Is there any reason why homes today should be worth twice as much as in 1996?
Graphically, prices were heading right back to 1996 until the government decided to spend trillions of dollars to prop them up.
Consider what’s been done to halt the collapse of home prices. Our demand for homes has been artificially boosted with low mortgage rates and tax credits, and our supply of homes for sale has been cut drastically by all of the foreclosure prevention efforts.
For some perspective, check out the original Case-Shiller graph that shows home prices, adjusted for inflation, for the last 100 years or so. Note that the numbers are slightly different because this chart includes all national data, not just large cities.
Looking at long-term trends, we each must fall into one of two camps. Either you believe that, eventually, home prices will revert back to their relative historical norm because people can only pay so much of their monthly income for housing. OR, you believe that this time really is different; that people going forward will be willing to pay relatively more each month for shelter than for the last 120 years.
I don’t see how this time is different. I don’t know why, socioeconomically, people will pay more of their monthly paychecks for housing over the next 120 years than they did for the last 120. Sure, you can make a case that a particular neighborhood or town has become more desirable, but that is irrelevant on a national scale.
In short, if you believe that the economic growth since 1996 was robust enough to justify the doubling of home prices during that time, then perhaps home prices are now at the “correct” levels. But if you believe that most of the economic growth since 1996 was built on bubbles and debt, then it’s hard to find a reason why homes should be twice as expensive.
....................................
Whoddathunkit??? A Realtor that's not full of it. Although in 1996 prices were pretty depressed in Southern California. That was at the bottom of our last crash and many including me think prices were probably a bit undervalued in that time frame. But two or 3 years later prices had recovered to what I would consider normal levels. So what should the median be today based on a "normal" market. In the year 2000 the median price in Riverside was $150k. If we add a decade of normal appreciation the median today would be approx $200k. And remarkably enough that's right about where we are today. However taking into consideration the terrible economy, the high unemployment and the government intervention propping up prices it's probably safe to say we are currently overvalued given the economic conditions. Maybe we should go back to the bottom of the last bust (1996). If we do that we find the median was around $120k and with normal appreciation that would give us a median of $181k today. Not a great deal of difference between the two, primarily because of the additional 4 years of appreciation. So, are we at the bottom? by all indications in most areas of the IE we are, or damn close to it. The only question is how long will prices remain low. Personally I don't think they are going anywhere but sideways for a while. Small normal gains are possible but with the current economy I don't see it happening (assuming the government stays out of the mix). So if you are gonna buy, you better plan on staying a while.
I got the median numbers from the California Association of Realtors and the "normal" appreciation I used was 3%.
