The graphic below, of the median home price in Sacramento, is very intimidating. In fact it looks down right precipitous.
However, there has been a lot of speculation that the housing boom was fueled by cheap and accessible money. So I looked at the numbers in terms of the out of pocket expenses for home buyers. What is the monthly mortgage payment? Because in reality that is what people are signing up for.
Looking at the monthly payment its not nearly as scary as it seems (interest rate and points were national yearly averages based on data from Freddie Mac). In fact we have not even surpassed an earlier peak that occurred in 1981. Interesting, if you add a trend line....it is completely flat! Rather fascinating....I am sure there is a good explanation for it....but I can't think of what it would be other than the Alan Greenspan factor...
While this data only goes to 2005, it does tell me that once we get to interest and inflation rate adjusted 2002 levels then we are in reasonable territory (at the historical average). So now I sit impatiently waiting for my cure.
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NAR brought up 1981 in the so-called "anti-bubble reports" in an effort to convince people that housing really wasn't that expensive ... But interest rates were the problem in 1981, not prices. Everyone knew rates would come down sooner or later, and they did come down substantially within a few years. IIRC the few buyers during those recession years used what passed for "exotic financing" back then, such as short-term IO balloon-payment loans. The payments during the first few years were brutal, but they were able to refinance at low low rates (like 9 percent!).
What about bubble buyers? The payments are similar to 1981 levels. But rates were low, which negates any chance of savings from future refinancing. And unlike interest rates, principal never fluctuates in response to outside events. So in the best-case scenario the bubble buyer is stuck with that high payment forever ... and in the more typical scenario of an exotic mortgage, it'll go up.
No, I'm not that old. I just offer myself as a warning ... don't let your little kids watch too much TV news, no matter how precocious they seem ... all the doom and gloom will turn them into bitter angry renters.
Thanks so much for the historical perspective. Great observations.
I was just a young lass then.
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