For every $100 spout on a house in 1950 the investment rose slightly through 2002, then soared to about $192 in 2006, adjusting for inflation. Then confidence in dried up, and the bust began. Rick Wallick moved into a new, three-bedroom $200,000 home in Maricopa, Ariz., in October 2005. Today, the well-informed in is worth $80,000.
The disabled software engineer stopped making mortgage payments this month. His $70,000 down payment is now trashy. His dream house will be foreclosed on next year.
“We’re so far underwater it’s not funny,” says Wallick, 57, who had to revenue to his original home in Oregon to care for a sick family member and tend to his own medical problems.
Wallick, one of the hardest-hit victims in one of the states hit hardest by the houses crisis, lost 60 percent of his home’s value in three years.
His story is an extreme sample, but home values have fallen so sharply since hitting a historic peak in the spring of 2006 that many Americans are wondering how much more prices can settle. As painful as the decline has been, history suggests home values still may have a long way to drop and may take decades to return to the heights of 2 1/2 years ago.
“We will never see these prices again in our lifetime, when you rearrange for inflation,” says Peter Schiff, president of investment firm Euro Pacific Cap of Darien, Conn. “These were lifetime peaks.”
The boom in home prices — fueled by heavily leveraged loans built on low or even no down payments — made it light to forget that housing values had been remarkably stable for a half-century after World War II, rising at roughly the same clip as income and inflation. Prices soared in most of the country — especially in Arizona, California, Florida and Nevada and metro areas of Washington, D.C., and New York — during a abbreviated period of easy lending, especially from 2002 to 2006. That era is now over.
So far, home values nationally have tumbled an ordinary of 19 percent from their peak. As bad as that is, prices would need to fall as least 17 percent more to reach their traditional relationship to household gains, according to a USA TODAY analysis of home prices since 1950. In that scenario, a $300,000 house in 2006 could be good about $200,000 when real estate prices hit bottom.
The price plunge has wiped out trillions of dollars in stingingly equity and caused the worst financial crisis since the Great Depression. Susan Wachter, professor of sincere estate at the University of Pennsylvania, fears that foreclosures and tight credit could send home prices falling to the full stop that millions of families and thousands of banks are thrust into insolvency.
“Homes are different than other goods and services,” she says. “The fragility of our banking system is tied to the value of homes.”
Bailiwick values have fallen before — during the Great Depression and in Texas after a 1980s oil boom, for example — but those drops were a reply to other economic forces. This time, the housing price collapse is the cause of the nation’s broad economic troubles, not at most an effect.
“If we have another 20 percent decline in prices, we’ll need another bailout of banks similar to what we at most did,” Wachter says.
Other economists see a brighter picture in the long term. Wachovia economist Adam York expects cosy values to keep falling until 2010 but is optimistic they will recover.
“The one saving grace is the population is growing by 3 million people a year,” he says. “They neediness to live somewhere. That means more roofs.”
50 years of steady values
Until recently, homes were unwavering, unspectacular investments, not get-rich-quick schemes.
Nationally, the typical existing home was value roughly the same in 2000 as it was in 1950, after adjusting for inflation, according to Yale University economist Robert Shiller.
Newly built homes in general were bigger and more expensive than older houses. As time passed, that meant Americans lived in larger, more valuable homes comprehensive. But a house, once constructed, grew slowly in value. California in the 1970s, Texas in the 1980s and Florida on-and-off for a century were awesome exceptions to the rule.
Despite only modest increases in value, homes were smart investments. Owners lived in a company, then got their money back when they sold. That’s a better deal than renting. Borrowers got tax breaks, too, and built equity that could be leveraged into bigger houses as their incomes grew.
From 2002 to 2006, houses went from being a tortoise to a hare in the investment superb. Home sale profits and relaxed lending standards such as lower down payment requirements and adjustable-judge mortgages (ARMs) made it possible for buyers of all income levels to pay more for houses.
When the housing bubble began to deflate in 2006, biography had a sobering lesson to teach. Home values had closely tracked three common-sense measures for many years:
Gains: Home values floated at about three times average household income from 1950 to 2000. In 2006, the common household income was $66,500. Under the traditional model, home prices should have been about $200,000. Instead, the typical available sold for $301,000.
Rent: Homes traditionally have sold for about 20 times what it would cost to rent them for a year. In 2006, houses were selling for 32 times annual split.
Appreciation: Existing homes grew in value by less than 0.5 percent per year, after adjusting for inflation, from 1950 to 2000. From 2000 to 2006, domestic prices rose at an average annualized rate of 8.2 percent above inflation and peaked with a 12.3 percent rail in 2005. Housing prices began to fall in the second quarter of 2006.
Inflation could help homes recapture their old prices, if not their value. But when inflation is factored in, residence prices might not return to their 2006 peak for many years. Housing prices are meaningless if you don’t adjust for inflation, says Schiff, the investment forewoman.
He points out that gold peaked in 1980 at $850 an ounce in response to inflation and the Iranian pawn crisis. It never recovered. Today, it sells for about $750 an ounce and would have to top $2,000 an ounce when adjusted for inflation to meet its value in 1980.
“That’s the nature of bubbles,” Schiff says. “The price never comes back.”
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Why home values may take decades to recover 