Posted on April - 21 - 2011
Home Prices: More Declines Needed in Some States; Set to Rebound in Some States
Housing continues in a slump in spite of a record high national home affordability index of 192.3, calculated by the National Association of Realtors. This means that a household with a median income has over 90% more income than necessary to qualify for an 80% mortgage loan on a median priced house. An index this high would usually happen only during an overheated housing boom. But not now. Households are not buying because of poor credit records, lack of a down payment, concern about income security and inflation or still dropping home prices.
Home prices have been falling for four years, declining 15% in the Federal Housing Finance Administration purchase only home price index. Price drops have been much higher in other indexes and in the most distressed state and metro housing markets. Have prices fallen enough to permit the housing recovery to begin? The answer is “yes” for the stronger housing markets which had relatively less speculative price rises in 2003-06. The answer is “no” for the most distressed markets, mostly in the southeast and Southwest. Nationally, only a little more price decline is needed to remove falling prices as a barrier to recovery.
The chart below shows that the US ratio of median home prices to median income has fallen sharply for last five years and is now 14% below 2003 before the housing boom began and 22% below the peak level at the end of 2005 which was the peak of the housing boom. This is consistent with the current record high Home Affordability Index. There are two price problems in most housing markets. First, potential buyers believe that home prices will fall further. Second, the huge price decline has put so many mortgages underwater that a large share of homeowners are financially trapped and can not sell.
Behind the national average, there is wide variation in the “price problem” across the country as shown in the accompanying table.
At the top of the list, median home prices in Michigan have fallen to barely more than median household income after a decade of recession. Home prices in Michigan and at least 15, perhaps 25, other states are very depressed relative to income and are set to rise quickly during the coming housing recovery as soon as concern about further price declines is over and a substantial share of the surplus of homes for sales is absorbed. This may already be happening in Texas. This will be very positive for residential remodeling and commercial building even before a sustained pick up begins in housing starts.
At the bottom of the list, the Pacific and Atlantic states (except Florida and Georgia) plus Colorado and Montana can expect further declines in housing prices to bring their housing markets back into equilibrium. Note that California and Massachusetts have had very high ratios of home prices to income for several decades and will be able to maintain this outlier position as long as Boston, San Francisco and Los Angeles continue to attract a large share of high wage and high growth industries.
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