But large-scale job loss has the most potent effect, note Eric Belsky and Daniel McCue, economists at the Harvard Joint Center for Housing Studies. Markets can overheat, overexpand and digest flippers and overexuberant builders, but housing prices are most likely to fall when people lose their paychecks.
Belsky and McCue studied housing downturns from 1980 to 2004 and discovered that the most likely cause of housing price declines were spikes in unemployment. Consider the industrial cities of Cleveland and Detroit, which have lost jobs steadily since 2000 and now post unemployment rates of 6% and 7.7%, respectively, well above the national average of 5.1%. Of the 10 cities on our list of cities experiencing the greatest price drops, they are the only two where prices are lower than in 2000.
Surprised? Don’t be. While prices are falling, they are, for the most part, higher than earlier this decade. In 2000, Inland Empire prices, for example, were $138,560. Moody’s has Riverside- San Bernardino, Calif., home values declining another 23% this year, to $291,590.
“In a normal housing market, we have ratios that you qualify for a certain amount of house at your income level,” says Anthony Sanders, a professor of finance at Arizona State University. “Since banks have tightened credit, we’re starting to revert back to those lending standards, and prices are going back to reflecting a ratio of income and median house value.”
Over the course of American history, real estate prices have in the short term been hugely sensitive to the availability of credit for buying real estate. Sounds like that dynamic is still at work here.
Interestingly, I have been hearing that falling prices coupled with the weak dollar have made real estate very attractive to overseas investors.
I think that real estate prices have a long way to fall, however after that (in a year or two, they may start rising quite rapidly as Europeans buy up real estate using debased greenbacks. That is what has happened in other countries that print money. However this depends on location. Beachfront condos may well come back, but I doubt that any wealthy europeans will be buying homes in Detroit.