I noted a few weeks ago that I don’t think the housing market has bottomed out. Despite what various talking heads may suggest, the numbers and historical trends suggest it still has more to drop. It still seems to expensive for there to be enough of a market to warrant the price. This is a cyclical problem. Unless housing becomes more affordable, or potential buyers become more affluent (unlikely) housing prices can’t be stable much less climb in any meaningful way. Eventually prices must drop.

I’m glad to see validation that my head scratching isn’t totally unwarranted. This has bugged me for several months. People claim it’s bottomed out, but there doesn’t seem to be any rational reason to think that other than wishful thinking, which I’d argue is optimistic, rather than rational.

The old rule of thumb is the maximum house you can afford is 3X your gross income minus obligations (debts). More than that and you’re odds of running into trouble making payments and affording upkeep/taxes becomes too high. That means the median affordable house is $165,000 if the household had no obligations. We of course live in a world of car loans/leases, $100+ cell phone bills, expensive broadband internet, and rising food prices. According to MSN Money the average household owes $8,000 in credit card debt alone [source].

For a more specific example, New Jersey’s median household income in 2008 was $70,347. Per Capita New Jersey is one of the most affluent states in the country. The median value of homes in 2000 was $170,800 [source]. The median price in the Northeast in July 2010 was $263,800. Assuming the median income rose to $75,000 the maximum affordable house is $226,041, again assuming no other obligations.

I should also note this rule of thumb was before the bubble and before banks became borderline paranoid about lending money.

The home ownership rate in the US is 67.8% [source (xls)] which means it’s a pretty representative part of the US population, hardly a niche group which we could suggest lives outside these numbers.

Using this back of the envelope calculation I propose that the housing bubble for existing homes doesn’t end until either the median existing-home price falls to meet the maximum affordable house index, or the incomes rise and debts fall to meet the existing-home price index. Only then will the supply and demand curve finally meet and the market volume will increase. Personal income and wealth are too tight for either the supply or demand side to cave right now. I further propose that housing prices will fall faster than incomes will rise.

Translation: the housing market hasn’t finished correcting.

I meant to post this over a week ago but just left the bookmark on my desktop. Here’s a great visualization of the current credit crisis. Simplifying something and having it still make coherent sense and still stay true to the real story is nothing short of an art. This one is a real work of art.

He’s made quite a few bold statements lately that got rather little press since they go against the grain at the White House.

Nevertheless, he acknowledged that individual accounts do not address the shortfalls the Social Security system will face over the next 75 years.

In fact, they would create additional costs because workers who opt for accounts would divert a portion of their payroll taxes away from the system….

Greenspan warned, however, that if accounts are introduced into the system, “We have to do it in a cautious, gradual way. … (We) should go slowly and test the waters.”

CNN.com Feb 16, 2005

That’s far from being for the policy. He’s advocating having a good plan B, and testing the waters very carefully. But that’s not how most of the media, and the White House took his comment. He’s clearly not against them, but not confident.

Now he’s saying that Protectionism (a core aspect of Bush’s Agenda which essentially won him the election) is bad

I’m getting increasingly disturbed about some of the pressures of protectionism that are emerging in the world because, were we to get a rigidify of international market forces, I’m fearful of what the implications could be to the American economy and, of course, to the world as a whole…
CNN.com May 5, 2005

I’m curious how the White House will react to this one. This was a big part of Bush’s (and all Republicans) agenda. Keeping jobs at home by imposing tariffs and other barriers. I doubt it will be silent. Just interesting to see how Greenspan is going against the grain, yet the spin factory ensures his voice isn’t heard.

His track record is rather remarkable. To ignore someone with such great accuracy is really a shame. I wish people would actually listen to what he has to say. There’s really nobody out there who is as good at understanding the US economy as him. That’s why he’s kept his position through so many administrations.

Why is he kept on board if nobody wants to listen to him?