Double Dip In The Housing Market

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Housing prices in many cities across the nation are at their lowest level in years. And while everybody has a theory as to why and the comments on the Internet have people blaming the banks, the homeowners, the legislature, the government, the truth probably lies somewhere in the middle.

The fact is that is will most likely get much worse before it gets better. It is inevitable as there is an estimated 5 million mortgages right now that are at least 2 months in arrears. And there is also a huge inventory of foreclosures now that are already in the pipeline, the so-called ?shadow inventory?.

But if you consider what happened to the price of homes since around 1996, you can see that such a big bubble was forming that a housing crisis could have been predicted and in fact it was predicted by a few.

Between 1997 and 2006, the average price on a typical American home in a typical American city rose by an astounding 124%. In the 1980’s and the 1990’s the national median home price was 2.9 to 3.1 times the median household income. By 2004 this increased to 4.0 and by 2.6 it increased to 4.6 times.

While these numbers don’t appear that alarming when you look at them in that way when you consider that if your income was $60000. a year in 1990 your average house at 2.9 times would have cost $174000. while for the same exact house and the same exact income in 2006, the house would have cost $276000. And along with that is the additional costs involved, meaning people are paying more for housing and saving less and both spending more and borrowing much more for housing.

In short, it was unsustainable.

Sure it’s great if you bought in 1985 and you still lived there and planned on living there forever. But what about the people just getting in? What about the people who need to move for jobs? What about the young people just getting into the workforce.

And during that time of rapidly increasing housing prices, many of the loans for houses were also unsustainable with adjustable rate mortgages, no documentation loans and of course, just sub-prime lending in general.

Again, it was unsustainable.

So be it a double dip, another housing crisis, whatever you want to call it, essentially it is and has been just an unfortunate but inevitable market correction.

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