http://efinancedirectory.com/article...damentals.html

The Dangerous Disconnect Between Home Prices and Fundamentals

Jul 09, 2007 --
By Ben W. (bdarbs)

The Disconnect Between Wages and Home Prices

Median income household cannot buy median priced home

Price increases are nothing new, since home values tend to go up over
time. What makes this housing bubble different (besides the fact that
it is the largest bubble in U.S. history) is the dangerous disconnect
between home prices and the basic fundamentals that typically rule the
housing market.

For example, increases in home prices typically keep pace with
increases in wages. But this has not happened. National median home
prices have increased by more than 45 percent in the last decade (when
adjusted for inflation). Average wages per worker, on the other hand,
have only increased by 10 percent in the same period.

As a result, for almost the first time ever, individuals who are
making the median household income cannot afford to buy a median
priced home.

In order to qualify buyers for loans, lenders loosened credit
regulations and encouraged risky mortgage products like interest-only
loans, negative amortization loans and ARM loans. This made it easier
to get a mortgage, but admittedly much harder to keep it.

In recent years, a large portion of the buyers bought out of their
price range. In many cases, their loan qualification was based on a
teaser rate and/or an interest-only mortgage payment. Now that the
interest rate is due to reset on these loans, millions will not be
able to afford their mortgage and will likely lose their homes to
foreclosure.

The Disconnect Between Rents and Home Prices

Also disconcerting is the disconnect between rents and home prices. At
one point, the only thing that stopped most people from buying versus
renting was lack of a down payment. Sure, it cost a little more each
month to buy - but not much.

But thanks to the housing boom, everything has changed. Home price
increases have far outpaced rent increases, rising 45 percent in the
last ten years. In the same time period, rents, like wages, increased
by only 10 percent.

Nationally, it now costs 60 percent less to rent than it does to buy.
But for some reason, this hasn't stopped people from buying. Between
1995 and present day, the homeownership rate has soared. In contrast,
the number of people who rent has declined for the first time since
WWII.

Since we already know that rising wages and lower home prices were a
factor, the increase in homeownership can be easily traced back to the
lenders who loosened credit and mortgage lending restrictions. Thanks
to these lenders, buyers who would have never stood a chance of
getting a mortgage just a few years ago were now being approved for
outrageous amounts of money.

(Of course, there is one other thing that may have encouraged people
to buy during this time rather than rent: low interest rates. In a
move that has been heavily criticized by some, the Fed began dropping
interest rates after the bursting of the tech bubble. Low rates made
it easier for people to qualify for high-priced homes, and also
encouraged buyers to 'act now before it's too late'.)

The Disconnect Between Home Prices and Home Sales

Although the disconnect between home prices and home sales was not
present during the housing boom, it most certainly is now. The public
has either lost interest or simply can't afford to buy into the
current housing market. Home sales have slowed nationally, and are
down significantly in cities within California, Florida, Nevada,
Michigan and Ohio.

As a result, supply has now exceeded demand in most areas. It would
take several months, and in some cases years, to sell all of the homes
that are currently on the market. Yet, home prices are staying level
for the most part - for now. If sales do not pick up soon, home prices
will most definitely begin to fall.

Why is the Disconnect Between Home Prices and Fundamentals Dangerous?

Just ask Japan. The country experienced a similar housing boom in the
1980s and is still reeling from the damage caused when the bubble
burst.

Almost every circumstance leading up to the Japan housing crash has
been present in the U.S. during the last decade:

* Historically low interest rates
* Housing touted as a 'can't miss investment'
* Average home prices doubled
* Average home prices in the six largest cities tripled
* Lenders offered bad loans
* Government acted as a partner to industry
* Home price increases far outpaced wages and rents

After reaching peak values, Japanese home prices declined by an
average of 40 percent. In the country's largest cities, the declines
were worse, averaging 65 percent. Homes in Tokyo lost 80 percent of
their value and are still on the downward slide to this day.

Japan home prices declined by an average of 40 percent

If you are wondering what will happen in the U.S. when the disconnect
between home prices and fundamentals finally becomes too much and
knocks the knees out from under the housing market, take a look at the
chart above.

The changes that have occurred in the U.S. housing market in the last
decade aren't much different than the changes that occurred in Japan's
boom market. Home prices have doubled nationally. Prices in bubble
states like California--where some of largest cities are also located--
have almost tripled in the last 7 years. When you compare the U.S.
chart (shown below) with the Japan chart (shown above), the
similarities are clearly visible.

Note: We are compiling the data for the six largest U.S. cities to
also include in this graph, so the graph below currently only
represents the U.S. national average home price (equivalent to the
bottom pink line in the Japan graph). We expect to have the new graph
up soon, so please check back.)

U.S. housing market in the last decade is very similar to Japan

When the crash occurred in Japan, prices fell to pre-boom levels. It
is not at all unreasonable to think that home prices in the U.S. are
about to do the same thing.

makes sense to me

On Aug 23, 12:09 pm, *Anarcissie* wrote:
http://efinancedirectory.com/article...connect_Betwee...

The Dangerous Disconnect Between Home Prices and Fundamentals

Jul 09, 2007 --
By Ben W. (bdarbs)

The Disconnect Between Wages and Home Prices

Median income household cannot buy median priced home

Price increases are nothing new, since home values tend to go up over
time. What makes this housing bubble different (besides the fact that
it is the largest bubble in U.S. history) is the dangerous disconnect
between home prices and the basic fundamentals that typically rule the
housing market.

For example, increases in home prices typically keep pace with
increases in wages. But this has not happened. National median home
prices have increased by more than 45 percent in the last decade (when
adjusted for inflation). Average wages per worker, on the other hand,
have only increased by 10 percent in the same period.

As a result, for almost the first time ever, individuals who are
making the median household income cannot afford to buy a median
priced home.

In order to qualify buyers for loans, lenders loosened credit
regulations and encouraged risky mortgage products like interest-only
loans, negative amortization loans and ARM loans. This made it easier
to get a mortgage, but admittedly much harder to keep it.

In recent years, a large portion of the buyers bought out of their
price range. In many cases, their loan qualification was based on a
teaser rate and/or an interest-only mortgage payment. Now that the
interest rate is due to reset on these loans, millions will not be
able to afford their mortgage and will likely lose their homes to
foreclosure.

The Disconnect Between Rents and Home Prices

Also disconcerting is the disconnect between rents and home prices. At
one point, the only thing that stopped most people from buying versus
renting was lack of a down payment. Sure, it cost a little more each
month to buy - but not much.

But thanks to the housing boom, everything has changed. Home price
increases have far outpaced rent increases, rising 45 percent in the
last ten years. In the same time period, rents, like wages, increased
by only 10 percent.

Nationally, it now costs 60 percent less to rent than it does to buy.
But for some reason, this hasn't stopped people from buying. Between
1995 and present day, the homeownership rate has soared. In contrast,
the number of people who rent has declined for the first time since
WWII.

Since we already know that rising wages and lower home prices were a
factor, the increase in homeownership can be easily traced back to the
lenders who loosened credit and mortgage lending restrictions. Thanks
to these lenders, buyers who would have never stood a chance of
getting a mortgage just a few years ago were now being approved for
outrageous amounts of money.

(Of course, there is one other thing that may have encouraged people
to buy during this time rather than rent: low interest rates. In a
move that has been heavily criticized by some, the Fed began dropping
interest rates after the bursting of the tech bubble. Low rates made
it easier for people to qualify for high-priced homes, and also
encouraged buyers to 'act now before it's too late'.)

The Disconnect Between Home Prices and Home Sales

Although the disconnect between home prices and home sales was not
present during the housing boom, it most certainly is now. The public
has either lost interest or simply can't afford to buy into the
current housing market. Home sales have slowed nationally, and are
down significantly in cities within California, Florida, Nevada,
Michigan and Ohio.

As a result, supply has now exceeded demand in most areas. It would
take several months, and in some cases years, to sell all of the homes
that are currently on the market. Yet, home prices are staying level
for the most part - for now. If sales do not pick up soon, home prices
will most definitely begin to fall.

Why is the Disconnect Between Home Prices and Fundamentals Dangerous?

Just ask Japan. The country experienced a similar housing boom in the
1980s and is still reeling from the damage caused when the bubble
burst.

Almost every circumstance leading up to the Japan housing crash has
been present in the U.S. during the last decade:

* Historically low interest rates
* Housing touted as a 'can't miss investment'
* Average home prices doubled
* Average home prices in the six largest cities tripled
* Lenders offered bad loans
* Government acted as a partner to industry
* Home price increases far outpaced wages and rents

After reaching peak values, Japanese home prices declined by an
average of 40 percent. In the country's largest cities, the declines
were worse, averaging 65 percent. Homes in Tokyo lost 80 percent of
their value and are still on the downward slide to this day.

Japan home prices declined by an average of 40 percent

If you are wondering what will happen in the U.S. when the disconnect
between home prices and fundamentals finally becomes too much and
knocks the knees out from under the housing market, take a look at the
chart above.

The changes that have occurred in the U.S. housing market in the last
decade aren't much different than the changes that occurred in Japan's
boom market. Home prices have doubled nationally. Prices in bubble
states like California--where some of largest cities are also located--
have almost tripled in the last 7 years. When you compare the U.S.
chart (shown below) with the Japan chart (shown above), the
similarities are clearly visible.

Note: We are compiling the data for the six largest U.S. cities to
also include in this graph, so the graph below currently only
represents the U.S. national average home price (equivalent to the
bottom pink line in the Japan graph). We expect to have the new graph
up soon, so please check back.)

U.S. housing market in the last decade is very similar to Japan

When the crash occurred in Japan, prices fell to pre-boom levels. It
is not at all unreasonable to think that home prices in the U.S. are
about to do the same thing.

a really well written article, thanks for posting it.

Outstanding Article!!! Thanks for posting it.

"*Anarcissie*" wrote in message...

The Dangerous Disconnect Between Home Prices and Fundamentals

In some states, 60% or more of recently sold properties are owned by
speculators who borrowed money at low (adjustable) rates, expecting to 'make
a killing' when they flipped the property. Can you say "Dutch Tulips" or
"Dot Com Boom"?

The owners and their lenders are now getting a rude awakening to the
realities of market pricing.....