Housing at 250% of Real Value
Princeton University economist and columnist for the NY Times, Paul Krugman, was open in his assessment of the US housing market while making a speech overseas.
"Macro indicators suggest that the market is speculative mania. Day trading cannot be sustainable."
"I think there is 50% chance for a major break in the situation in the US next year.'"
"There is a real bubble mentality in the US housing market,' Prof Krugman said, adding that prices of US housing were 250% of their real values."
250% of real value is an interesting number. At face value, a $700,000 starter home near NoCal's Baghdad by the Bay (San Francisco) is really worth $280,000.
A $500,000 starter home near Baghdad South (LA/South Bay) is really worth $200,000. The scary truth is these numbers actually seem about right.
I have been adamant about a slow, painful and conservative 40% drop; 10% per annum over the next 4 to 5 years in the bubble areas.
But to get in line with Dr. Krugman's thinking, this type of reality check would require a 60% drop in current "value". As some of us still have 1989 - 1995 fresh in mind, this is not out of the question.
Asia - Shift to Domestic Led Growth?
"Macro indicators suggest that the market is speculative mania. Day trading cannot be sustainable."
"I think there is 50% chance for a major break in the situation in the US next year.'"
"There is a real bubble mentality in the US housing market,' Prof Krugman said, adding that prices of US housing were 250% of their real values."
250% of real value is an interesting number. At face value, a $700,000 starter home near NoCal's Baghdad by the Bay (San Francisco) is really worth $280,000.
A $500,000 starter home near Baghdad South (LA/South Bay) is really worth $200,000. The scary truth is these numbers actually seem about right.
I have been adamant about a slow, painful and conservative 40% drop; 10% per annum over the next 4 to 5 years in the bubble areas.
But to get in line with Dr. Krugman's thinking, this type of reality check would require a 60% drop in current "value". As some of us still have 1989 - 1995 fresh in mind, this is not out of the question.
A small history lesson: Coachella Valley P&I payment levels adjusted for inflation are almost at their all time high which was 1989 to be exact. Does anyone remember when 80% of the homes (mostly new construction) in Moreno Valley were in foreclosure?
1993 was the year and the banks got no takers at the trustee sales as the remaining loan amounts were greater than the property values. The banks put RENT ME for $800 a month signs on the REO's, offering to credit the rent paid towards purchase.
These were 2 year old homes that had sold for $250-$300K and were resold eventually for under 150K. Will we see a redux?
A hat tip to Ben Jones Housing Bubble BlogAsia - Shift to Domestic Led Growth?
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