Housing market’s upside: affordability

Source : Business Times - 10 Mar 2009

This could stimulate demand when economy stabilises

Houses in the United States are now more affordable than at any time in the last 40 years when compared with personal income.

Only a couple of years ago, home prices rose to clearly unsustainable multiples of income, and the abrupt change could hold out hope for a revival of the housing market.

In the summer of 2005, when funny-money mortgages were readily available and helping to drive up home prices, the national median sales price of a home was almost eight times as much as the average per capita after-tax income of Americans.

But by this January, with incomes up and home prices down sharply, that multiple had fallen to less than five.

That may be little comfort for many homeowners who owe more than their homes are now worth, but it does indicate that home prices have fallen far enough, at least in many areas, to make them affordable.

‘You have a big debt overhang problem, but you don’t have a house price problem anymore,’ said Robert J Barbera, the chief economist of ITG, an advisory firm.

Home prices vary widely from region to region, and people in areas like New York or Los Angeles can only dream of finding an acceptable home for US$169,900, which the National Association of Realtors says was the median sales price of previously owned homes sold in January.

That figure was down from a peak of US$230,900 in July 2006. It is not clear that prices have declined enough to make houses broadly affordable in some regions.

National median prices can be misleading, particularly because more or fewer sales may be coming from high-cost or low-cost areas.

Moreover, the volume of home sales has plunged. Many recent sales involved homes that were in or close to foreclosure, and may have been conducted at prices lower than the asking price for other homes in the area.

But it is also possible that the decline in the median price may understate the devastation that has befallen the housing market in some areas. In December, the latest figure available, the S&P/Case-Shiller composite home price index for the 20 regions was off 27 per cent from July 2006.

The personal income figures may also be high, since they are affected by government transfer payments and include significant increases in Medicaid and unemployment insurance payments. But the trend is the same even with transfer payments eliminated from the calculation.

Pressures are still forcing home prices down, including the difficulty of obtaining mortgages for prospective buyers who cannot meet the standards set by Fannie Mae and Freddie Mac, the government-controlled agencies that finance the bulk of new home loans.

In addition, there was a lot of overbuilding in many areas, and even though construction has plunged, the inventory of unsold homes has stayed stubbornly high. Rising unemployment may discourage some who could buy from doing so.

But at least by one measure, home prices no longer appear to be high by historic standards. That fact could help to stimulate demand, if not immediately, then at least when the economy appears to stabilise.