During a question and answer session at a recent industry conference, a home builder asked Moody’s Analytics chief economist Mark Zandi for his thoughts about the labor
Measuring Housing Affordability Market by Market
Housing Giants columnist John Burns outlines how affordability issues have affected different housing markets in this economic cycle — and what it means for home builders.
Astute builders carefully monitor affordability in their markets, which is one of the three key determinants of housing market health (demand and supply are the other two). Affordability remains a problem in 102 of the 169 metro areas we monitor closely, but recent price corrections have reduced the number of severely overpriced markets to only 18. (The latest housing affordability statistics are always available at the John Burns Real Estate Consulting site.)
In 2002, we created an index we call the Housing Cycle Barometer as a way to measure affordability conditions market by market. The index measures each market's historical ratio of housing costs to income and sets 0 as the most affordable time, 5 as the median and 10 as the most expensive time in that market.
In 2002, only 14 of the 44 markets we were monitoring were overpriced, and only three were severely overpriced (Boston, San Diego and Fort Lauderdale), but we warned that affordability was becoming a problem in more markets. (The history of Seattle is shown at right.)
Little did we know at the time that two additional years of falling interest rates followed by two years of extremely aggressive lending would lead to the downturn we are seeing today.
However, many builders became more conservative in the overpriced markets, primarily by taking on joint venture partners, using more option financing to buy land or making significant investments in process improvements.
Today, these builders are monitoring affordability to determine when to jump back into the market.
Affordability is not an issue in every market. In markets where supply can rapidly be added to meet demand, rapid appreciation did not occur. However, the heightened construction levels in these markets have led to an oversupply, particularly as the economy has slowed and mortgage criteria have tightened over the last year.
Peak-to-trough price corrections in this down cycle are likely to be significant — our current best estimate is 19 percent based on our market-by-market forecast. In the markets with significant affordability problems, corrections are likely to exceed 30 percent. In many markets, home builders have already corrected prices as far as we are projecting the overall market will correct. However, inferior locations, higher densities and significant local competition will likely cause further corrections in 2008.
Although 2008 is likely to be very painful, falling prices will restore the market to astate of equilibrium, where builders will be profitably selling homes to consumers who can afford them. We believe that new home prices will generally stabilize at least one year before resale prices do in many markets, because home builders and their lenders have been quicker to adjust to market conditions. This will lead to an earlier turnaround for the new home market rather than for the resale market.
|John Burns helps many of the largest companies in the industry with strategy and monitoring market conditions. He can be reached at email@example.com.|