RO, everything we say right now is obviously a hypothesis based on educated guesswork by looking at historic affordability metrics such as rent/mortgage and prices/income ratios. If we look at previous bust cycles we will see that the ratios have always reverted back to their base values of somewhere around 3-3.5.
Given the theory that history repeats itself we can argue that this time it will not be any different, the relationship between prices and income will revert back to somewhere around 3-3.5.
Inflation adjusted income growth has been nonexistant in the last 5 years. If people are not making more money how are they suddenly richer to pay more for their homes? Especially considering that some fixed costs like education and health care have been skyrocketing. It doesn’t make sense.
As for making assumptions that income growth will be stagnant or will even decline we can make this assumption due to the trend of the last few years. Companies are already aggressively cutting costs or moving jobs offshore, it’s in the news almost every day. Given the increasing availability of talent in Asia it doesn’t make much sense for companies to suddenly start paying MUCH more in the future for US workers.
Now increases in rents are dependent on income, if income cannot rise substantially then I don’t see how rents can go up either.
If you’re saying that by 2015 prices will come down 30% nominal then that is a 60% drop in inflation adjusted terms! (inflation at 4.3% for Orange County). My guestimate was a 40-50% drop in inflation adjusted terms.
