Sunday, November 19, 2006

Problem: Income down, housing costs up.

Entry for October 11, 2006

First the article, then the commentary:

By Joanne Morrison Tue Oct 3, 3:58 PM ET

WASHINGTON (Reuters) - Soaring U.S. home values in the first five years of this decade have left homeowners feeling flush, but housings costs also have risen sharply, cutting into stagnant incomes, Census Bureau data show.

From 2000 to 2005, median home values surged 32 percent, fueling a consumer boom as homeowners tapped into this wealth. But the sharp rise in home values also boosted the monthly cost to own a home by 5 percent, and to rent one by 6.7 percent.

At the same time, median incomes changed very little over those years, posting only a 1.1 percent gain from 2004 to 2005 for example, the Census Bureau's American Community Survey showed.

The national median income adjusted for inflation was $47,599 in 2000. It dipped to $46,326 in 2005, according to the data...

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I found this blurb in a quick scan of recent news stories, as I was looking for the most recent data available on median income. The reason I was looking for this data is because in the last day or two my husband printed out an article from one of his servers at work about how much of people's income is being used for housing. I think that article came from a site called Cyburbia, but I could be wrong. The gist of the article was that even though financial planners say that families should only allocate about 30% of their income for housing costs, most families are well into the 40-50% range now. And while that is sad, it crossed my mind that on top of that, real incomes have actually been falling. I wasn't sure how much, so I wanted to find some recent stats.

What we see here, then, is depressing. Housing costs have soared, as the blurb says, but incomes have actually fallen over the same period. As I mentioned here once before, in real life the average family can no longer actually afford to buy a home. They think they can, and they squeeze their budget as hard as they can, and unrealistically expect to always have two incomes - but it's an illusion, a fairy tale gone bad. People don't understand how the usury system works, so they don't understand why the prices of homes keeps going up and up and up. They're baffled, and so they think if they can just hold on for a little while, then they'll get a raise or a bonus and things will get better.

And then it doesn't.

Raises and bonuses and real income of all types went down, not up. So what happens now? As you may have read in other articles, people are starting to default on their mortgages. Others are trying to sell their homes and downsize - but it's too late! There are now so many other people trying to do the same thing and so many developers and flippers trying to unload their unsold inventory that housing prices are crashing, dramatically:

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On the decline
Moody's Economy.com looks at the 100 largest markets and predicts their tops, their bottoms - and total price drops.

NEW YORK (CNNMoney.com) -- The housing market will get worse before it gets better - that's the finding of an analysis by Moody's Economy.com.

In the survey of 379 metro areas, the study's authors project that nearly 20 areas eventually could experience a "crash," or a decline of more than 10 percent from peak to trough. The most hard-hit areas will be in California, the Southwest coast of Florida, and in Arizona and Nevada.

Nationwide, the study forecasts a 3.6 percent decline in the sales price of existing homes...

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Another friend of mine is learning this lesson the hard way - she lives in California and they decided it was time to move away from the left coast before it gets nuked or something and come back to her hometown. But her husband dragged his feet last fall and winter, and on into spring, and didn't get the house on the market. Bad move. They have lowered the price of their homes nearly $40,000 from what they were originally told it was worth and still don't have a single offer, the last email I received. The market there is toast.


She was worried that the house they wanted to buy was going to be lost, but I wrote back to her not to worry - the real estate market is toast there, too. My husband's sister sold her house a year ago last summer, to a woman who wanted to flip it, apparently. She took about three-four months to do the work, meaning that the house went on the market shortly after my husband and I sold our house and moved to the condo. But even at that time, it was already too late. The house has sat on the market for a year now, unsold even at auction! She can't get anyone to pay what it cost her to buy the place plus the repairs she made (which in all fairness it did need - the house was built in the 70's and wasn't exactly up to the latest standards).

This story is being repeated all over the place - we've heard it from people we know in various areas all over the country, and the news reports bear it out: the housing market is crashing. I hate to say I told you so, but I did, if you recall. And unless the Fed lowers interest rates to practically nothing, there's no real way out of this mess. People can't afford to buy houses, and the people who need to sell houses can't sell them for the amount they need. They have lost money, plain and simple, both on their homes and regarding their overall income.

I don't know about you, class, but most people I know don't really have any money to lose. So this may be just the tip of the iceberg. We'll see. But I'm a pessimist, so I predict things will get a lot worse. Look for houses to start "accidentally" burning to the ground, the same way SUV's starting getting "stolen" and burned a year or two ago. That way, at least they get insurance money for it. As it is now, they can't get refinancing, can't sell it, and can't afford the payments. How can this possibly end well, class? It can't, I'm afraid.

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