The doom and gloomers (mostly economists) are predicting a further serious downtown in housing prices. Who are these people with no sense a’tal? When the market roars up for a while, it tends to come down for a while. Housing is a cyclical market and geographically centered. That’s no news.
Ownership of real estate is normally recommended for a minimum period of five years. The correction period is usually about five years. What does that mean? It means that before you buy, you should plan to own for five years. It isn’t like buying Google stock for the short term.
Several recent articles in the New York Times suggest that housing could see a 20% correction. The examples cited in the articles were Southern Florida recently, and Boston condos in the 1990 correction. Ok, fine. If a person was greedy enough to buy several condos in Southern Florida, he/she might have considered the risk and the cyclical nature of real estate at the outset. The same could apply to Boston where the condo market experienced a 30% drop. Those are examples of specific situations in particular geographic markets. I accept that, but let us generalize a little more about the housing market.
One article said that the ratio of home prices to household income had maintained a 3:1 ratio since about 1960. The cited example was the year 2000 when average home prices were $130,000. When I divide 130,000 by 3, I get a household income of $43,333. Has anyone noticed that income may have gone up since the year 2000? Granted inflation is a factor, but it is also a factor for home prices.
The article when on to state that the current ratio is now a shockingly high amount of 4.5, as opposed to the average of 3. To put that in perspective, I checked the CPI increase from June 2000 to June 2007. It shows a total increase of 21% and that increase might be reflective in household income also.
Real estate values have increased more than CPI; there is no doubt about that. My point is that the downward correction might be partially mitigated by increased household income on average. The second point is that spreading doom and gloom is like spreading an infection. It’s easy to catch it.
How about a little realism that says we had a boom and now we are posed to give some of that boom back. It is the nature of the housing market and the cycles repeat themselves over and over again.