Thursday, June 28, 2007

The Price of a "Normal" Market

From John Burns Real Estate Consulting (hat tip CNBC's Realty Check):

We calculated how much prices would have to fall for housing costs (including mortgage payments, property taxes and down payments) to return to each market’s typical ratio of housing costs / income. We identified 10 markets where prices will have to fall 30% or more to return to its normal ratio, and another 31 markets that are clearly overpriced. The most likely scenario in these markets is that resale prices will fall, but not as much as we calculated, unless something terrible happens like mortgage rates spike or the economy enters a prolonged recession. Nonetheless, here are our calculations, with a commentary that follows:

#11 Sacramento, CA
Housing Cycle Barometer: 8.1 *
Current Price: $375,000
Required Price Change: -29.3% or -$110,000

Why So Much in Some Markets: The markets that have the worst affordability problems tend to be where speculative investor activity drove prices up 200% or more during this time period [1999-2004]. Some speculators made a lot of money, and others are in the process of losing it all. Speculative investing is certainly a risky business.

*Our Housing Cycle Barometer scores each market based on its own history of affordability. A score of 0 means a market is the most affordable it has ever been in relation to incomes. A score of 5 indicates median affordability and a score of 10 indicates that the market is more expensive than ever before.


Sippn said...

"We agree that many "overpriced" markets become permanently more expensive every year because of their desirability as a place to live and their supply constraints, so it is unreasonable to suggest that they will return to their long-term housing cost ratios.."

Diggin Deeper said...

Not to take things out of context...let's finish the thought

"Miami, Los Angeles, Orange County, Seattle and Portland would certainly be considered among these markets. This doesn't mean these markets are insulated from corrections, however."

You'd of thought he might mention Sacramento in the list above...

buying time said...

These findings are very consistent with the quarterly Global Insight study which I consider to be matter what sippn says =)

Had to smile looking at the results...I moved from one overinflated market (D.C./Northern VA) to another (Sac). I must be a glutton for punishment...well not really, I just work in a government related field.

SacramentoCrash said...

Let the fun begin!

Diggin Deeper said...

If you take the aritcle at face value, it basically talks about a correction in prices barring any spikes in interest rates, or recessions, etc. Great caveats in an economic environment thats already showing signs of distress...GDP up only .7% over '07's first quarter, and interest rates pushing higher on the important 10 and 30 yr Treasuries, affecting mortgage rates to the upside.

Another quarter of sub 1% GDP growth (based on how the government tweeks the numbers to promote positive sentiment) and I'd say a recession is imminent.

And that's not even considering the distressed inventory increases that are still pouring in month after month due to the subprime blowout....

smf said...

"We agree that many "overpriced" markets become permanently more expensive every year because of their desirability as a place to live and their supply constraints, so it is unreasonable to suggest that they will return to their long-term housing cost ratios.."

No, I disagree. Many of these more 'desirable' markets have suffered from years of low population growth, due to the huge amount of money required to purchase a home there.

The last time I checked the statistic for the Bay Area, they have suffered from little to almost negative population growth.

Under what 'logic' can you get higher prices when the housing demand cannot be high, as the population is not there to purchase these homes.

cba said...

So... let's finish the articles other important thoughts

Attacking The Unprecedented Price Decline Myth: We agree that a 25% or more decline in resale home prices is unlikely, especially if interest rates don't change much and the economy continues to grow. Helping matters is the fact that household incomes increase every year. However, a significant price correction is not entirely out of the question in the many markets where the following two statements are true:

New home builders have already dropped prices (including incentives) 20% below where they would have been selling these homes two years ago, and

A 20% decline in price would only be a return to the prices of early 2005

Conclusions for Consumers: If you are hoping to buy a home soon, compare the value of new homes to resale homes. Home builders cannot afford to have their homes sit on the market for months like most homeowners can. Builders, and particularly the largest builders, have been aggressively improving the value of their homes to sell them. Reduced prices, along with 6-7% fixed mortgage rates, might be a buying opportunity you may never see again.

Gwynster said...

There is a KB home we liked (not that I'd consider it with the HOA and MR fees) in Woodland. In Dec it was 410K, now it 367K and I bet the incentives are large.

I'm also seeing more and more sellers underwater in Davis. These are people who bought in 04' and 05' who are apparently bringing cash to the table to try to get out.

My guess is these were Daddy houses that didn't pan out like they had hoped. Maybe living in the dorms for 12k a year (with food) was a better investment them selling at a 20K loss less realtors fees and lost opporunities for that money - you think?

In the meantime, my next door neighbors are moving out after 2 years. Someone offered them a 3/1 for $1,275. in town - nice deal

smf said...

"We agree that a 25% or more decline in resale home prices is unlikely"

I have already seen 25% price declines, and they just started.

If you wait for incomes to catch up to home prices, you will wait a long time.

Diggin Deeper said...

Once again, what IS...and what MIGHT be (IF) are completely different concepts and article is loaded with IFs.

Only facts lead one to make good choices based what is known. Speculation will give options on a gambled result one could expect.

Frankly, I'll leave gambling to the casinos and accept facts for what they are.

Sippn said...

Buying Time - yes I know his data is similar, hell it might be the same data as GLobal Insight, but he at least had an opinion...

He only mentioned a few of the top 10 markets... Sac is not.

Inventory in Atlanta - 117K
Chicago, Detroit - 70K, Miami 112K each, Houston, Phoenix 47K ea

Permits in Houston, So Cal - 71K each

Sac region is 10-15% of these numbers.

Diggin Deeper said...
This comment has been removed by the author.