Bloomberg.com Article: U.S. Existing Home Sales, Prices Slumped in January

According to this Bloomberg.com article U.S. Existing Home Sales, Prices Slumped in January.

The gist ofthe article is that the declining economy is going to going to continue to drag down the housing market as consumer confidence also declines.

According to the article the economy will likley not rebound with respect to unemployment until 2011.

The article quotes Lawrence Yun, the chief economist for the National Association of REALTORS (NAR), as saying that the recent goverment actions may lift home resales by as much as 900,000 units this year.

Being a REALTOR myself, I have read Mr. Yun's predictions many times over the past 3 years. 

I have to say that he has said the market would improve in 2006, 2007 and 2008.

Each time he was wrong and he will be wrong this time as well. Despite what NAR would like

consumers to believe, homes are still not affordbale. NAR's way determining home affordability is

to factor in financing (see the NAR Home Affordability Index). The problem is that when financing

is abnormally cheap (i.e. like during the market boom) it lends itself to over-inflated prices (like during the market boom).

The result is that when rates increase the home owners cannot sell their home for as much as they paid and a whole

new problem starts just like what we see now. The fact is that prior to the huge run up in home prices that started

around 2000, the median home price in a given area was more related to the median income in that area.

For homeowners to be financially solvent the ration of home prices to median income needs to be around 2 to 1

with an absolute maximum of 3 to 1. Now even after the market declines that started in 2006

the median price of a home in most areas of the US is 3-4 times the median household income

meaning that 2 people now need to work to buy a home as opposed to just one worker in each

household. Two family incomes helped push up the median price and this was worsened by

consumers accepting more debt as being OK. Historically, the values of real estate were

determined by the quality of life that the location offered, the size and type of property and

local employment prospects. Unfortunately, during the most recent run up in prices the major

factor was the monthly housing payment versus household income. As rates went lower and

financing became more available, prices increased until the prices reached a popping point.

That cannot happen again, otherwise, we will see the same problems all over again. The solution

is that real estate prices need to continue to decline for a while longer in order to bring affordability

more in line with common sense criteria, not monthly housing payments.