But I really don't buy the fact that there is no discretionary spending room left in the average american's budget.
You don't have to buy that as that is not my argument. My argument is that discretionary spending isn't nearly enough to support real estate speculation, which is what drove prices up in the first place, or spending more on a house than what it is really worth.
Furthermore, interest rates cannot stay low indefinitely. Such low rates have many cumulative negative effects including deterring investment. When interest rates rise, expect housing prices to plummet simply because people can only afford such and such monthly payments.
The Case-Shiller graph you posted shows 100 as the nominal price level in 1999. What is it that makes 1999 the correct level of pricing for houses?
Here's the full Case-Shiller graph from 1890 to 2010. Unfortunately, our dumb as rocks press doesn't have the basic intelligence to continue plotting along this graph and instead looks at a mere 10-15 year history. I've always detested such short-sighted views.
Anyway, the value 100 in the index is defined as the arbitrary valuation point of the year 1890 which is the earliest data in the index. 100 is not defined as the norm, but simply as what real (not nominal) prices adjusted for quality in the year 1890.
The historical average is actually below 100, but that is due to an unusual and long period where demand was low between WWI and WWII. If we start with the modern, post-WWII period, we can get a sense of what the real fair market level is. It really stands out. The 1960s, 1970s, and 1990s were dominated with relatively flat periods centered around the 110 mark. This mark is also about average for the period from 1945 to 2000, before the incredibly obvious bubble on the graph. The previous buyers and sellers market didn't move much away from 110 and the average always returned to 110.
This is why it is my assessment that 110, not 140, represents the historical norm for housing in modern America. If someone wants to make the case that 140 should be a new historic norm, then there better be a damn good reason for it. If anything, I'd expect a new historic norm to be lower, not higher, as houses are getting cheaper to build (or to print out in the near future) and America's population isn't expanding like it used to and that we've reached Peak Baby.
As such, there is no reason for housing prices to now be 30% higher priced today than during the past two generations. There are certainly reasons for them to be priced lower:
1. Lack of expected population growth.
2. Baby Boomers retiring and downsizing.
3. Millennials moving back in with parents.
4. Women delaying motherhood and having fewer children.
5. Construction costs decreasing.
6. Technology improving.
7. Overbuilding during the bubble.
8. Expectation of higher interest rates and thus lower prices.
9. Massive debt in the Millennial generation.
You could make the same arguments about healthcare and college expenses, but they keep increasing also. I think we are in an unprecedented era of monetary manipulation, so I'm not sure we can expect things to ever revert to the "norm."
I think like Dan, many of us are betting on the fact that the FED can only manipulate so far. Seeing as each round of QE has had less effect each successive round, it seems like a safe bet for many of us.
I see a few basic arguments supporting housing prices between 20-30% above the previous 'historical norm':
1. The homes are larger and we spend more time in them. Our houses are twice as big as they were prior to 1980. We use them for home theaters, for play areas, and for temporary housing for visiting relatives.
2. The average finish quality of new / remodeled homes has moved to the right of the curve. In 1990, natural stone counters, hardwood floors, and professional grade appliances were considered high-end luxuries. Today they're considered basic finishes.
3. Interest rates really are absurdly low, and I don't see anything to suggest that they'll go significantly higher in the near term.
4. People are just willing to spend more on housing than they would have in the past. With pensions gone and 401(k)s either too confusing or unavailable for many, housing is the last "dumb" retirement planning option available. If you pay off your mortgage while you work, you can sell your home at retirement for a few hundred thousand bucks and live in comfort for the rest of your life (you can even do a reverse mortgage).
5. Inertia. People have an idea of what a thing should cost, and it takes an enormous amount of energy to change that. A guy may be deeply underwater, but if he believes his home is worth X, he isn't going to sell it for less than X unless he has to.
As someone involved in building a new home, I don't see any evidence that building is getting cheaper. Every advance we've made in reducing costs has been offset by something else. We use plywood / OSB instead of solid wood in framing, but we have to now sheath everything for seismic protection. We use MDF for trim but now we have to insulate to R-19 minimum. We use drywall instead of lath and plaster but now we have to use lead-free, low-voc paint that costs twice as much per gallon.
Homeowner confusion arose from the fact that MERS assumed title to the mortgage instruments associated with the loans that its member organizations were bundling and selling off as securities. Yet MERS, according to the complaint, failed to ensure proper transfer of the mortgages, leading it to foreclose upon houses without the authority to do so. Homeowners trying to fight off foreclosure were hampered by the convoluted chain of title -- in other words, it wasn't clear who was actually foreclosing on them.
I've followed the MERS story closely, but it clearly hasn't had the impact that a lot of people thought it would have. If it was affecting the real estate market substantially in my area, I would know about it, because my neighbors wouldn't be able to sell their houses. They are all having no trouble doing so. So, why should I care about MERS?
It has been a contributing factor to the $7 Trillion loss real estate has suffered over the past 3 1/2 yrs.
Given the policies of the Fed, I think if you are waiting for a greater decline to buy, you are going to be waiting a long time.
I agree, at least 2 more years and think of all the rent money you will waist in 2 years! Buy now cause people in the BA are only getting richer and smarter.
Is this supposed to be a serious comment?
Yes, run out now and give you money to any owner. They worked hard to keep the house from falling apart and deserve all your money. Give then 100k over asking and don't ask any questions. Then become a slave to the bank and watch as the owners drive off in their new Mercedes. They worked so hard for your money you have nothing to do but smile and wave. God love them, they are the ones that shall inherit the earth.
Even if you have discretionary spending, people will be wary of spending-when you don't know if you will still have your job or will be able to get one if you lose your job-you are not going to spend as much.