US Residential Housing: Further to Fall

Simple data aggregation coupled with modest assumptions suggest that aggregate US residential housing prices have to fall another ~15% over the next two years before they reach historical median values. This reality alone will place more stress on the household balance sheet and curtail spending for the foreseeable future, but in my opinion we are likely to see prices decline more than to this historical value (measured as median price/median income).

First, a simple example outlines a major demand concern:

Assuming a 5.0% 30-year fixed loan with 20% down, the median household faces:

• $180,000 median house
• $36,000 cash down payment
• 1.44 * $550 PI = $792/mo. * 12 = $9,504
• 1.5% * $180,000 Property Taxes = $2,700 (almost no tax benefit since PIT ~= two-earner standard deduction)
• 2% * $180,000 Insurance and Maintenance = $3,600
• Total yearly outlay: $15,804

This $15,804 annual outlay as a percentage of median income ($53,500), means the cost of ownership on an annual basis is 30% of total income. In other words, the median house is now barely affordable by the median household. Furthermore, this example depends upon both a 5.0% mortgage rate and a $36,000 down payment; a best-case, and highly unlikely scenario. Real homebuyers earning the median income most likely face much higher mortgage rates, have under 10% down payments available, and face additional fees and expenses in the form of insurance penalties.

In a supply environment of record inventory, with this demand enviroment (decline incomes, unemployment, etc.) it is quite likely overshooting such that prices decline much more than 15% from today's levels. As you can see in the following charts, previous downturns almost always resulted in declines below the historical average, and there is certainly no indication that this environment is likely to prevent such an occurance.