991 was smaller in terms of percentage.

        We were able to buy a brand new home in Irvine at the bottom in 1995 since needed a place to live after getting married. The builders were the price leaders but Shapell in San Ramon who are stuck with many 50+ day standing inventories are not budging. We disengaged after 10 days of negotiation. So I think all potential sellers – home owners, banks and builders may be in denial and the unwind of the prices may take longer…

      • Hello I’m from Blackpool in England and it’s interesting to see how, in other countries, we’re all now paying the price for what has been a huge global fraud committed by the elite bankers and financiers. This past 4 years have been the ultimate argument against rampant capitialism that the US is renowned for and our Labour government so foolishly embraced lock, stock and smoking barrell.

        You can use all the sophsiticated arguments you want but at the end of the day property prices in the USA, UK and other countires are governed by wages and disposable income. You have exactly the same scenario as we do in England with the government talking about a recovery being imminent while ignoring the fact that the vast majority of us have hugely declining disposable income (brought about by price hikes in fuel, food, clothing and job losses) or at best static wages.

        The huge fraud in England was initiated by one simple yet fundamental change in how mortgages were approved. Our system used to be that you had to save with a building society for several years. Then you would be interviewed by the building society manager to see if you were suitable. He would then tell you the mortgage would be 2.5 x the main salary + 1 x the lessor salary. Oh and you had to put down 10% deposit on the value of the house you bought! This was subsequently changed to “NO DEPOSIT NEEDED,” and we will give you 5 x your joint salaries. In such a manner pandora’s box had been opened and unleashed on the English property market and it was destined to end in disaster.

        I don’t know if this scenario also applied to the US housing market but it was the economics of insanity and it was allowed to happen right under the noses of the so called governing elite. Had we lived in Stalinist Russia these fraudsters would have been summarily rounded up and shot. A bit extreme? No because these so called masters of the gobal financial world in the UK and USA have destroyed the lives of millions of hard working, honest people. Effectively these charlatans dropped a neutron bomb on the lot of us. Stood there laughing their heads off at how we’d all fallen for the big con and then, at least in England this last January, received their £billion in bonuses after we, THE PEOPLE, had bailed out their banks!

        The only thing that will revitalise the housing market in the UK and USA is a strongly recovering economy and JOBS as in real employment. Then people will be able to stand on their own two feet and take care of themselves and their families.This is what most people want. One small problem exists however and that is the fact that our UK and USA governments have stood by and allowed millions of jobs to be transferred to India and China. In other words for those less gifted people i.e. those who did the manual jobs there will be no employment. They will become a permanent underclass.

        I myself have always been thrifty and was looking to invest in several repossessions in Florida but I just cannot see how the USA can recover from the disaster it’s facing. I’m not being smug when I say this because we in England are going through the same collective trauma.

  • Repeal of the Community Reinvestment Act would be a great start. Next reinstate Glass-Steagall. Then phase out the Earned Income Credit ….make the recipients wean off it to encourage them to seek higher paing work. Eliminate dependent deductions….except for adopted/foster kids/disabled relatives….after 2 kids…or at least phase them out. e.g. Don’t fund Octomoms.

    Then either a flat tax or a VAT on everything but unprepared food.
    Sequester gas taxes for roads only.

    Get the Feds out of the school business and reduce taxes accordingly.

    Sell off the bloated federal acreage inventory…the feds are violating the Constitution. They get to own ONLY forts, post offices, and necessary government buildings.

    Sell off Fannie Mae and Freddie Mac and make it unconstitutional to do crapola like that again (no bail outs).

    Turn federal Parks and Dept. Interior lands over to the states.

    Quit fighting 6 wars.

    Nothing but a people voted on paycheck for federal elected candidates. The only perk should be a barracks berthing and a chow pass at Bethesda Naval Station. They can take the rail to work from there too. No free parking off base.

    No funding of anything like NPR or Planned parenthood.

    Eliminate foreign aid until the debt is paid off.

    Pay off the debt.

    This is actually fun…it should happen.

    • Very well summarized. I agree with everything you said.
      The first step is to punish those neocons that are responsible for the wars based on lies. The Iraqi war has cost us well over $1 trillion (closer to $2 trillion by the time it ends, if ever). Punish those that were responsible by jailing them and making them pay it back. How can they pay $2 trillion? Easy, they got funded by guess who: Wall Street. The hedgefunds and investment bankers are the primary funders of the special interest groups like AIPAC that pushed through the Iraqi war. very easy to trace back all the donations and all those that are responsible.
      This would be a good start. Then, you can move on to punishing those responsible on Wall STreet for the collapse of the financial system. Even if SEC has shredded all the investigations (see recent news) there are plenty of sources to find the guilty.
      If you don’t penalize the guilty, they will continue to do it.

      • how to get it paid back? while i doubt this will actually happen, it pleases me to imagine a reintroduction of the Pillory, with a few modern twists… some of which will be especially appreciated by the financial sector. First, it goes without saying we’ll call them The Stocks. As a corollary to each convicted individual’s jail term, a dollar value representing his/her cost to the economy (basically, cost of crimes, investigation & trial, and incarceration) is assessed. Good behavior – that allows one to reduce time served before parole becomes an option – will require the repayment of this sum. If one can’t or won’t liquidate sufficient legitimate personal assets to cover the amount, then the fun begins. Convict is assigned to the Pillory Tour, and goes from place to place (in a chain gang, perhaps on foot?), where he/she is put on display daily to endure public scorn. For this one earns minimum wage… ah, but there are opportunities to up the return. While all members of the public may see and talk to &/or shout at them from a safe distance – say, 30 feet – those who wish to pay for the privilege may get closer, with a menu of options for purchase: spitting, throwing rotten fruits and vegetables, personal soapbox (purchase time for an individual, face to face (non-physical) semi-interactive session of lecturing, hectoring and haranguing the con, with the option of having him/her able to respond or gagged… ). While we obviously must forgo torture and corporal punishment, I’m sure we can think of a few more acceptable interactions. Just trying to help the cretins earn their way back into society.

    • By all means support planned parenthood, remember neocons, if you break it you buy it, wanna educate, medicate and incarcerate all those precious bundles from god, wtf. I narrowly passed on a condo here in Long Beach recently, after inspection the realtor refused to go at fanny for some issues found, real jerk, he scolded me about the lost opportunity if I pass it up, how he had many others waiting for me to trip up on this great deal, told him where to get off the bus, hey it’s still on the market 60 days later, wow, where is that army of buyers mister realturd??? When I moved to LB in 2001 I was blown away at how high the housing prices were, guess I was right, when I see prices kissing 1990’s levels, I’m in, thanks group for the constant reminder/sanity checks.

    • Yep, NPR and Planned Parenthood are so obviously responsible for the real estate crash, and the banks had nothing whatsoever to do with it ….

      Ummm, may be not.

      I see an agenda boiling over here.

      Don’t forget, while the disabling of government regulation enabled the mess, it’s the banks who did almost all the damage.

      The leaders of the banks should be in jail, not in mansions!

      • Cut entitlements like…Social Security. You see…the last twenty-five years of deficit spending is clearly associated with the older generation an not the 30 year olds on down. Unfunded benefits are a joke…especially on the massive scale that it is. Cut the benefits 15% off the top. Change the age one starts receiving the bene’s to at least 67 for men and 70 for women maybe higher. This selfish generation of which I am included voted in the governments that tore down Glass/Steagal act and poured massive cash into open ended wars. I am 48 by the way. Let’s take some responsibility people. Let’s go a different direction in the future…a non political direction that is good for America. Thanks

      • It must be a great burden to go through life knowing exactly what needs to be done to fix everything to one’s satisfaction. Particularly when the thing to be fixed, or done away with, causes oneself no direct or immediate discomfort or inconvenience.

        Silly me, here I thought that where we need to start is with ending the crimogenic culture of banking. Not cutting NPR and Planned Parenthood.

        Silly me. Here I thought banksters caused this mess. Turned out it was all that Morning Edition and birth control.

    • A very good list. The one thing that is not clear to me is the entry about the two present “main” wars. In my view, they are hardly fought due to the folly of neocons, as some times they are described. That could be the initial read, but with time another picture has emerged.

      I think that the two campaigns were started as part of a move to 1) ensure that long-term access to carbon energy is not compromised and 2) increase our military presence in strategic locations.

      The first reason is obvious, with Greenspan in 2007 making a public admission about the Iraq oil-war. One can also see the Afghan war as effort by the US and Europe to keep a presence in a region that has both oil and gas [some neighbors of Afghanistan, particularly Iran]. Why the bases is some of the ex-USSR republics?

      The second reason is also strategic, but more political: it is to keep tabs on our “non-friends”, mainly on China. [How is that for double-speak? Let’s not call them adversaries or, God forbid, enemies.] Not only can we maintain some proximity, control of the energy sources that China needs, covets, but also can we keep in check any expansionist moves, as it inevitably will have. The recent aircraft carrier may be not so significant, but the neighboring countries are starting to pay closer attention. As a curiosity, it is something else to see Vietnam now planning on making a strategic alliance with the US! What a change!

      Another reason for the Afghan presence is to be near nuclear Pakistan (mostly), India and also Iran, even though Iraq already serves for the last case.

      As far as the attitude to housing, I know first hand about the LA South Bay. Back in the 70’s and 80’s it had already set in. The zip-code thing made a big difference on the price of a place. Or wether or not it was East or West of the Sepulveda.

      The trend is downward in prices, with the few exceptions. This is a trend seen also in places that had bubbles, such as the UK and Spain. But is is at a snail-race pace. Jobs will eventually move out from areas that become too expensive, as the companies cannot pay the salaries needed to attract people.

    • must agree with other responders, while your list is mostly admirable and a good start, nixing NPR and PP stand out as belonging to a separate and inappropriate agenda. media concentration needs to be offset, and NPR makes a valuable contribution to that. PP is a sadly necessary element in transcending institutionalized poverty. don’t blame the money game on its victims.

  • Well, if you didn’t want a country run for and by exploitive vampire banks, why do you borrow money other than from a credit union, and bank there as well? People could crush the banks 90% tomorrow, by removing their deposits and cease using big bank or affiliated, loans and credit cards; they don’t. The fact that Americans still treat the “big five” banks as places to shop for credit and pay the fees and interest, means we vote for the vampires exactly, doesn’t it? The big five banks have sixty percent of the mortgage business, so it’s clear the public at large is all for the big banks way of doing business and capturing their money and politicians.
    Noting here one thing, that the chart of total new houses built each year should be population growth adjusted, as the chart goes way back into history, and when population adjusted, it isn’t merely “dismal”. What’s below dismal on the scale of horror?
    However, the comparison of “median area income” to home price is flawed: in no way is overall median highly correlated to home value, in Hawaii or Aspen or even Hollywood or Orange county. Nonresidents with money screw up any area with absentees; and since the lowest two thirds of the population rents in some cities, it is only HOMEOWNER (or for resorts, home second buyers) potential income that matters to homes, excluding then the topmost 3% group of homes. The best match of data to the point trying to be made, is that the 50%-75% of market-potential buyers median income is then matched to the proportion of non-rental homes (about half), but only in a very vague correlation. When this is done, the calculation surprisingly shows that, in fact, in many (most) markets homes are NOT overvalued to the seemingly target potential market and yet continue down. That means the factors that matters most aren’t the median home family income. Exactly what is pinpointed here in this article is that now what matters more are: demographics, debt, divorce, age groups, and needing some semblance of actual bank credit to get a real loan even at these low rates. I read but have seen no study, that the real estate agents claim the issue is that potential homeowners OWN A HOME already and fear they can’t sell and move in all likelihood anyway at an acceptable price.

    I have yet to hear of actual statistical proof that sane would-be home buyers avoid buying for the other main fright point: that if mortgage rates go up so much as 2 percent OR down payments go to 8% real cash or greater on FHA, the whole real estate home sales and prices pyramids in almost all cities collapses even worse and by far.

    • NOTHING will get our fellow Americans outraged. On the one hand most of our fellow citizens complain about how the big banks own our politicians and country, how they are upset about various fees they must pay at their local big bank, etc…. Yet, they do nothing about it. After TARP was passed, there was an email circulating and the author of it urged people to take out their money from their big bank and place the funds into a credit union or a community bank. The majority of Americans should be outraged and then match that outrage with their actions.

      • Yes, I tried to follow through on cutting the big banks out of my life. My savings and checking accounts are with a local credit union, but my Visa card is with Bank of America. I decided to get a credit union Visa card. No go: They wanted to extend me a $500-limit credit card because of my modest income and high mortgage payment (15 years, half paid off), versus the $10,000 limit I have now. I charge everything—groceries, drugstore, whatever I buy—so the bill is often over $500, and I pay it off in full every month (which the CU can see). I have no debts other than the mortgage. The CU knows I have a big pile of cash in a savings account with it. It’s nice that it’s conservative, but it also should have some sense.

        So when I get around to it, I’ll be looking for a new credit union. Until then, I still have a Bank of America credit card. (My mortgage is 4.85 with a smaller bank, since then bought out by a foreign bank. I’m going to look at refi now that the rates are even lower.)

    • Only problems is the banks — even well run ones — don’t have the money on hand, or even in their system, to pay off all their depositors, or even a small fraction of their depositors, at one time. That is why bank runs are so devastating. The cash is elsewhere, like in crappy real estate “investments”. So, while its nice to fantasize about sticking it to the banks, it ain’t going to happen. The sticking will continue to be a one way street, with them pitching and everyone else catching …

    • Good point about the key metric being homeowner median income, not median income by itself, for an area. You would think that this number could be calculated from the census or tax filings, but I can’t find it.

      I do imagine that absentee owners push most “beach accessible” SoCal home way up, and then the displaced “natives” move further out, pushing others further out… I guess that’s the downside of living somewhere that people like to come on vacation.

  • Very nice article, Doctor. That 80% decline in sales is typical of bubbles. Prices will indeed follow; and I wouldn’t be surprised to see price declines of 90% from the peak, nationwide. I figure an 80% decline at a minimum, nationwide, from the peak in prices.

  • Hawaii is a great place to live and the ratio makes more sense when you consider (as for most locales) that most of the homeowners purchased their homes a long time ago, many have paid them off, and now can live on relatively low income in relationship to the really high average home prices.
    This is not to say that the ratio and prices won’t come down, rather that the downward pressure will be from the newer buyers and those distressed due to loss of job, illness, etc.
    Although I enjoy reading this site, I wonder why the focus on higher incomes. When it comes to a rational economy, it seems to me we (and the rest of the world) would do better to work toward a sustainable economy – less consumption of resources, etc., living easier on the planet, more time to enjoy the time we have here (all of which would require huge changes to tax codes, incentives, etc.). Unfortunately the powers that be feel economic growth is the holy grail.

    • I visited Hawaii a few months ago. Houses anywhere near the coast were insanely expensive. As in 1.5-2 million for a smallish, 50’s house with no updates. I live in California and Hawaii made Cali look dirt cheap.

    • I don’t know how long you been reading the DRHB, but from your posting, nothing seems to be rubbing off. Hawaii, you must be kidding. Forget about housing, what about daily living expenses, food, transportation, etc. The ‘Holy Grail’ is economic growth – unless you know how to employ all these newborn kids. Or the opposite, support all the retiring baby boomers! In Japan, they have experienced a no growth economy now for over 20 years, largely due to a demographic time bomb of a aging population. In fact, because of their immigration policies, this time bomb is here today. Over the next 10 to 20 years you will witness a economic disaster in Japan – no jobs, pension plans collapsing, medical costs through the roof, all due to their inability to produce children in a timely fashion. China also has a problem due to their 1 child program. They are running out of workers to support their aging population. The DRHB has written about this on several occasions. Income growth is the key, new worker growth is next – without this combination we will all move back to caves. He mentioned that several times, so if you don’t remember, here – their are 7 million home owners in CA, of which 50% are baby boomers, what do you think will happen to R.E. prices when they begin retiring – collapse. It already has happened in Japan. Watch for China next.

  • The raw emotional value of owning a home in a desirable location is real. As for me, a renter in WLA with cash to buy but waiting it out. in the meant time, I think about what extra money I will pay to have a house on the Westside. For example, in the 90019 zip code there are some decent areas North of I10 around Fairfax. Houses there are 150K less than houses West of the I405. So, I notice myself thinking, YES, I will pay an extra $150K to be a few miles further West (90064 or 90066). That would be a forced savings account, right? because when I live in the house for 20 yrs and then retire it sells for more than if I lived in a house in the 90019. But alas, I plan to wait until Spring 2012 and then see where prices are then. Regardless, a house in the Westside will sell for more now and will sell for more in 10,20,30 years???

    • We hung out in WLA for 5 years renting, then just moved away and paid cash for a house in a wonderful neighborhood. For the price difference we can fly to LA when we need a city fix. We wanted to start a business and we knew CA did not want people like us, so we left.

      • Agree – I’ve been renting and can’t justify the prices here in Pasadena area – I figure I keep around $2500 a month in my pocket by renting versus buying. I’m looking to start a business and So Cal makes it difficult – I love it here – I’m born and raised LA guy, but after 40 years I think it’s time to leave so I can start my business and live somewhere reasonably priced. I plugged the numbers into an income calculator for some other areas to live and the difference in wages needed to sustain a lifestyle consistent to LA was amazing. In some cases it costs over 154% to live in LA versus a rural area! It was encouraging to see homes in other areas that would be a $1M plus here for $250K there. Got me thinking anyhow…

  • Singletaxonland

    Interesting article. I have to agree on the banker privilege as a core problem. I want to add:

    This problem of land value retraction runs on an 18 year cycle in the USA. These land bubbles are the catalyst for recessions and depressions. The problem is land is treated as a commodity giving the landlord privilege to own the rental value of land. A value no landlord created.

    This privilege is a continuation of European Royal privilege. The original immigrants despised the old royalty but wanted to be like them, especially with all the land available.

    Privatizing the rental value of land creates speculative bubbles. When cash is withdrawn from the economy and gambled on land values the economy is starved for cash. The Fed intervenes again and again and eventually a financial collapse with all the fallout from foreclosures to bankrupt state capitols.

    The only solution is too recapture the rental value of land with a land value tax (actually a user fee). This would take the land speculation out of the picture. Since we do not want a tax increase it would be best to have a tax shift off human productivity (the economy) and direct it on land values.

    Notice all the governments continue to tax productive human effort and wonder why revenues disappeared. There answer is to continue punishing the economy to get out of the recession. This does not make sense.

    You might be interested in these links:

  • I sold my house and moved to expensive place with rental payment of $4000 per month. Since my lease is one year, I have time to shop home. My down payment is CD in the bank with 1% interest. I have following concerns:

    1. Housing price might go down.
    2. Inflation might be dominated.
    3. Mortgage deduction might be adjusted soon.

    Should I buy house within a year or stay in rental home for couple of years?

  • Yeah there is still high prices in housing but even the Bay Area prices are slowly coming down. Unlike the earlier Bay Area poster, I’m starting to see prices in Sunnyvale, Fremont, Mountainview, and even some San Mateo properties come down in the $200K’s. And these are better areas. I have a feeling that earlier poster is looking only for the greatly desired properties to come down…well best of luck.. my hunch is those will continue to be in the $500k+ range.

  • The housing market in any desirable part of California will be a rough go for first time buyers in the future, I think that’s a sad reality to look forward to. You are competing with entrenched owners who are milking Prop 13 and have literally won the CA lottery by buying in certain areas many years ago, these people will either die in their house or leave it to their kids. The “new, real money” is also attracted to these areas…the 250K and up salary crowd all want to live in the swanky areas (Manhattan Beach, Santa Monica, Brentwood, etc). And like the doctor said, many people find it perfectly acceptable to part with a huge portion of their paycheck to “own” a house in certain areas. Until this mindset changes, I think it will be business as usual.

    Potential first time CA home buyers, you were unfortunately born in the wrong decade!

    • I agree with you – the prediction/hope that boomers will all downsize is not that likely. I think they’ll opt to stay in their big houses where they pay no property tax. SoCal is already filled with neighborhoods dominated by elderly retirees, and that’s just going to become more common. Their kids will eventually get the homes, and most will sell, with some renting them out and some moving in. That process will take decades tho, so like you said, timing is everything!

      • If that happens, you’ll eventually spin down the entire CA state/local economies due to lack of tax revenue to maintain services. If everyone does squatter living under Prop 13, it explodes and it won’t come close to making it a full generation no less two. You are already seeing the damage from the last decade. Those services and eventually infrastructure start to crumble, it becomes a whole lot less desirable to live there and hits prices. Before this happens, they change the tax code. Honestly, they won’t run the state into the ground just to keep taxes low for generations of owners – it’s unsustainable and they will change the rules, simple as that.

    • @Slim – Yes, infrastructures are already crumbling and chinks have started to spread across Prop 13’s armor. But they’ll remove Prop 13 protections from corporations way before they take it away from seniors.

  • I am not sure median income is really telling the full story here. In well established areas in the Bay Area for instance, a large percentage of home owners bought 10-20-30 years ago when prices were much lower, so who cares how much or little they make now?

    The people looking in the Bay Area market now are usually well paid knowledge/IT workers with a chunk of stock (options/units) and sizable down payments. Add in the fact that housing (especially new) is very constrained (particularly in the South Bay), significant population growth (Santa Clara will add about 700k in 10 years) and I think you can argue for that prices won’t really fall significantly from here.

    The only thing really hurting the Bay Area housing market would be another big downturn in overall economy which could lead to massive layoffs. But at this point I think most companies in the region are mostly cut to the bone already, so I don’t see that as very realistic.

    • Why do you speculate about the “well paid” income of the Bay Area population? It’s stated above, $98k for the San Jose/Sunnyvale/Santa Clara area.

      As for people who have owned their homes for 10-23-30 years, who are they going to sell to? They can trade homes with one another all they want, but it’s the new buyers that ultimately drive prices. And if new buyers on average bring in $98k, the potential pool of buyers for $500-700k homes is tremendously small.

      The average home in Willow Glen, Campbell, Cambrian, Almaden, Santa Clara and the Greater San Jose area will eventually sell for $300k.

      • I would like to see the stats for median income for current buyers in those areas. I would guess it would be higher than 98K, but that would be interesting to see. I have come to the conclusion that certain areas will never be affordable to your upper/middle class citizen.

      • @ Wheresthebeef- I agree with you that the pool of current buyers probably has a higher income than $98k. However, I doubt it’s that much higher. A very small portion of the population makes over $150k.

        Additionally, the amount of housing inventory that has to be sold over the next few years far outweighs the small pool of potential buyers.

      • I can guarantee you $98K is not the average household income for people looking to buy and establish themselves in the south bay in good school areas. The vast majority of these buyers are usually two working professionals with at LEAST $200K combined, it’s not unusual at all…

    • I already addressed this previously. Nothing you mention changes the overall picture that I mentioned. What you cite is nothing more than another way of saying “we’re different”. We’re not, though that is hard to swallow in the Bay Area right now. Check back in two years and it should even be obvious to the most rampant bull right now.

      I went through a similar discussion with rampant LA RE bulls two years ago. Even they are now bears. 🙂

    • Check that HP stock today. It only cost John Paulson 500 million in one day. The only thing worse than real state bubbles is a gold bubble in terms of malinvestment. You have not seen a real bubble until gold crashes on top of all the other current deflation. Keep an eye on oil. If it breaks $70 then head for the hills.

      • Gold is not a bubble. Gold is real money. Unlike RE, everyone around the world wants gold, esp. when fiat currencies all collapse.

  • I wish this blog didn’t focus so much on California. Of course the situation in CA can be extrapolated to other areas, but I’d like to see Doc include areas outside CA in his analyses. In Austin, for example, the bubble is as inflated as ever. Half a mil for a one bedroom “starter home” is not unusual.

    The local real estate shills like to trumpet that Austin is weathering the current depression well, and maybe it is. But it is because Austin has a more stable government employment base, rather than due to any kind of “pro-business” polices like Perry would have you believe.

    The state capital and a huge university are located here, and these were the same things that helped Austin weather the Great Depression. But even though those jobs are relatively safer than private sector jobs, most state and UT workers haven’t had a raise in forever and don’t make enough to afford current home prices, anyway. Meanwhile, prices ain’t coming down.

    I like this town, but between the perpetually inflated cost of living and the current summer temperatures (soon to be a record-breaking “hottest summer ever”) I am beginning to consider moving elsewhere.

    • I’m curious about areas that still seem to be holdling on to bubble prices, too. I live in Northern CA. But we’re considering moving to Portland. But when I look at price history on trulia on Portland homes a lot of them are still in 2003-2004 price range. I was wondering if some of these areas are just slower to fall but will pull back eventually.

  • I’m seeing alot of scare tactics and misleading information. With interest rates at historic lows and prices at the lowest we’ll see in a generation, there’s never been a better time to buy!

    • Lowest where you realatard idiot! Maybe if you buy in Stockton, Las Vegas, riverside or San bernadino. Most decent cities in California still have pockets of bubble pricing. Go smoke some more hopium and watch more Fox news, I’m sure you’ll feel better.
      Ps. When your low interest rate goes up, no one will be able to afford your overpriced box!

  • We were in Carmel, CA this week. This town probably has the highest net worth, per person, of any city in CA. Tiny houses routinely sell for millions of dollars.
    Because it is “car week” there, the streets were filled with Ferraris, Bentleys, Lamborghinis, etc. driving around town.
    But there are many, many vacant stores in downtown Carmel. If retail stores can not survive in a town of multi-millionaires, it does not bode well for our economic

  • I’m just starting to see real first level cracks here in the SF Bay Area. Fixer-upper Homes in decent areas that were buying bought by flippers are now sitting empty and unwanted for months. At prices that are fairly low. The “investor” class has figured out that they cant make money. This is new. I’ve been watching this market for the last few years and they’ve been very active. But now, they’re gone. And these houses are just sitting.

  • Another year or two of this and the people of the US will start to understand that we’re going through a systemic, structural change to the global economy and NOT a cyclical recession. Housing will NOT be going up for a very long, long time. Nor will employment.

    • You speak truly, CAE.

      The economies of the US and Europe are starting to go through the biggest shift since this country industrialized in the late 19th century, and from where I sit it looks like we will emerge a much poorer country. The depletion of resources is the main driver here and how we will come out of this, no one knows.

      • Please, stop being so pessimistic. US is the largest, most dynamic, most innovative and most diverse of any country on the globe.

        Once we are through this slump we’ll come out as a rocket as we always have in the past. Betting against the US is a bet you’ll always loose in the end…

  • I too believe we have yet to see the worst of the housing crash in our bubble cities. On the Westside of LA, we have only corrected 25%. If we overshoot the mean, which given the size of the recent record housing bubble could happen, it will be a disaster for affluent Southern Californians. 60% off of 2007 peak prices is not so far stretched anymore.

  • The perception that the paid off homes in these bubble areas will just be left to the kids is a little off I think. Folks are living longer these days, are the kids really waiting around until the are in their 50’s until they get the house. Who’s to say mom and dad are not relying on the value of that property for retirement too, a common thing in CA. I agree that there is a huge population of homeowners who cannot afford their current house but eventually most will need to sell either because they need the cash or they can no longer afford or manage physically the upkeep. Desirable So Cal neighboorhoods will always be pricier, but it’s definately still in a bubble, at least here in LA.

    • manhattan transfer

      good points Candace,
      reverse mortgages, second’s etc. Parasitic property taxes as the CA budget crisis builds like a tsunami. A bunch of houses trying to find buyers amidst the shadow inventory. A lot of 401k’s going into mandatory liquidation to retirees. Pension’s failing and being forced into government health plans (the real reason gov wants to be in health care). Extrapolating the future from the past is very risky…

  • The key point is that houses are an asset that depreciates very slowly over several decades, as the components wear out. However, since the components of a house, (nails, lumber, glass, labor, copper, etc.), are fairly ubiquitous, they tend to rise, collectively, with the overall level of price inflation. Therefore, there is this misunderstanding that houses are an ‘appreciating’ asset. Actually, in a stable interest rate environment, houses should lose just a little bit of ground to inflation, maybe 1/2 of 1% per year, or less. But since inflation often runs around 4% or more, existing homes ‘appear’ to be going up in value.

    To further muddy the waters, the USA has not been in a stable interest rate environment since the Federal Reserve Bank was given the power to set short term interest rates decades ago. In particular, since the technology bust in 2000, they have forced interest rates unnaturally low, further distorting the housing picture, since most home purchases are financed.

    A falling interest rate structure is a very deflationary environment for large purchases, like houses, that must be financed. The reason for this is that older debt is set at a fixed rate of interest. Therefore, a business that borrowed working capital a few years ago now has a massive competitive disadvantage, compared to any competitor that is borrowing now, at much lower rates.

    With residential housing, the borrower usually has the right to refinance at will, should interest rates fall. In the current situation, however, many borrowers cannot take advantage of lower rates, because they are under water on their mortgage. Usually, you cannot refinance for less than the fair market value. So they are stuck. Look for sales volumes and prices to continue to decline.

    Ironically, borrowers that wish to refinance, must mark their home’s value to market, in order to refinance. But the bank that is holding the note can carry the note at whatever value their ‘mark to make believe’ computer program says it is worth, lol.

    • Jason,

      You are correct, once you flush that toilet the first time it starts depreciating. Real estate value (not price – price is what you pay-value is what you get) typically is land + improvements, hence the “they aren’t making more land” argument. So the 2×4’s, nails and shingles could not possibly have appreciated, it was only the land. Now when a homeowner shows me the receipts for the travertine and I tell them it has the same functionality as linoleum they are not happy! If they can provide multiple comparables with travertine versus similar size comparables with linoleum then maybe I can extrapolate a dollar value associated with it. Let it fall! Does anyone think that if your typical SoCal mortgage payment went from $3000 to $2100 a month that at least 75% of the difference would not find its way somewhere else?

  • DR. HB wrote: “During the Great Depression, new home sales fell 80 percent from peak to trough. In this crisis we have fallen 82 percent.”

    While I don’t dispute the actual numbers, I don’t think they tell the whole story. What I mean is that in the Great Depression we were not in a housing bubble, so an 80% drop peak to trough was much more extreme than the 82% peak to trough drop we are seeing now. The peak in 2005/2006 was unusually high because of all the gimmicky loans. I don’t know this for sure but I’m guessing the peak prior to the Great Depression wasn’t so crazy.

  • Really surprised few people are discussing the fact some owners of 800 to 2.5M properties have been living mortgage/ rent free for the past 2-3 years. I personally know 4 in Newport Beach, SJC, Dana Point and Laguna Beach. Banks are holding off foreclosures since there are zero buyers for these properties. It appears that lenders want to keep up appearances and slowly move inventories to avoid neighborhood devaluation on a large scale. I bought my place NP Back Bay in the 1970s and stayed, average price for a 1800 sq went for $145,000. Looks like these prices may reappear.

  • Some people on this board have expressed that homes in posh/sought after neighborhoods will never come down. Well sooner or later the fundamentals will win out. I live in Chicago and in our sought after neighborhoods, people are still clamoring to live in them and are still willing to pay 700K to 1.5M for a home so they can tell their friends/family they live in a nice neighborhood. To them, I say God bless you. I can not sleep well at night knowing a disproportionate amount of my income is going towards my housing expense. I love to sleep well at night.

    There are people are out there who can afford it. To that I say if it floats your boat and it makes you happy, then go ahead and do it. Not everyone is the same and not everyone is obsessed with money (some people don’t care if the house they bought will still go down in value).

  • Yes, Nimesh, but note that even Gold Coast, Streeterville, and Lincoln Park prices have dropped steeply. For $1.5M, folks expect a home that would have fetched $3M at the peak, and many “mansions” in LP and other “green zone” nabes are languishing.

    You’d really think that the builders would have done the demographic studies to discover just how big a market there really is for upper bracket housing in Chicago before they built thousands of expensive condos and McMansions priced from $800K to $6M. Take a look at the 60611, 60610, and 60614 zip codes on to see just how many people there are in the “over $200K” income bracket even in those wealthy zip codes, and you can see these builders really overshot their market, and should have known it.

    There’s still a lot of room to drop in Chicago, now the country’s most troubled condo market. Relatively modest $600K homes in “green zone” neighborhoods are moving, but with steep price reductions as buyers get choosier and qualified buyers are harder to get in the current climate of tight credit and scared money.

  • “This is why after trillions of dollars funneled to the banking sector little has been done in terms of boosting incomes or home prices. Where do you think the money went? It certainly didn’t go to adding jobs….”

    You’re correct on this, but there’s no reason we should expect corporate revenues to go into job creation right now. As you rightly point out, there are still trillions in bad mortgage loans in the US alone. There are trillions more scattered throughout Europe and Australia. Just as troubling is the trillions in European sovereign debt whose value is questionable right now.

    All of these are problematic but are not systemically disastrous on their own. The real problem is that, thanks to securitization mania, nobody knows who holds how much of what. Even the institutions holding those assets don’t know what they’re holding, how much, and therefore have no way to gauge even their own linear risk. Let alone the risk posed by institutions in which they have invested.

    As a result, no large companies are willing to lend, invest, pay out….anything. The stoppage in job growth, even in the face of demand opportunities, will not be mitigated absent tremendous debt overhaul in the US mortgage markets and the EU.

  • Laura I agree 100% that builders and speculators built too many homes in the 600K to 3 M dollar range. I mean, back in the 1980’s and even early to late 1990’s I remembered what a house from 250K to 3 M. looked like. Now, the market is flooded with homes in that range. There will be a serious downturn in the high end real estate market.

    Back when the real estate bubble burst in 2006-2007, I was certain the time to buy would be in late 2012. But the way things are going, with all of the market manipulation, it wouldn’t surprise me if we go the way of Japan. A lost decade or two. Also, the idea of a 80% to 90% drop from peak doesn’t seem too far fetched now (we have already hit 45% to 60% decline from peak in Chicago).

  • What I don’t see happening is the prime areas dropping into what would be considered affordable. Of course a home going from 6mill to 3 or 2 is one hell of a drop, but two million dollars is still a boat load of money. The inland empire dropped because it never should have been high in the first, no jobs, hot as hell, and long commutes. I never understood how those areas ever got that high in the first place.
    We have seen examples of little shacks in nice areas dropping but are we really going to see a nice home in a nice neighborhood going for a true rock bottom price? I place a high value on quality of life.
    I would love to see some of those 1mill to 800k homes drop to under 300k but I really don’t see it happening. I wonder what is the opinion of the board?

    • Hard to say. The American Empire is slowly collapsing, so it seems anything is possible. May take many years to see those kinds of drops.

  • California house prices will collapse when the mainstream media officcially recognizes the fact that we are now in another Great Depression and NOT a recession.
    Another million jobs will be lost in the public sector by the end of 2012 and then there will be no doubt in the minds of the American people where we stand. That is in the abyss of another Great Depression.
    You can fool some of the people, some of the time. But you cant fool all the people, all the time!

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