There are two and only two long term values to a house:
1. It can keep the rain off your head as you sleep at night
2. It can earn money as a rental
Assuming this, there are a couple of ways to determine the value of the house based on the above two values:
1. For the person who want’s to keep the rain off their head, an important ratio is the median home price to income ratio which the professor gives as being over 14 when it is normally less than 9 and as low as 7. I know this is calculated using median house prices, but from what I see on the lower end, it carries over to that market as well, just use Zillow and look at the progression of house prices in Vista or Escondido.
2. for the person who wants to own a place and then rent it, an important ratio is the price to rent ratio. I’m not sure what a good ratio here is, but I remember it being about 15 or so, currently in San Diego, it’s about 25-over 30 depending on the area.
Both of these ratios seem to be way out of wack on the low, middle, and upper middle of the market, as I believe many readers of this board believe: because of the E-Z credit that is available to everyone.
Obviously, other factors will pop up and affect these ratios in the next five years, (inflation or deflation, higher incomes or lower incomes, recession or continued growth), but excluding these factors, it looks like housing has a long way to fall across the board.
Looking at these ratios, I’d say that a $400K house for $250K is a possibility if these ratios moved back to their normal values, and the other factors (inflation, income, no recession) stayed the same over the next five years. Will these other factors stay the same? Hell no, but the ratios are probably a good guide.
I’d say that the only housing market that won’t be affected by a bubble burst is the multimillion dollar market since the buyers in this market are probably not relying on financing as much.