Technology TransactionsRealty Viewpoint: Housing Crosses Biggest Hurdle - Price
I like the way economist Dr. Irwin Kellner explains housing, because he"s sensible and straightforward. He says in his latest column for MarketWatch that housing could turn around quickly because it"s become affordable again.
"I don"t care about the cost of land, labor, building materials or the house next door," he says. "What matters to me is the ratio of home prices to household income."
Dr. Kellner points out that as of April, home sales statistics suggest that the median existing home costs 3.4 times household incomes, while median new-home prices are about 3.8 times family incomes.
To put these numbers in perspective, Dr. Kellner says that home prices are down from 4.2 times household incomes in 2005, although they "remain above the 2.8 figure that prevailed in the 1980s, when housing sold at a brisk pace."
"But home prices don"t have to get down to 2.8 times incomes to kick-start the market," he says. "A bit over three times might do it."
According to the National Association of Realtors, the national median existing-home price for all housing types was $202,300 in April. Prices have dropped 8.0 percent below a year ago when the median was $219,900.
If you use Dr. Kellner"s ratios, it would take an income of $59,500 to buy the median home priced at 3.4 times earnings.
Dr. Kellner"s stats matter because lending standards have returned to the 1980s. Gone are the alternative loans which allowed people to get into homes with nothing down and teaser rates. Also, income to debt ratios are much more conservative.
Buyers can count on safely qualifying for a home if they have good credit, put 20 percent down and buy a house with no more than 25 percent of their gross income. By that standard, a family with an income of $45,296 can buy a median priced home, according to a NAR series.
The NAR says that the median income for first-time homebuyers is $58,600, and for repeat buyers, it"s $85,700. No wonder housing is looking more affordable.