Marketwatch - 10.13.05
A solid article by Marketwatch points out several of the things Doug and I have been saying for the last year.
The average U.S. home price is roughly 3.1 times the average household income, the highest in history and up from an average of 2.6 times since 1960, according to a recent report by Standard & Poor's. Driven by low mortgage rates and looser lending standards, home-ownership levels of 69.4% are also at an all-time high.
We need to ask why home prices would grow to 3.1 times income and the answer is fairly simple, low rates followed by interest only and negative amortization loans. The more important measure is the percentage of household income going to the mortgage payment. While this has climbed, that climb has been muted by alternative mortgages. When rates climb the market will slow, in a slower market there will be less pressure on people to buy homes at all costs taking on the risks of these alternative mortgages. Add it up and there is an excellent chance that the multiple in question reverts to the mean of 2.6 over the next 7-10 years through a combination of falling home values and increasing incomes.
Lastly, Mark Zandi makes a great point that the real estate market moves at a glacier's pace. We may be hearing the first cracks in the glacier but it will still be a while before the glacier actually starts to split up and disintegrate.
Mark Zandi, president of Economy.com, warned that rising interest rates, the growing use of exotic mortgage products, and an overvalued housing market could result in falling prices in around a quarter of U.S. metropolitan housing areas by late next year or early 2007.
Comments