Another interesting report out today from Merrill Lynch's crack economics team. North American economist David Rosenberg notes that thanks to the ongoing runup in housing prices, the affordability ratio for first-time buyers has deteriorated to levels last seen in the third quarter of 1989. Yes, interest rates are still low by historical stands, but prices for starter homes (which are up 14% in past year, notes Rosenberg) have outstripped first-time buyer incomes (up 4%) by an
unprecedented pace. And here's where Rosenberg offers a history lesson, reminding up what happened in the third quarter of 1989...

Here, I quote from his report:

"...For those who need a history lesson on what happened in 1989Q3,
what happened was that the bids dried up the following year as existing home sales slid 10% and new home sales by 20%. Inventories surged as the backlog of unsold new homes rose from 7.1 months’ supply to 8.4 months’ a year later; the inventory backlog rose from 7.8 months to 9.6 months in the resale market. The median price of a new home fell 5.8% in the ensuing year while existing home prices essentially stagnated after rising 60% in the prior decade. Needless to say, consumer confidence sank and retail sales sputtered during that painful adjustment period, which by the way, also featured a sharp rise in energy prices and a Fed tightening cycle...."

Which suggests that anyone contemplating buying a house at this moment might want to think twice...

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