If you were born before the Beatles appeared on Ed Sullivan on February 9, 1964, let me remind you of a couple of things.
Think back: Lyndon Johnson was elected president.
Jayne Mansfield, Brigitte Bardot and Sophia Loren were the movie “icons.”
The Ford Mustang was introduced.
Paper currency was made Legal Tender for all debts, both public and private and was backed by gold.
The BASIC created (Beginner’s All-purpose Symbolic Instruction Code) computer language.
Sony introduced its first VCR.
Slogans like Clairol’s “Does she … or doesn’t she?” and Esso’s “Put a Tiger in Your Tank” became popular.
Martin Luther King Jr. received the Nobel Peace Prize.
And, in 1964, who doesn’t remember the Surgeon General’s report that smoking may lead to lung cancer?
The average income was $6,000 a year, gas was 30 cents a gallon, average monthly rent was $115 and the cost of a new home was $13,050 with an average home price of $3,360.
Although stable, owning a home was not intended as an investment. It was meant to live in. For close to 50 years, the annual return was only around .05 percent after inflation.
But then in 1998 a housing bubble began and continued until it peaked in 2006. No longer able to sustain the inflated values, the bubble burst in 2007. So, with a price index of $100, it was worth $104 in 1997. In 2006, it had grown to $192.
Traditionally, home prices have been equal to about three times one average household income. In 2006, it was closer to 4 1/2 times income.
In turn, home rentals historically are about 1/20 of the cost of the home. In the peak, that rose to 1/32, so a $200,000 home would fetch about $10,000. The same home would be worth more than $300,000 to get the same rent.
How did prices get so high?
As late as 1990, down payments were at 20 percent. At the peak of the bubble they were at 9 percent. More people, even low-income, who typically rented could now purchase a home. People borrowed more and put less into the purchase of their home. And then you have to add the new adjustable rate mortgages with low rates that later soared.
As the ability to purchase a larger, more expensive homes rose, sales of smaller, less expensive homes began to fall.
This sharp increase in value made people think one could get rich by owning a home. Using home equity loans, buyers were borrowing faster than their home values increased.
Many with mortgages were so far in debt that as home prices decline, the loss of income —or worse — job loss is devastating. From 1998 to 2007 the average home debt increased almost 60 percent.
In addition, the number of qualified buyers plummeted, making it difficult to maintain a six-month supply that National Association of Realtors considers a reasonable inventory.
Fast forward to January 2012 — now.
Many believed that residential investment would increase in late 2011 and instead of being a drag on the economy it could contribute to the recovery.
Based on population, the bubble we just experienced was not as extreme, proportionally, as prior to the Great Recession when the population was half what it is today.
If you were to look at the ingredients of today’s household, our children tend to move out in their early twenties. Many form their own household or live with a roommate or two and for the next decade are creating their own households.
Those who had already begun to form their households when the bubble burst have been on hold. Add them to the aging youth who are ready to buy a home for less than the one their parents live in, with mortgage payments less than rent.
Nothing is for certain, but if history holds true, sometime this year we should see a serious increase in home purchasing and in cities in the state of Florida we could start seeing a serious increase in construction.
I am the ultimate optimist and I’ll be the first to admit my knowledge is limited, but working in the media field for more than 30 years and raising six children born from 1977 to 2005, I am exposed to things that when put in some order, makes sense.
This time more than most, I hope I am right.
– Jim Bailey is publisher of Realty/Builder Connection and president of Bailey Publishing & Communications Inc.