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WSJ: Some Home Prices Fall Below Pre-Bubble Levels

Wednesday, 17 August 2011 11:49 AM

U.S. home prices have fallen below "fair value" in one-third of nearly 130 housing markets, according to a study conducted by real-estate analysis firm Zillow.

The study raises concerns that some properties have overcorrected while incomes and housing prices are no longer moving in unison as in the past.

The survey examined the relationship between home prices and annual incomes over a 15-year period that ended in 2000, well before the housing bubble began.

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Home prices and incomes have moved pretty much in tandem for decades, but Zillow's figures show that may be changing, The Wall Street Journal reports.

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For the United States as a whole, home prices were around 2.9 times incomes from 1985 to 2000, yet during the housing boom, values shot up much faster than did incomes.

The price-to-income ratio peaked at around 5.1 in 2005, and home prices have since fallen so that on average, nationally, prices are around 3.3 times incomes, or about 14 percent above the historical trend, the Journal reports.

Many areas of the country, however, have seen drastic drops in home prices.

In Las Vegas, home prices are now 25 percent below their historic price-to-income trend of 2.7. During the housing bubble, that ratio more than doubled to 5.6. Home prices have been falling for the past five years, and by March, prices were just 2.1 times household incomes, the Journal reported.

Home prices are undervalued by 35 percent in Detroit; by 18 percent in Modesto, Calif.; and 13 percent in Fort Myers, Fla., the Journal reported.

"At a broad level, it is helpful to understand that if people in certain markets paid three times their average income in housing before the bubble, those markets are probably going to get back to that level," says Stan Humphries, chief economist at Zillow, according to the Journal.

The data also show that as recovery unfolds, incomes and home prices are less likely to move in tandem as they did in the past.

The housing sector played a leading role in throwing the U.S. economy into the worst recession since the Great Depression.

Many say the sector continues to lag on the economy and dampen recovery.

With so many residential properties built during the boom, excess inventory may be hampering demand for construction, a key driver to economic growth.

Housing starts slipped 1.5 percent in July, according to the Commerce Department.

Starts fell to a seasonally adjusted annual rate of 604,000, down from a downwardly revised 613,000 rate in June, the Commerce Department adds.

Economists polled by MarketWatch had anticipated an annualized rate of 600,000 for July, and many had thought June’s initial reading of 629,000 was too strong.

"The problem for homebuilders of course is that there is still such a massive supply of existing homes that are up for sale as well as lots of foreclosed homes still in the pipeline," says Bernard Bahmohl, Chief Global Economist, Economic Outlook Group in Princeton, New Jersey, according to Reuters.

"Residential construction remains depressed until we see new home sales improve significantly. We are at least six to 12 months away from that. The economy is still weak. Home builders are pulling back. Everyone is on recession watch," says Robert Dye, chief economist at Comerica in Dallas.

"The multi-family market is going to be stronger than the single-family market. That is where we are going to see a relatively tighter market, but that market has always been volatile," Dye told Reuters.

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U.S. home prices have fallen below fair value in one-third of nearly 130 housing markets, according to a study conducted by real-estate analysis firm Zillow. The study raises concerns that some properties have overcorrected while incomes and housing prices are no longer...
Wednesday, 17 August 2011 11:49 AM
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