According to research by ISI Group, an international research firm, from 1971 to 2001, median housing value was between 2.6 and 3.0 times the median household income. As the housing boom took off , that ratio jumped to 4.0, and has since fallen back to 3.8 times median household income. But these are national averages and don't give a clear picture of the extremes that exist in various regions.
In some formerly hot areas, such as California's Inland Empire and Florida's Miami and Sarasota markets, prices need to correct more than 50 percent to get back to traditional measures of affordability, where homeowners spend roughly 30 percent of their monthly income on housing, according to Zelman's research.
Zelman estimates prices will fall until 2010 or 2011, while Burns believes prices will start increasing on average in 2010. Burns says the Inland Empire, where many builders flocked during the boom years, could be the worst market in the country in 2008.
OVERSUPPLIED: Months' supply of new-and existing-home inventory has increased greatly from low levels during the housing boom. With cancellations and foreclosures not tracked in official tabulations, the true level of for-sale inventory is higher still.
“What Fort Myers, [Fla.], was to 2007, Riverside, [Calif.], will be to 2008,” Burns says. “It's going to be everybody's biggest write-offs and worst horror stories.”
CONSUMERS WARYIf people are fearful about the state of the economy, their investments, their job security, the idea that they may not get a raise or bonus this year, or are simply scared of buying a home that will decrease in value, then affordability can improve all it wants but until consumer confidence improves, price reductions will not lead to sales.
“Sooner or later you are going to need some sort of effective demand to come in. If the consumer thinks prices are going to fall, even if they have the money and they're a qualified buyer, they're not going to buy unless they have to,” says UCLA's Shulman. “The consumer is going to have to have some sense that prices are in a bottoming process, and I don't think they're there yet.”
Early December indicators show signs of what economists even as recently as November said would be impossible: consumers cutting back on spending. Riverwoods, Ill.–based Discover Financial Services saw a decrease from 96.5 to 93.4 for November in its Discover U.S. Spending Monitor, an index that measures consumer spending.
“Consumers are doing their best to adapt to the economic environment, spending more on the things they need while cutting back on discretionary purchases and savings,” said Margo Georgiadis, executive vice president and chief marketing officer of Discover Financial Services, in a statement announcing the data.
Consumer spending accounts for two-thirds of total economic activity; and if it declines even a little, the economy will fall into recession. While home building is already in its own recession, an economy-wide recession could mean a several-year delay beyond 2010 for a recovery for home building.
CONFIDENCE BOOST NEEDED: Builder confidence in the market is at historical lows, and while consumers see low prices as an indicator of this being a good time to buy, tighter credit and falling prices have them waiting on the sidelines.
And the subprime mortgage fallout has far from run its course. A mid-December story in the Wall Street Journal highlights just how much of a drag the mortgage crisis could have on the overall economy, projecting losses of $150 to $400 billion, accounting for 1 percent to 3 percent of GDP. By comparison, the savings and loan crisis of the 1980s saw losses of $189 billion, which was 3.2 percent of GDP.
Robert Shiller, professor of economics at the Cowles Foundation for Research in Economics at Yale University and with Case a creator of the S&P/Case-Shiller Home Price Index, says builders should be watching the overall economy and consumer spending in other industries for signs of what's to come for housing.
“It doesn't take a big movement in consumption to throw us into recession,” he says. “It can be amplified through the markets, and it would be felt by home builders. Home builders feel these recessions more than most people.”