Videos and Resources

Wednesday, June 25, 2008

Utah's Crash-Proof Fundamentals

The Harvard Joint Center for Housing Studies just released its 2008 report yesterday. Its very insightful but depressing because it speaks on a national level...not a Utah level. You can read the whole report for yourself here.

One of the main fundamentals driving home prices is personal income. How can a 3 Bedroom home in the Avenues of Salt Lake sell for $380,000 and the same home sell for $110,000 in Rose Park? The answer is income.

People are naturally self segregating. Like attracts like. Higher income earners tend to mingle among themselves as do middle income and low income earners. We all seek the company of those we identify with (usually). This self segregation process ultimately produces "neighborhoods" with reputations for one thing or another. When you say "The Avenues" of Salt Lake, what do you think? When you say "West Valley", what is your first impression? The point is that the reputation each neighborhood has has been created by the inhabitants of that neighborhood. The price of housing is guided by the income produced by those inhabitants.

But, sometimes, housing prices become distorted in relation to personal income. What if so many people wanted to buy a home that they found loan officers who where wizards and they could get their borrowers qualified for these amazingly large mortgages with these incredibly small payments?

There is a natural relationship between house price to personal income. The nerdy title for this is the median house price-to-median income ratio. Looking back at time, we can tell if house prices are too high, and therefore due for a correction, if the ratio is higher than historical averages.

Hence our chart for the day:


For the Salt Lake area people have tended to spend 3 times their income on a home on average. As of 2006 (the hottest year of our boom market) people were spending 3.2 times their income. Lets compare this to LA where in 2006 they were spending 10 times their income! LA has a historical norm of about 4.5-5. That means that housing prices in LA are double what they should be in relation to income. That is amazing. Its also terrifying if you own property in that marketplace. Vegas is much the same. Both Vegas and LA are experiencing severe price declines right now.

So is Salt Lake in for a big price correction? From this chart, I would say no. It is consistent with previous boom-bust cycles in Utah that show that prices accelerate dramatically for a a brief period and then stabilize for a few years before repeating again and again. I expect that our prices stay where they are for a few years before another wave of appreciation comes our way.

No comments:

Post a Comment

Please keep comments appropriate and respectful for a real estate blog. Personal rants, spam, and off topic comments will be deleted.