Realistically, I cannot see prices falling the 40-50% that everyone seems to hope for. The tightening of credit will exclude some at the low end, and make borrowing more difficult for everyone, but the largest factor sustaining real estate prices is the ridiculously low interest rates. All in all, the amount people spend each month on housing hasn’t increased in proportion to the increase in prices. People monthly housing expenditure, while certainly higher than 20 yrs ago, is not THAT much higher after inflation is factored in.
We all talk about how absurd it is to consider spending 8-10x your annual gross on a home, but the true number that directly affects peoples bottom line is how much that home is costing per month. As an example lets assume a monthly house payment of $3500 in 2005.
165K in 1985 and 600K in 2005… both houses for ~$3500/mo
Therein lies the problem… the median house owner spends roughly the same amount per month now as they did in the mid 80’s. I think that interest rates really have to start increasing to truly pop the bubble. Only then will house prices begin really tumbling, but so will the purchasing power of the mortgage dollar, so you will end up spending the same $3500/mo on a $350K house at 12% interest.
