Saturday, October 04, 2008

Housing Crisis: Making It Personal

Steve Sailer caps a series of posts on the housing crisis with some statistics from the California housing market.

Steve had written previously that an appropriate median home price / median AGI ratio is about 2.5. Oddly, this has been about the ratio I've targeted in my own home purchases, but I had never really considered looking at the community ratio to guage whether home prices were out of whack.

Along comes City Data, a website readers can look up the stats for their area by city or zip code, whichever is more meaningful. So I used the zip codes to compare the median house value of 2005 with the median AGI of 2004 (the most recent data, but fairly representative of the boom years) for my three real-estate holdings.

Gulf Coast: 4.1. Ouch! This is consistent with the $20K drop in the assessed value (courtesy of the tax assessor) from last year to this. The good news is that I bought it pre-boom, so the house is still almost twice as valuable now as it was when I purchased it (if the tax assessor is correct), and still rented out profitably.

Rocky Mountains: 3.9. The assessed value actually increased by $30K between last year and this, but I'm pretty sure the values were calculated a year in advance, so they probably reflect the 2007 value over the 2006 value. It also may reflect the $20K or so in improvements (added A/C, massive landscaping) I made during the three years I lived in it. I'll have a better idea come next year. I purchased this house in the middle of the boom, and the rental income only covers the payment when there is no maintenance. But . . . enter the magic of rental property depreciation, which saves me $1200 in taxes every year from this property alone.

Upper Midwest: 2.1. The housing boom never happened where I presently live, so the bust has largely skipped us as well. But here's the thing: in all three communities, while the median sale price has only slumped rather than crashed, the number of home sales has crashed, often dramatically. For instance, in my Gulf Coast zip code, the number of home sales fell from 350 during the second quarter of 2005 to only 75 for the second quarter of 2008. Ditto for the Rockies: 470 to 140. Ditto for the Midwest: 170 to 70. This could mean that the wave of speculative sales has ended; it could also mean that unsold inventories are accumulating until the prices adjust to reflect the new market realities.

The stock market, however, depresses the shit out of me. My portfolio is approximately (the exact number is too depressing to contemplate) $20K poorer than it was in January. I also looked at the average total returns of my 14 year investing life: two percent, as of the end of September. Two percent! Measily bank interest. So much for being a "long run" investor. I can take small satisfaction in watching the further decline of the stuff I dumped at the early stages.

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