The height of the ARM mortgage boom has yet to write its final chapter in our economic history. The chart above shows that we are only two years into a six year spell- or more - depending on how many other non-traditional mortgage products will come back to haunt the investor.
Yes the pain is great, and the days of easy credit and no down-payments are probably over. I know countless families whose lives have been dramatically affected by our false assumption that our personal prosperity would always grow, that we could “leverage debt” (our home) for the future. But in the end, we all knew this was a bubble didn’t we?
If we didn’t, we sure should have seen the signs:
Here are some historic measures:
Rent. In the last half century, homes have on average sold for 20 times what it costs to rent them for a year. In 2006, at least in some places, they were selling for 32 times annual rent.
Income. From 1950 to 2000, home values sold for three times average household income. In 2006, average household income was $66,500, which should have put median home prices at $200,000. Instead the median was $301,000.
Appreciation. Existing home values rose 0.5 percent annually, adjusted for inflation, from 1950 to 2000. From 2000 to 2006, they rose at the annualized rate of 8.2 percent above inflation and peaked with a 12.3 percent rise in 2005.
Well, we all know that good things must come to an end.
Consider this, USA Today writes:
The boom in home prices — fueled by heavily leveraged loans built on low or even no down payments — made it easy to forget that housing values had been remarkably stable for a half-century after World War II, rising at roughly the same pace as income and inflation. Prices soared in most of the country — especially in Arizona, California, Florida and Nevada and metro areas of Washington, D.C., and New York — during a brief period of easy lending, especially from 2002 to 2006. That era’s over.
So far, home values nationally have tumbled an average of 19% from their peak. As bad as that is, prices would need to fall as least 17% more to reach their traditional relationship to household income, according to a USA TODAY analysis of home prices since 1950. In that scenario, a $300,000 house in 2006 could be worth about $200,000 when real estate prices hit bottom.
So what if this “economic crises” is really just the market responding to an economic imbalance? Not everyone is going to have the means to afford a $320,000, 3,800 sq ft home with a three car garage. And yet, that is what was being built- everywhere.
Can we please, just for one second, consider that perhaps *some* of the the people losing their homes shouldn’t have qualified for it to begin with? Can we consider for just one second that perhaps we should let the institutions fail that perpetrated these bad loans, easy credit and overabundance of generational space? Can we consider for just a second that maybe this crises is just part of the normal business cycle and we are really just getting set up for the next success?
Sigh.
But know this, the demand for these homes will still be there. Sure, the prices may be down, for awhile. But, as the Village Soup article notes, we grow by three million people a year. The only question is will the government let the market work to match these, and other new buyers, to the sellers? That is what we must concern ourselves with now.