Housing Bubble Bursts, But Not Everywhere

NEW YORK (MainStreet) — Back in the heady days of housing bubble excess, stubborn renters who refused to buy until prices dropped had to face down certified experts who insisted, “15% annual gains in housing costs are economically sustainable, not bubbly at all. Buy now or be priced out forever!”

Today, in hindsight, experts agree the last decade’s enormous rise in housing prices was a bubble after all; now, instead of “is or isn’t there a housing bubble?” the new debate is, “Has the bubble finished deflating?” Search online for the phrase “home prices have stopped falling” and you’ll find people saying calling an end to the trend as far back as summer 2008, through 2009, and through 2010 as well.

Now, early in 2011, the great debate revolves around whether or not housing will “recover” (read: rise in price).

I optimistically expect the market will make a full recovery in time – but then, as one of the stubborn renters who sat the bubble out, I define “housing market recovery” as “prices drop back to where I can comfortably afford one.” To determine whether I can, I still rely on the old pre-bubble conventional wisdom: “Save 20% down, and you can afford a mortgage loan equal to three years’ salary.” That kept me out of trouble around 2005: regardless of how low interest rates dropped, there was no way I was going to borrow five or six years’ pre-tax pay for a starter home.

Walter Molony, the senior public affairs specialist for the National Association of Realtors, said “In the 1970s, buyers would spend two-and-a-half to three times their [annual] income … during the boom, maybe six times income.”

In today’s housing market, he said, “two things are pulling at each other: historically high housing affordability – today’s affordability levels are the highest dating back to the 1970s. Today, affordability is still extremely high, with a great interest rate environment. The problem is overly tight credit … we went from extremely lax lending standards [during the bubble] to overly high standards [now]. Only the cream of the crop qualify for a loan. Once we return to normal, sound lending standards, we project home sales will rise.”

Despite such optimism, a comparison of income-to-home-price ratios in markets throughout the country suggests most of them still have ample room to fall before hitting bottom. To check those affordability numbers we compared median household income estimates from 2009 (the most recent available) with median home sale prices reported on Trulia.com, which based its numbers on sale data for the two months spanning Nov. 10, 2010 to Jan. 11, 2011.

Southern California still shows bubbly price-to-income ratios; in Irvine, with its median home price of $563,000 and household income of $85,000, houses cost over six and a half times their buyers’ annual salaries. That’s a bargain only when compared to places like New York City, with a median household income of $50,333 and median home price 20 times that: $1.1 million.

Of course, Manhattan has always been expensive; high home prices there don’t suggest trends anywhere else. The same holds true for Boston, with a median income of $56,000 and median home price ten times as high: $576,000.

But in the suburbs, Framingham, Massachusetts has a higher median income and significantly less expensive homes: $62,000 in median income and $267,000 for the average house.

It’s still a bit higher than historic price ratios though: By the old “20% down, three years’ pay” standard, the median Framingham house “should” cost $32,000 less than it does – though Framingham’s proximity to expensive Boston might justify at least some of the price differential.

It’s certainly better than the differential in the Virginia suburbs of Washington, D.C. though. In Alexandria, Va. the median home price of $358,000 is 4.6 times the city’s $77,095 median household income.

In February the New York Times reported a “housing crash” in cities like Seattle and Atlanta, previously considered immune to housing-market slumps. Yet price-to-income ratios suggest prices in those cities have further yet to fall: Atlanta’s median home price of $214,000 is 4.3 times its $50,000 median income, while Seattle’s $341,000 median home costs 5.6 times its $61,000 median income.

Vegas, formerly a housing bubble hot zone, has cooled off considerably, with its $121,500 median home costing less than 2.4 times its $51,000 annual income.

The bubbly froth appears to have receded in Arizona, too. In Scottsdale, with its median income of just under $72,000, the 20%, three years formula would suggest a median home price of $269,000, close to Scottsdale’s actual median of $275,000. In nearby Phoenix, the median home is down to $88,500, less than twice the $48,000 household income.

Whether you define recovery as “prices rise” or “prices fall”, the housing picture differs significantly from one city to another. Even if you can afford a certain house according to the old 20% down, three years formula, check your region’s median-price-to-income ratio.

You still might get more for your money if you wait before you buy.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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