The Housing Chronicles Blog: Home price changes are 'sticky' and likely to continue

Wednesday, February 13, 2008

Home price changes are 'sticky' and likely to continue

One of the reasons that home prices change more slowly than other asset classes (such a stocks) is because they're 'sticky:' selling is expensive, people can take their homes off the market and there's a definite psychological barrier to lowering prices below a certain level. And yet although home prices have clearly fallen from their peaks, the relationship between incomes and home prices remain far above the historical average. In the WSJ, Brent Arends argues that they're still 'wildly overvalued' and have a ways to go:

...even after a year of misery and falling prices, homes in many of these regions still aren't cheap. They remain wildly overvalued compared to average personal incomes.

There is a strong long-term correlation between the two figures. And in many regions, house prices would still have to fall a very long way to get back into line.

How far?

Try around a third in Florida and Arizona -- and closer to 40% in California...

Even if house prices stabilized, it would take a decade or more for rising incomes to catch up.

The data on median house prices and per capita personal income in these states have been tracked by Karl Case, economics professor at Wellesley College. (He is one half of the duo behind the closely-watched Case-Schiller real estate index)...

Median prices in California peaked in 2006 at 13.3 times per capita incomes. Hard to believe, but true. They may be down now to about 11.1 times.

But that's still way above the ground. Throughout most of the 80s and 90s they ranged between six and seven times incomes.

Just to get down to seven times incomes, prices would have to fall 37% tomorrow.

Those who bought at the peak of the cycle may be pinning their hopes instead on "incomes catching up" instead. But they had better be patient. Even if house prices stayed exactly where they are, it would take around 10 years for rising incomes to bring the ratios back into any sort of alignment.

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