Demand for housing is going to be less than its traditional long term average. And now you throw banks in there who are a bit gun-shy (not to mention collapsing) and it's a pretty good formula for housing prices to drop below their long term average.
Additionally, it pays to compare the US housing market to that of Japan's almost 2 decades ago. You think we've had a drop in prices now? Japan's housing has never recovered, going from a house to income indexed ratio of 120, to almost half that today.
If the Japanese housing market is any kind of portender of things to come, if we link the US chart to the Japanese chart to project the US housing market, prices could drop significantly more than what we think they will;
Roughly, 40% MORE from what they've dropped already. The median house price in the US would go from $220,000 (2007) to about $130,000 by 2023. Of course that's only if we're stupid enough to do what the Japanese did and bail out their economy to the tune of a trillion dollars and keep dead companies afloat at the expense of the tax payer...oh wait.
I'm not sure Japan is a great comparison. It has been in a crisis of low birthrate for a while, and has very low immigration.
ReplyDeletehttp://news.bbc.co.uk/1/hi/world/asia-pacific/7096092.stm
This isn't to say we won't have a severe correction, but our recovery prospects are different than Japan.
Very interesting thesis, this would further complicate the coming baby boomers retirement if they plan to downsize their homes. Whom will the buyers be.
ReplyDeleteHow similar is the Japanese problem from the 80s and the one we're facing now?
ReplyDeleteI like the thesis, particularly as we seem to be modeling Japan's actions to date.
ReplyDeleteThis price adjustment assumes that incomes will remain level. In this economic climate I would argue that the dollar costs of homes will also fall as incomes fall. More and more people will be competing for jobs, pushing wages lower. In this scenario homes would fall in nominal terms by the 40% called for by the ratio, and even further with declining incomes.
It also doesn't look like Japan's home prices are even done falling!
What will this do to governments that rely on property tax collections to operate? I predict wealth taxes over time, probably starting at the federal level and modeled after France's Solidarity Tax on Wealth.