House Prices in US Reaching Bottom?

Many Canadians had the impression that our market had the same problems as the US. There a hugh percentage of mortgages were ‘sub-prime’ and basically not going to be repaid, along with other problems. While our market has rebounded strongly, some of that perception remains. This post highlights how inflated the bubble was.

America’s housing market may be bottoming. New home starts and sales were up in June. Prices rose during the last three months for the first time in three years. Prices have plunged 30%, a handful of major markets now look affordable, and all of them are closer to sane.

Table 1 shows the rapid increase in house prices since 1987. Yale economist Robert Shiller studied house prices from 1890 to 2004 and found they outpaced inflation by just 0.4 percentage points a year. Until the Federal Reserve reduced interest rates and unleashed a speculative bubble. With the drop in prices prices are returning to where they would have been without the bubble. For the two lines to rejoin, house prices don’t necessarily have to fall further. They could flatten for a couple of years and let inflation catch up. (Of course, they could also overcorrect.)
House buyers  care about whether they can afford their mortgage payments, and if buying is a better deal than renting. The National Association of Realtors publishes an affordability index, which is graphically illustrated in Table 1.

The blue line is the ratio of house prices to rents and the red dots show the ratio of house prices to median household incomes. Income figures are only available through 2007, so the author gave America a 3% raise for 2008 and another 1.5% increase for 2009 through May.

With rents and incomes not moving much since 1987,  the chart is dominated by changes in house prices. Again, we see a bubble, a bust, and the approaching — but not quite reaching — of a normal level of affordability.

Table 3 confirms the trend with price/rent ratios for six major markets.

Jack Hough, in SmartMoney, Aug 4