Home affordability at pre-boom prices

WSJ - home affordability at pre-boom prices

Data provided by Moody's Analytics track the ratio of median home prices to annual household incomes in 74 markets. By that measure, housing affordability at the end of September had returned to or surpassed the average reached between 1989-2003 in 47 of those markets. Most economists believe the housing boom took off in 2003. Nationally, the ratio of home prices to annual household income reached a peak of 2.3 in late 2005. But by last September, it had fallen to 1.6, matching the lowest level in the 35 years the data have been collected and well below the historical average of 1.9 between 1989 and 2003. "Based on incomes, this is as affordable as it gets," said Mark Zandi, chief economist at Moody's Analytics. "If you can get a loan, these are pretty good times to buy."

Measuring home prices relative to income is not the only way economists calculate housing affordability. They also examine the relationship between house prices and rents. Measured by the price-to-rent ratio—the price of a typical home divided by the annual cost of renting that home—prices are fairly valued, or undervalued, in around 20 markets. Nationally, the price-to-rent ratio stood at 14.85 at the end of September, above the 1989-2003 average of 12. The data suggest pockets of the country have further to fall. Home prices still remain overvalued by both measures in several markets, including Seattle, Charlotte, New York and Portland, Ore. Based on rents, "it's still not a slam dunk to buy" in those markets, said Mr. Zandi. He said markets appeared most overvalued in the Pacific Northwest, which was among the last regions to enter the housing downturn.

Historical measures also showed prices were still high along the Northeast corridor from Baltimore to Boston. Of the 74 housing markets, Baltimore appeared to be the most overvalued. By contrast, prices in Cleveland, the most undervalued market, have returned to 1991 levels based on the price-to-rent ratio. Historical measures comparing rents and incomes with home prices provide a useful gauge of affordability, but can be imperfect at measuring how close different markets are to recovering from a bubble.