In business, when inventory increases and sales do not, a few things happen, one of which is usually a price reduction. In the housing market, inventories are increasing. Bloomberg says housing inventories are expected to rise anywhere from 8 to 12 million in foreclosures/repossessions. These properties are to be dumped onto the U.S. market over the next few years. That is several years of supply of housing. Now stop and think about that for a second. If U.S. homebuilders did not build even one house, and U.S. homeowners didn’t sell one home, it would still take more than two years just to clear away all this additional, bank-owned supply. Meanwhile, 30 year interest rates are at an all-time low. Many believe home prices are now at 1998-1999 levels. If homes must go lower, how much lower?
For that answer we might look to the $60 trillion dollars in Unfunded US government liabilities and the measly $13 trillion US economy. As the USA seems well on its way to insolvency, borrowing money to survive, the short term values for house prices seem to be headed South. The US economy broke from its last ties to the Gold Standard back in the early 1970’s. And that is also when the last time America was the world’s lowest cost producer. Times have changed. Now we are no longer on tied to gold and silver in any way and we have not been the World’s lowest cost producer since Japan took that title away back in ’73.
So, what did a typical house sell for, say in Chandler, Arizona, back in the early 1970’s? Well I happen to know about one house that my own dad purchased for $33,000 at the time. For those use to houses sold in the 50’s & 60’s, it was a “large house”. It was an amazing one thousand six hundred and twenty nine livable feet. It was so big you simply could not say the square footage; you had to say it out loud with emphasis on each amazing digit. It was brand new, nice new neighborhood, close to schools and shopping, and on the “good side of town”. It was build to satisfy any ego with a good paying job and who had plenty of kids. Why it had not two bedrooms, but three! It had not one carport, but two! It had not one bathroom but two! And luxury? It had a huge “in the ground” built in swimming pool! That house of course would not be complete without a brand new Chevy “Suburban” all shiny in the open carport. At a whopping cost of $3,500, my grandpa gasped at my father, “Why that is the price I paid for my new house!” My father of course explained to my grandpa that his new house was purchased in 1959, which improvements have been made and they must be paid for”. My grandpa gasped that his new truck had cost him “only” $999 dollars and he “wouldn’t pay a penny more”. So my grandfather had paid about 3 times more for his house than his truck, but my father you see, as my grandpa smartly pointed out, had paid over 9 times for his house. In the end, my father was considered a genius when he sold the house in 1986, some 15 years later, for an amazing $76,300 dollars. That year he also traded in his 150,000 mile “suburban” for a new four wheel Ford Truck with all the extras. He liked telling everyone he could that he got $3,500 on the trade-in, the same price he originally had paid. What he failed to mention, was his new truck cost was only a few thousands shy of the $33,000 that he paid for the house. What he failed to say was that his new house in 1986 cost him $125,000 dollars. Inflation made Sellers winners.
Well today it seems that deflation is making Sellers losers. It’s a buyer’s market. Bargains are bargains and they are out there by the dozen. Costs are dropping like a rock. I for one would not be surprised if we see $33,000 “new” houses again, at least in far out areas of town. As for cars and truck prices, that market has yet to see the same price drops that housing has. Could we see the day where a new house and a new truck are worth about the same? Probably not. Could we see the day when a new house and a new truck trade at just 3 times over, like it did for my Grandpa back in 1958? Probably. Certainly a used house and a new truck prices are getting very close. So why the personal story? Because if anyone has the data and can through it into an excel chart, I would like to see a chart showing the year to year gap between the cost of a new house and a new truck. Perhaps when those two prices are at their closest, that will be the time to buy. Are we trading at 3 times over like it was in my Grandpa’s day in 1959? Not quiet, but we are getting very close. At 4 times over. A fast look shows that Trend Homes is selling a 1,700 square foot model for just $160,000 and a Chevy Suburban selling for $41,000. That’s 4 times over and certainly better than the 9 times over when my dad bought that $33,000 house and a $3,500 Chevy Suburban in the early 1970’s. Will America ever be the lowest Cost producer again? Well, for that answer, I will save for another blog.
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