By: Dennis Norman
Last week I wrote a post about housing affordability being at a record low. Two weeks ago, for a blog for real estate investors, www.RealEstateInvestorDaily.com, I did a blog about a study by a professor at the University of Virginia School of Architecture indicating that price declines and foreclosures were not as bad as was being made out in the media.
In the UofV report William Lucy the author of the report, looked at, among other things, the relationship of home prices to median income. In his report he then compared this to the same data for the year 2000. I thought his choice of the year 2000 was good for comparison as I feel the real estate market at that time as “normal”. It was prior to the impact of 9/11, prior to the real estate “boom” and after the recession times of the 90′s.
These two posts got me thinking…In the post on affordability I think the National Association of REALTORS(R) I think uses a very good approach to look at affordability. They look at home prices, family income, interest rates and ultimately use all this data to see if the average family can afford the average home based upon whether or not they qualify for a mortgage to buy one.
The post on foreclosures ignores the financing aspect of the transaction and just looks at the relationship between home prices and income.
The more I thought about it the more I liked the latter approach. While I think it is great that homes are more affordable than ever, I realize part of the reason are the historic low interest rates. Hmm….how did we get in this mess to start with anyway? Oh yeah, in part due to the easy availability of financing, particularly sub-prime and non-conforming loans. So maybe it’s not such a great idea to be seduced into buying a home just because the payment sounds good?
I then decided to put my economists hat on (I know, I’m not really an economist but some of them haven’t been so accurate the past few years so what the heck?) and took a look at current home prices compared with income and see how it looks compared to the market back in 2000.
Using data available from the National Association of REALTORS(R) I put together the chart below which shows median home prices for the 4 regions of the country as well as the US as a whole as of January 2009 and for January 2000. It also shows the median family income for the regions during those time periods as well and then a computation is done to determine the ratio of home price to income.
As you can see from the chart the ratio of home prices to income for the US as a whole is at 2.84 for January 2009 which is actually a hair lower than the 2.85 ratio for January 2000. I think this shows that home prices nationally have fallen to where they need to be relative to income. Since my analysis does not take into account interest rates, the bargain interest rates are just a bonus.
When you look at the various regions you see that the ratios for the Midwest and the West are actually lower than 2000, the South is only slightly higher at 2.83 to 2.62. The Northeast appears high at 3.4 compared with 2.64 in 2000. Based upon this data I would say the majority of the country have experienced about as much price decline as we will see for them with the exception of the Northeast. By my calculations the median home price for the Northeast needs to drop below the $200,000 mark to get prices in line with income.
Of course, as with any analysis of the market there are many factors that could affect this. We are facing record unemployment levels which could lower median income which may then necessitate further declines in prices to maintain a reasonable ratio, however the unemployment situation will hopefully be a temporary one and only time will tell. Additionally, as I have written about before, the laws of supply and demand are at work too….If there are too many homes for sale then prices are likely to drop no matter what the ratio is to income.
Overall I think this data is positive with regard to the market.
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