No Fair!

Todays question of the day in the Wall Street Journal: How much do home prices in your neighborhood need to fall before they are fair. I had thought better of the Journal than to ask an economic question using the word "fair". Is this the footprint of the Murdoch regime?

What is "fair" beats my pair of jacks, but what is affordable is clearly measurable. Here is a link to data collected by demographia.com showing change in affordability in major markets from 1995 to 2005. It's a simple metric based on the ability of a household earning the median income for a metro area to afford the median house in the same metro area.

Look, for example, at Milwaukee. In 1995, the median home price was 1.9 times the median income. A household at the median income can qualify for a mortgage for 1.9 times income with the minimum down. By 2005, the median home prices is 4.2 times the median income. Few conventional lenders are going to lend 4.2 times income.

The subprime upchuck is but a taste of what is to come here. Conventional wisdom says that house prices will always be going up because the number of people is increasing and the amount of land is not. However, this is based on the implicit assumption that the increasing number of people can qualify for financing. Once this ceases to be true, the conventional wisdom no longer works.

If you can only sell to people who are walking around with either high incomes or substantial down payments, that is a much smaller buyer population to compete for the same property. And this implies a lot of people with their noses pressed to the glass.

What does this mean? It depends on what kind of nation you want to have. This Christmas, while watching It's a Wonderful Life, notice the implicit assumptions about the kind of community you get when people are homeowners as contrasted with the community of renters.