If a neighborhood started out at $200k in 1997 the natural inflation to 2007 would result in a price just over $255,000. A $255,000 sale price with 5% down would result in a mortgage of $242,250;
At 7%/30 yr amtz that results in a monthly payment of $1,604 + $238 for the property taxes and another $175 for insurance and HOA; and we end up with a PITI payment of $2,017/month; Divide that by 35% and that ends up with a gross income of about $5,760/mont, or $69,154.
By my count, that $69,000 is right in line with the average household incomes in that area. Coincidentally, The $200k house in 1997 probably peaked out at about $500,000 (maybe a touch higher); and a 50% decline off peak would end up at $250k.
We always talk about the correction coming to the long term trendline; we never seem to but touch on the idea that it could actually overshoot and go negative to the trendline. Logically speaking and considering we just had a massive spike the correction basically has to overshoot in order for that trendline to continue on in the same general direction.
I keep getting that nagging suspicion that maybe a 50% is being too conservative. Maybe our regional wage/population trends don’t economically support the absorbtion of the additional 10% more housing we’ve built in the last 10 years. Maybe now that the specuvestors have left the building we’ll end up facing an oversupply of homes that would lead to a period of below trendline pricing.
Maybe 50% isn’t the number we should be anticipating after all.