flexiblefullpage -
Currently Reading

Measuring Housing Affordability Market by Market

Advertisement
billboard -
Awards

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.


By John Burns February 21, 2008

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.)

The Housing Cycle Barometer

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.

Not A Problem Everywhere

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.

The Future

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.


Author Information
John Burns helps many of the largest companies in the industry with strategy and monitoring market conditions. He can be reached at jburns@realestateconsulting.com.

Tags

Related Stories

Business

Entries Closing Soon for Best in American Living Awards

Custom builders have only one week left to submit their projects for recognition 

Awards

Three Custom Homes Honored by Best in American Living Awards

These three custom homes stood out in the Best in American Living Awards for their site sensitivity and attention to detail

Awards

Home Design: A Mellower Modern

Three New England contemporary homes show modern architecture's softer side

Awards

Impeccable Execution

These custom homes captured top honors in the 2017 Best in American Living Awards with their brillant synthesis of design and craftsmanship

Awards

BALA-Winning Custom Homes Set High Standards

Three Platinum winners from the 2016 Best in American Living Awards show how custom is done

Awards

2012 Chrysalis Awards

The top projects from across the country in this year’s competition

Awards

David Weekley Homes honors top suppliers with Partners of Choice Awards

Houston-based David Weekley Homes last week announced the winners of its Partners of Choice Award, which recognizes the product suppliers that ranked highest in satisfaction by approximately 500 David Weekley staff members.

Awards

Quick! Bookmark HousingGiants.com

Housing Giants is making another big leap, and this time, you have more opportunity to contribute

Awards

Key Accountability

Diligent training and follow up keeps his staff on its toes and product moving in a market that just got a little tougher

Awards

She Made Cyber Sales Soar

Prospecting on the Web became a fresh and effective tool for selling new homes

Advertisement
boombox1 -
Advertisement
boombox2 -
Advertisement
boombox3 -
Advertisement
native1 -

More in Category

Business

Entries Closing Soon for Best in American Living Awards

Custom builders have only one week left to submit their projects for recognition 

Awards

Three Custom Homes Honored by Best in American Living Awards

These three custom homes stood out in the Best in American Living Awards for their site sensitivity and attention to detail

boombox4 -
Awards

Home Design: A Mellower Modern

Three New England contemporary homes show modern architecture's softer side

Awards

Impeccable Execution

These custom homes captured top honors in the 2017 Best in American Living Awards with their brillant synthesis of design and craftsmanship

boombox4 -
Advertisement
native2 -
Advertisement
halfpage1 -