The New York Times has a very depressing article today on the continuing fall of housing prices, and the very real possibility that we are nowhere near the bottom. The article predicts continued declines trhough next year, and maybe longer in places like LA where housing is still relatively expensive compared to rents and incomes.
The No. 1 thing that drives housing values is incomes,” said Todd Sinai, an associate professor of real estate at the Wharton School at the University of Pennsylvania. “When incomes fall, demand for housing falls.” ……One reliable proxy of housing values — the ratio of home prices to rents — indicates that in many cities prices are still too high relative to historical norms.
In Miami, for instance, home prices are about 22 times annual rents, according to analysis by Moody’s Economy.com. The average figure for the last 20 years is just 15 times annual rents. The difference between those two numbers suggests that a home valued at $500,000 today might be worth only $341,000 based on the long-term relationship between prices and rents.
The price-to-rent ratio, which provides one measure of how much of a premium home buyers place on owning rather than renting, spiked across the country earlier this decade.
It increased the most on the coasts and somewhat less in the middle of the country. Economy.com’s calculations show that while it remains elevated in many places, the ratio has fallen sharply to more normal levels in places like Sacramento, Dallas and Riverside, Calif.
The article also points out that mortgage rates have bounced back up (last week, they hit a low point, hovering around 6%). The average 30-year mortgage is hovering around 6.75% — and that’s for the lucky people who can qualify. Banks are so tight with lending rules right now that even those with excellent credit and big down payments are being denied.
In an effort to help drive down rates, the Treasury Department has announced plans to buy mortgage-backed securities issued by Fannie and Freddie. The government also recently increased the amount of loans the companies can buy and hold. That’s where government plans to buy mortgage-backed securities comes in, with the hope that will convince lenders to loosen the purse strings, but, as the article points out:
Still, those efforts will take time to have an impact and it is not clear whether they will be sufficient to get banks to lend more freely, especially in areas where jumbo loans make up a bigger percentage of lending, like New York and parts of California and Florida. Economists say that prices in those places will probably fall further.