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Home Prices Drop Again


Home ownership and sub-prime origination, 1987 through 2007

Have you ever heard someone say that the stock market is going through “an adjustment”? They are describing a situation in which stock prices have been inflated beyond the real value of companies and stock prices fall to more accurately reflect what a company is worth.

As hard as this is to accept, the housing market collapse may eventually prove to be the same kind of adjustment.

Americans tend to equate new home construction with a good economy to the point where construction is one of the prime indicators of our economic health. But what if new home construction exceeds the need for new homes? What if the new homes being constructed are priced too high for the average family? What if new home construction is adding to our economic problems, not indicating a healthy economy?

Comparisons of incomes and prices across time are normally adjusted into their equivalent in today’s dollars. That’s not monkeying around with the beans. In purely numerical terms, the median income in 1967 was $6,156 per year, but today, the same income would be equal to $40,770 in purchasing ability.

So, back to that 1967 number….the median income is the absolute center of the income spectrum in a population. In 1967, the U. S. median income was $40,770. The median house price was $25,000. In 2007, when the housing bubble was collapsing, the median income was $52,820 but the median house price was $250,000. In forty years, the median house price went from 61% of median income to 473% of median income. Economists have long used a simple measurement to determine if one can afford a house. The price should not exceed 150% to 200% of income. By 2007, using that standard, one would have needed an income of $125,000 to $166,667, 2.4 times to 3 times the median income.

Naturally, house prices vary widely across the country, but so do incomes. One place where this whole thing is very easy to see is Atlanta. Back in 2007, you could drive around the suburbs of Atlanta and see dozens of housing developments and the cheapest house price was $175,000. More normal was $300,000. But drive into the city and you found a huge swath of the city with dilapidated houses, certifiable slums, too many owned by absentee landlords. The amount of housing between those two points was not equal to the number of people who were at the median income level. Older neighborhoods with relatively affordable houses were occupied by older people who had bought those houses twenty, thirty years previously or by tenants. Some older neighborhoods were being “gentrified” by young professionals. The affordable housing market for the family with a median income was practically non-existent, and for a family with one median income, absolutely non-existent. There was a horrific case about a decade ago involving a young family who had downgraded their housing so the wife could go to school. The husband became the victim of a random shooting in a convenience store parking lot in front of his two young children. They could not afford for the wife to go to school and stay in the more safe neighborhood they had lived in. The shooter was a ten-year-old gangsta-wannabe.

Since the housing bubble burst in 2007, house prices have fallen. It’s a particularly bad situation for those who bought those inflated homes during the 2000s. Too many now have mortgages higher than their houses are worth. It is conventional wisdom to blame the bursting housing bubble on everything starting with a law passed during the Clinton administration that forbid banks making mortgage decisions based on the zip code of the house instead of the financial stability of the purchaser. The practice was called “red lining.” Red lining contributed to deteriorating neighborhoods as those people who might have held off urban blight were kept from buying in neighborhoods on the brink. Fannie Mae and Freddie Mac are blamed. But the worst abuse is blaming people who “bought houses they couldn’t afford.” No one ever thinks to blame the housing bubble on people who thought they were entitled to have their houses double in value in five years, or the never-ending construction of grossly over-priced houses. No one wants to see that when people cannot find houses they can afford, they are forced to buy houses they cannot afford or live the rest of their lives in rentals that are inadequately maintained and allowed to crumble. And they also don’t want to see the impact of a President who pushed for an “ownership” culture, as George W. Bush did.

We can talk openly about the stock market “adjusting” and how the “tech bubble” bursting weeded out the dead weight in the industry, but we are reluctant to discuss the housing market “adjusting” or the “housing bubble” bursting as a means of correcting something that went very wrong. We lost sight of the fact that people need decent, affordable housing.

Mitt Romney has suggested that we should deal with the foreclosure crisis by allowing developers to buy up those houses, renovate them and rent them out. No. We do not need more absentee landlords. We need a way to stabilize the housing market so that people can afford homes again they way they did in the 1950s and 1960s. We have to decide if we are going to lower the river or raise the bridge. We can lower home prices until they are in line with incomes or we can raise incomes so that people can afford them. There are no easy solutions to this, but we cannot determine solutions if we refuse to acknowledge the totality of the causes.



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