USA Today: “Why home values may take decades to recover”

This 12/15/08 article from USA Today argues that today’s home prices are still unsustainably high:

Why home values may take decades to recover

…”We will never see these prices again in our lifetime, when you adjust for inflation,” says Peter Schiff, president of investment firm Euro Pacific Capital of Darien, Conn. “These were lifetime peaks.”

…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…

An extreme relaxation of lending standards inflated the housing bubble…

The danger of rapidly falling home prices is that — similar to the Depression — potential buyers and lenders will stay away, fueling even sharper price declines…

Download this PDF (450KB) bundled with the USA Today article. It contains charts that suggest how home prices are likely to fall towards more normal valuations relative to household income and rental receipts:

Historically, home prices have been equal to about three times average household income. In 2005, they peaked at 4.5 times income…

Economists also measure home prices based on how much it would cost to rent the house. Historically, homes cost about 20 times what it would cost to rent the home for a year. A house that rents for $10,000 a year — about $830 per month — would be worth about $200,000.

In 2005 and 2006, home prices peaked at unprecedented levels — 32 yearsʼ worth of annual rents…

Homeowners have bigger homes, bigger mortgages and less home equity than ever…

One in 10 homeowners are behind on mortgage payments or in foreclosure — a number unheard of since the Great Depression…

A six-month supply of homes is considered a healthy inventory. The supply of homes for sale is not at record highs. But it has never taken this long to clear out a surplus, especially after prices have fallen sharply…

See also:

Boston Globe: “Double-digit drops in home sales, prices” (4/30/09)
The median price for single-family homes fell 18.2 percent, to $253,500, in the first three months of 2009, compared with the same period last year – marking a record drop during any quarter since Warren Group started charting prices in 1987.

Sales volume also continued to decline, with single-family home sales dropping nearly 11 percent in the first three months of the year, the slowest pace for a first quarter since 1991, Warren Group said.

“I don’t think we’ve hit bottom yet,” said Timothy Warren Jr., the firm’s chief executive…

Condo sales in the first quarter dropped nearly 27 percent.

Springfield Republican: “Local home sales rise, but state figures drop” (4/30/09)
In Hampshire County, March sales decreased by 30.36 percent over the past year and prices decreased by 10.16 percent.

New York Times: Downsides of Owning a Condo in a Downturn (5/15/08)

Krugman, NY Times: Home Prices Have Plenty of Room on the Downside (12/14/07)

House prices to drop much lower: Greenspan (9/21/07)