Well, it wasn’t the response I expected, but that’s OK. I wrote so poorly that most of what I was trying to say got lost. I’ll try to make this supplement clear(er)..
INTERNATIONAL FACTOR
1. Prices in Ohio will track the average income of the US fairly closely and over long periods. Pick your own favorite number for the long-term rate of increase of average US wages and these prices. For argument’s sake, I’ll pick 4%. That means the Ohio price 30 years from now would be 324% of today’s price.
2. Prices for beachfront property in S Ca will track, over long periods, the average income of the top 1% of 1% of the world’s population. Thta’s my (controversial) hypothesis. Maybe I’m smoking something, but I think this average income will increase by more than the US average. Let’s say that it averages 6% a year over 30 years. So home prices at the beach in 30 years will be 574% of today’s prices. The ratio between S Ca beachfront prices and Ohio prices will be 177% of what it is today. (Isn’t this growing differential just a continuation of what’s been happening since the 1970’s?)
3. Prices for property in between these two extremes in location will grow over the long run at a rate somewhere between the two extreme growth rates. In my hypothetical example, that’s somewhere between 4% and 6%.
4. Long-term home price increases in Flatsville, Kansas, will track closer to Ohio’s than homes 5 miles inland from the beach in S Ca. Prices 5 miles inland will track closer to the beachfront home prices than Ohio’s. It’s a diminishing effect as you go inland or to less desirable areas, but you still get some impact. So if it’s 4% in Ohio, and 6% on the beach, what is it in Turtle Rock, Irvine? I think there’s enough economic connections between the beachfront group and Turtle Rock that it’ll be, maybe, 5%. Prices 50 miles inland, or near skid row… I don’t know about those.
NASTY MORTGAGE FACTOR
I have never had a loan in my life, apart from having a buddy or relative cover a lunch bill until I went to the ATM. But most people are ready to borrow whatever a lender will give them. Some loans that allowed ridiculously high principal to income ratios with little or no money down are now in disgrace. We all know that will change.
Does the recent problem in mortgages mean we’re going back to 20% down, level payment 30-year fixed interest loans? I doubt it. New loan products will be brought out that are given a stamp of approval and insurance help by regulators. Do I like that? Not at all. It simply forces taxpayers (like me) to subsidize people who borrow too much (not me) by handing out cheap govt mortgage insurance on their loans. But it’s a political reality that people who borrow to buy homes – over 50% of the population – form a group that controls how Congress acts.
So what loan product generates the highest supportable principal amount while still having a chance at being called “reasonable” by regulators? New, creative loans will be cooked up. I can’t think of them all, so I just came up with a simple fixed interest loan design with annually increasing payments. The annual increase is fixed in advance, but is set at what the wise regulators (wink) decide is supportable. My guess is that they’d accept expected average wage increases, minus a safety margin. I’ll throw in 6%, less 1%. (Use your own guess at where the regulators would draw the line.) If people are prepared to pay $30,000 in mortgage payments, that’s a loan of $835,000. If you lower the annual increase in payments to 4%, then it’s $737,000. I find these numbers depressingly high, but not inconceivable.
MY PERSONAL CONCLUSION
Having said all that, I think prices and mortgage practices now are nuts, and will pull back, even in the best areas. But I think the price decrease, especially for better homes in better areas, is very precarious. It wouldn’t take much to reverse it. Hope I’m wrong, and I hope someone can show me why. (For example, I am sure there are contributors here who have good knowledge of Congressional and OFHEO oversight of the GSEs, and could provide educated commentary on the degree of loan risk Congress could push the GSEs to sign up for.)
