This isn't a popular thing to say, but the silver lining in this crisis is that housing costs will return to rational levels. One of the things that d
January 28, 2009

This isn't a popular thing to say, but the silver lining in this crisis is that housing costs will return to rational levels. One of the things that drove the spiraling debt economy of the past three decades was the rapid shift from housing as shelter - to housing as speculative investment. Those high housing costs drove everything else: Most families needed two paychecks, because wage deflation wasn't keeping up with the mortgage prices:

Home prices were down nearly 20% at the end of last year, according to two new reports. But there is plenty of further room to fall, say economists who forecast where the housing market is headed. The median sales price of existing homes fell to $175,400 in December, down 15.3% from a year earlier, according to the National Association of Realtors (NAR). Looking at the S&P/Case-Shiller index, home prices in 20 cities fell 18.2% in November compared to the year before. Both measures make houses about as expensive as they were in 2004.

And we're likely not done yet. "Our outlook is that home prices will continue to fall, bottoming by the end of this year, but it won't be until the end of 2010, maybe even 2011 that we'll see steady price gains," says Celia Chen, an economist at Moody's Chen and her colleagues predict that home prices, as measured by Case-Shiller, are due to drop some 30% from their early-2006 peak. We're only about two-thirds of the way there.

That forecast, gloomy as it is, still assumes the government is able to create economic-stimulus and foreclosure-prevention programs that work. If not, then home prices could be expected to fall even further. Major layoffs, of which there are more each day, keep downward pressure on home prices since people without jobs are less likely to buy a house — or to make the payments on the one they have. Foreclosures exacerbate the problem since banks tend to sell repossessed properties on the cheap. December saw a surge in existing-home sales, especially out West, but 45% of those were distressed sales at discounted prices, according to NAR.

Beyond the state of the economy, the problem is that in many markets houses still cost too much. Housing consultancy Zelman & Associates compared what houses cost to how much people earn and found plenty of markets — including Portland, Miami, Norfolk, Philadelphia, Los Angeles and Salt Lake City — where homes would have to shed at least another 30% in value to get back to being as affordable as they have been historically.

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