Housing Prices Must Adjust to Incomes

The home real estate bubble of the past few years benefited those who got in early enough to enjoy the jump in prices, but the market has run so far ahead of incomes that a significant downward adjustment is all but inevitable. The sound you hear is the real estate rocket falling back to earth.

As Michael Grunwald writes in today's Washington Post, "One-third of Americans now spend at least 30 percent of their income on housing, the federal definition of an 'unaffordable' burden, and half the working poor spend at least 50 percent of their income on rent, a 'critical' burden."

Last week, as reports showed July new-home sales off by 4.3 percent and existing home sales reaching their lowest level in two years, the slide in the housing market threatened to fall off a cliff. We've been warning about this for almost a year:

March 21, 2006 -- ABC World News Tonight reports, "Interest rates for nearly a quarter of all mortgage debt, or $2 trillion, will be reset in 2006 and 2007, according to Moody's Economy.com." Further, "As interest rates steadily increased over the past year and the explosive growth in housing prices declined, more Americans started to fall behind in their mortgage payments."

January 28, 2006 -- Our concerns about the housing market were confirmed this week when the National Association of Realtors reported the third straight month of decline in existing-home sales ... Consumer debt is further piled on top of ever-burgeoning federal government debt ... So here's something for analysts to remember: an economy built on a house of credit cards can easily collapse like a house of cards.

December 3, 2005 -- Consumers have been willing to take on debt as they see their net worth boosted by rising real-estate prices, but as the housing market cools, they could find themselves in a credit crapshoot.

November 18, 2005 -- The housing market is gearing down, which could occur in an orderly fashion or could implode on a mountain of consumer debt ... The problem is that homeowners have been using their homes to print money, which they've been spending freely.

September 6, 2005 -- Consumers across the nation will feel the effects [of Hurricane Katrina] in long-term higher gasoline prices and higher home heating fuel costs this coming winter. The expected demand for building materials, from cement to lumber, are already driving up raw materials prices, and that will have an effect on housing costs across the country.

As Grunwald points out, poor choices in zoning and land use have forced homeowners further and further from their jobs and pushed lower-income renters to overcrowd apartments and houses to make ends meet. "This creates all kinds of lousy outcomes -- children who don't get to see their parents, workers who can't make ends meet when gas prices soar, exurban sprawl, roads clogged with long-distance commuters emitting greenhouse gases," he writes.

Economists -- most of which likely own their homes -- and other homeowners aren't yet ready to accept the possibility of a wrenching realignment of housing costs versus household incomes. The market, however, isn't equipped with such a psychological defense mechanism.