US Housing Markets Strong in 34 States

New Study Uses Broader Data to Forecast Recovery Begining in 2010

Jun 30, 2009

In "When Will Housing Recover?" Eli Beracha and Mark Hirschey inject some much needed, fresh ideas into the condition and future of US housing markets

The study is published in the Financial Analysts Journal: March-April. In the main, it emphasizes the importance of looking at housing market values - the rampaging elephant of family assets - as multiple markets, with some in much better shape than others.

The housing market is huge. Putting it in perspective, for 2007 Standard & Poor’s estimated the value of US residential real estate totaled $22.5 trillion, at the close of the year. That compared to a $19.9 trillion domestic equities market and a $29.7 trillion bond market.

Authors Sum Up True Condition of Housing Markets

According to Baracha and Hirschey, professors of finance at East Carolina University and the University of Kansas, respectively, "Despite stunning drops in a handful of important regional housing markets, it is important . . . to recognize that the housing market remains strong throughout much of the United States."

This assertion implies a public misconception exists about the true situation. Perhaps this is attributable to the immense publicity received by excessive defaults among securitized subprime mortgages; and also because of the Draconian legislative measures the US Treasury and Federal Reserve Bank demanded from the Congress, to prevent a total paralysis of world banking credit.

However, rather than placing the blame on the government’s political oversell of remedies, the article suggests a better explanation for the excess gloom. Two significant events have occurred and caused a twin shock, for the first time since World War I. They are extraordinary drops in nominal prices and real prices for housing simultaneously.

Homeowner and Home Buyer Fantasies Caused Real Estate Bubble

When house prices collapsed in 2006, homebuyers apparently had decided the steady rise in prices post World War II would last forever. An army of sales persons, appraisers and money lenders accommodated their fantasies.

But in spite of the general despair over shattered values of many properties, the study points out that house prices actually rose in 23 states between the second quarter of 2006 and the second quarter in 2008 (latest available data). In another 11 states, the slide was only between 0% and 5%. Therefore, they conclude that the unprecedented drop in housing prices had minimal effect on house prices in 34 of the 50 states, over two-thirds of the market.

New Study Uses Affordability Concept in Expectations

Their use of data from the House Price Index (HPI), maintained by the U.S. Federal Financing Agency, rather than the more publicized S&P/Case-Shiller indices, explains most of the discrepancy. The HPI focuses on securitized but conforming Fannie Mae and Freddie Mac mortgage loans, and collects data from all 50 states, while the other index is weighted toward urban centers.

By figuring the differences in the current affordability levels and their historical averages from the first quarter of 1982 to the second quarter of 2008, the authors estimate how far house prices must recede or incomes increase to return to that long-term condition of affordability.

Currently, the affordability differential for the entire US is 9.5 percent higher than the long-term benchmark. That means if the median housing price remains flat for the country at large, and median income grows at its normal rate for 1.49 years - roughly 18 months - housing affordability will be triggered and the general market will likely begin a recovery.

Markets in Some States Could Begin Recovery in 2010

Following the study’s expectations, states with current affordability ratios near or below historic levels are likely to be in the vanguard of the recovery; while those far above historical trends are likely to suffer further atrophy in housing markets, before they recover.

The top ten states expected to show rapid recovery in residential real estate are:

But Housing Markets in Many States Remain Unaffordable

The top ten states where high residential real estate prices indicate further slippage are:

Eli Baracha and Mark Hirschey conclude that housing markets are stronger than generally thought, as shown through the use of the Housing Price Index’s more inclusive data, rather than the "hot-market-cold-market" prices of another popular Index. Furthermore, in many states, expected growth in home buyer incomes will create greater housing affordability, an upturn likely to start a recovery in many US markets by the second quarter of 2010.

The copyright of the article US Housing Markets Strong in 34 States in Real Estate Investment is owned by Howard Bryan Bonham. Permission to republish US Housing Markets Strong in 34 States in print or online must be granted by the author in writing.