Yet another example of why The Big Picture is required reading. The graphs provided today of housing value and debt as percentage of GDP and existing home prices vs. median income fundamentally tell the entire story of why housing prices are still too high. The fact that housing value has gone from 170% to 130% of GDP tells the story of our illusory wealth and our continued comeuppance. The ratio of median income to housing prices is a good indicator of affordability and indicates an ongoing process of regression to historic means. But there is another important metric not shown by the charts and that is the price of the least expensive homes:
Go to any suburban neighborhood — the one you or a freind/family member lives in. Look at the starter homes that a newlywed couple just starting out might consider. Small capes, 2/3 bedroom houses or cottages. Assume that this couple are late 20s/early 30s, and are making decent — but not 6 figure — salaries.
Can they afford that starter house? If not, then the entire real estate chain is frozen.
What’s left is mostly lateral moves, greatly reducing the overall sales.
So don’t expect a recovery until the prices of those starter homes return to reasonable levels, perhaps for those people who make just above to just below the median national income. (Below that, renting is probably the way to go.)
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