The upcoming 2010 housing crash

People around me think that housing prices are low. They are only low compared to the extreme heights of 1996 when irresponsible banks gave irresponsible loans to irresponsible buyers. They are still high when compared to what the average person can reasonably afford.

This is why housing prices are going to crash, most likely this year:

1. Government interest rates have to eventually rise: The Prime Rate is currently 3.25. Except for the great depression, they are the lowest they have ever been. Historically they have ranged up to 20% with about 6% on average. Most people buy the house they can get a loan for, not the house they can responsibly afford. So lower interest rates increase competition for higher priced homes, and raise home values. Here’s a fuller article on the subject.

2. In the 1970’s, with one income earner, if the primary income earner lost his job his spouse could enter the workforce and help things get by. However, today most households already have two income earners, thereby doubling your risk of lost income due to job loss or sickness. As we are in a recession, the chance of job loss is relatively quite high.

3. Prices are still too high for the average family to afford. Typically, you can only buy a house 3X your annual income. Here in Orange County, the average house is 550K, but the average household income here is $96,436. As I live here, I know first-hand that $300K can only get you a small condo (basically an apartment) plus heavy association fees.