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California Association of Realtors (CAR) March 2009 Analysis: Already -59% over 21 months

This is just the first half.  The next leg of this will really hurt.

As you look at those peak prices, just quietly calculate what the median household takehome income probably was for each area, and it becomes apparent that all of these homes were priced about 10X compared to what should be 3X median take home income.

http://globaleconomicanalysis.blogspot.com/2009/03/california-association-of-realtors-car.html

So, if the peak was $600,000, you could say that it should drop to $180,000, ie –70% (-$420,000) from peak, so that the ratio of 3 is reached.

However, that still will not be the bottom.

1. people are losing their jobs and having their wages reduced
2. real estate and other taxes are rising to make up for government shortfalls from falling home prices and slower consumer spending
3. people are becoming more cautious and less willing to stay in debt on underwater mortgages, and even refinancings will eventually stop when rent prices drop as more people subdivide their properties to rent them out to make the mortgages or previous separate renters move in together or with other friends and family who own their homes to consolidate their costs

#1 leads to a lower denominator of house price / median takehome income
#2 leads to a lower denominator of house price / median takehome income

#3 leads to a lower tolerable ratio overall.

If let’s say median household takehome income was based on 1 1/2 people working and bringing in $50K post-taxes, seems safe to assume that could drop by 20%, to say $40K with job losses, wage reductions and tax increases.

If the ratio stayed at 3, then the median home price would drop to $120,000

But if the ratio dropped to 2 out of overall diminished confidence in future earning power or collapse in value of savings and pensions or just a cascading walkaway from underwater mortgages, then the bottom looks like $80,000.

If the ratio dropped to 1.5 then bottom is $60,000.

So, those who don’t own, but who think they still will have enough of their savings left in 3 years, can rejoice that they can buy a house that used to cost $600,000 for $60,000.  Those who are wealthy and already own their home, can dollar-cost-average by buying up more properties.

Those who rent can be happy that their rents can probably be renegotiated downwards.

But everyone will be quite uneasy knowing that this collapse in asset values will translate into lower economic activity and therefore less job opportunities, higher pressure at work for those still employed and at lower wages, reduction in government safety nets and services, greater domestic discord, rising substance abuse, but with cheaper substances, etc.

Bottomline is that we’re still far from the bottom.
In fact as a % of the value remaining, we still have another 75% to fall.

By SpiralMan