Money Manager Argues that the Contractual Mortgage Changes are not Worth the Effort or is a Band-aid for the Problem

Read here. An excellent article from Dean Foust of BusinessWeek.

I am the first to admit that I am not a ‘real estate’ economist or that I have conducted research in the area of real estate; I have provided external reviews on some academic research real estate papers.

One item in this article which I think is extremely important is the ratio of the median cost of a new home vs. median income; I can understand this ratio.

Mr. Foust argues (and I think this is the key)

The fact is that despite the double-digit declines in housing values in most cities, housing remains significantly overvalued in many markets by all of the traditional benchmarks: One key ratio – the median cost of a new home vs. median income – suggests that home prices nationwide still need to drop another 15% to 20% on average, as you can see in this chart compiled by money manager Barry Ritholtz. And the equilibrium price is far more than that in bubble markets like southern California and Florida. According to this “fair value” calculator, one suburban neighborhood outside Washington, D.C. that I checked (Alexandria, Va., where I lived in the mid-1990s) is now 47% overvalued. Ditto for a few communities in Los Angeles that I surveyed.

See below

My wife and I lived in Washington DC and still have friends in that area. When I compare what we have in Alaska to what they own in housing, I am surpized since Alaska is supposed to be a ‘high-cost’ area; it is higher cost than Texas from where we moved, but not nearly as high as California and many other places.

Interestingly, Mr Foust continues

A second measure – home prices to average rent –also remains out of whack, and would require another 20% to 25% plunge in home prices to make it more advantageous for the average apartment dweller to buy a home instead, particularly now that few homeowners have any illusion that their house is an “investment” that’s going to soar in value in coming years.

Excellent Work