Recent data out from the National Association of Realtors (NAR) shows that its home affordability index (HAI) is at the best levels in more than three decades. The HAI compares median family incomes to median home prices on a national basis. A value of 100 signifies that a family earning the median income has enough income to qualify for a mortgage on a median-priced home. (The monthly mortgage payment is conservatively figured to not exceed 25 percent of the median monthly family income).
The current HAI value of 141.8 means that a family earning the median family income has 141.8 percent of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home. This represents a substantial improvement in home affordability from the level of 119.4 just one year earlier. The current reading of 141.8 is the best since the early 1970s and the best ever since the NAR began determining this ratio monthly in 1981. HAI data from the 1970s was calculated annually, and in 1973 the HAI averaged 147.8. (It’s highest annual average was 154.8 in 1972.)
Financing is more challenging today for some prospective homebuyers to get than it was a few years back. Those with weak credit reports or low down payments are finding fewer and more costly mortgage options. From a historic perspective, however, the current lending standards are more the norm with borrowers expected to have sound credit credentials and down payments amounting to at least 10 to 20 percent of the value of a purchased home. What was unusual were the loose lending standards of the past decade or so.
With home affordability at attractive levels not seen in more than a generation, the question remains whether homes offer good value. A new report from IHS Global Insight suggests that nationally housing prices are now undervalued by about 3.8 percent, which is quite a change from the peak of being 24.5 percent overvalued in the second quarter of 2006.
IHS examines trends and valuations in home prices in 330 metropolitan areas across the United States. For each metro area, home prices are analyzed in relation to population densities, mortgage rates, local incomes, and historic norms within given metro areas.
IHS’ latest report looked at home prices as of 2008’s third quarter and found that prices declined in 73 percent of the tracked metro areas in the third quarter. The weakest markets were generally found in the Southwest and Southeast.
Only three metro areas now have "extreme overvaluation" given the market’s fundamentals. Fifty-two metro areas held this same distinction back in 2005. The three most overvalued areas and the percentage above expected fair value are as follows: Bend, Ore., 43 percent; Atlantic City, N.J., 43 percent; and St. George, Utah, 39.7 percent. Most of the other overvalued areas are concentrated in the Pacific Northwest and portions of Utah.
Home prices are now back in line with market fundamentals thanks largely to price declines. While most areas of the country experienced moderate declines, 29 metro areas, all of which are in California, Florida and Nevada, have experienced price drops of 30-plus percent since the market peak of the mid-2000s. Other areas suffering significant declines include Michigan; northeastern Ohio; southern metros from Charlotte, N.C., to Atlanta, Ga.; and portions of New England.
Metro areas now generally considered undervalued include: Southern metros from Mississippi through Texas; and now many metros in California and Florida due to significant price declines of the past two years. The vast majority of the 330 metro areas are now considered fairly valued or undervalued. (For a link to the report as well as color-coded maps showing local housing-price changes and relative valuations, please visit my Web site at www.erictyson.com).
Even though by historic measures prices are fairly valued or even undervalued already, as the study’s authors point out, markets tend to overshoot so of course it’s possible that in some areas prices may fall further. That said, history has proven time and time again that if you buy sound real estate at a fair price and hold it for the long term, you will make solid returns.
Eric Tyson holds an MBA and is a best-selling co-author of "Home Buying for Dummies" and "Real Estate Investing for Dummies."
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