Real Estate Value Myth - True House of Cards

Due to the privilege of paying income taxes, income earners pay the highest combined tax rate; and because year-to-year compensation increases rarely even keep up with inflation, America reached the point where the middle class was spending 101% of its income just to stay afloat.

The real estate nuclear bubble that has laid waste to Wall Street was driven largely by overconsumption and sheer greed. Middle class borrowing against rising "equity" to pay for what they thought were necessities, along with Wall Street being very happy to make everyone think the bubble would go on forever, created an environment where Wall Street thought real estate borrowers would be able to pump more and more money in the real estate funnel to maintain the higher yields of mortgage-backed securities.

Investment bankers were happy to raise capital for mortgage lenders so they could sell more mortgages, so they could then repackage the mortgages into more mortgage-backed securities, and so they made money on both ends of the mortgage business. So now you know why all those CEOs (many now-departed to find other pastures) got the multi-million dollar compensation packages. So why are we being asked to spend more taxpayer money on bailing out the financial system? Because Wall Street has "mortgaged" itself to the lie that these assets are worth what they "paid" to acquire them.

The truth is these mortgage-backed assets are major factor in why a decent house in the Los Angeles metropolitan area still costs over $500,000. I have seen a house purchased right after the Northridge Earthquake in 1994 for $135,000 go down to $100,000 after much of the aerospace industry left Los Angeles soon after the earthquake, and then go as high as $650,000 at the top of the real estate bubble. Even after losing 35% of its value since then, the house is still worth more than $400,000, which means it increased in value an average of 14% per year over the last 14 years. Though my income has done well by most standards, it has only increased an average of 7% per year over that some period, so I would venture to say there is still a disconnect between incomes and housing prices, at least in Los Angeles. That said, how are the real estate prices in Los Angeles going to be able to stabilize if so few people have good enough credit, $100,000 to $150,000 in cash for a down payment, and the income to be able to afford the mortgages to purchase those homes?

Financial systems like equilibrium, so real estate prices are being driven down to the level where more people can afford them. This momentum comes from the steep level from which these values are following. If you think of accumulated mortgage debt as the deep snowpack on a very steep mountain, then you can think of the slide in real estate values as the avalanche of snow screaming toward the bottom of the mountain obliterating everything in its path. This avalanche will not settle down until it reaches flat land and releases its kinetic energy, and real estate values will not settle down until all the downward momentum has dissipated. I'm thinking the snow still has a long way to go...