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Home prices outstripping income gains


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June 30, 2005

Home prices outstripping income gains

Dean Foust

The FDIC--the federal agency that regulates many banks--released a report on Tuesday that got scant attention but offers interesting insights as to whether we can sustain the kind of appreciation in home prices we've seen in recent years. The FDIC report nominally analyzed banking and economic trends in every state, but devoted a lot of attention to real estate, since that represents a growing share of bank lending.

Cut to the chase: The FDIC noted that in many states, the gap between home prices and income has reached a record level, which suggests that we could be entering a long stretch where home prices--at best--do nothing, while incomes try to catch up...

Consider the situation in Florida, which has seen a spike in home prices, fueled in part by speculation. Home prices in the Sunshine States have risen to a level that is 4.4 times income levels of 2004. In metro Miami, the average price of a home is now more than six times income levels.

Contrast that to the old rule of thumb that real-estate agents and mortgage lenders use in qualifying buyers: For the longest while, most lenders wouldn't qualify buyers to spend more than three times their annual income.

My take is that with this kind of gap, there's no way homes can continue to appreciate. And as for the future, that means that we could be facing a decade--or more--where homes in markets like Florida don't appreciate a nickel (and that's the best-case scenario)while incomes try to catch up. That could be bad news for buyers who are buying in late on the assumption that home prices only go up, up, up.

To check on the FDIC's analysis of conditions in your state, click over to: http://www.fdic.gov/bank/analytical/stateprofile/index.html

03:13 PM

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Not in the Washington D.C. area! House prices here may rise less rapidly in the future (and that would be a good thing), but they won't stop going up. If you lived here, you'd see that.

Posted by: Audiorich at July 1, 2005 04:21 PM

My blog space supports your analysis.In the June 18, 2005 addition of the Miami Hearld the unemployment rate of Miami Dade and Broward county, Florida was 4.3%. This was much lower than the national avarage but real wage remain flat to lower since 2001. Most of the job created were in construction and real estate. But what will the economic growth be when real estate slows. What industry will lead the economy in growth if tight lending becomes standard. Please visit my site for more.

Posted by: Stephen blake at July 4, 2005 12:41 PM

Each market's future is dependent upon the complex interlacing of job / population growth pushing demand above supply (legit or real demand - not that fueled by investors), interest rates and prices for that particular market. If you're in a market where population and job growth continue due to some innate strength in that market (homeland security growth in the DC area for instance) people will need some place to live even if higher rates and higher prices make that difficult to do. They'll move farther out or they'll buy that large $650k townhome instead of that $1.2 million single family or they'll rent somewhere. The pressure of negative cash flow investors leaving the market may actually help rents recover more quickly in legit demand areas as fewer investment units will mean less rental inventory and somewhat higher rents. The key to remember is this is an industry driven by local conditions.

Posted by: AlreadyGone at July 6, 2005 02:10 PM

I can't imagine incomes "catching up", as you suggest. Since homes are overpriced - in that light, it wouldn't even be desireable for incomes to "catch up" (which would put a ridiculous burden on the economy, talk about inflation!). Meanwhile, consumers should be putting more of their existing income into savings, rather than their homes. If these 2 forces play out, home prices would have to come down, but I see it happening gradually.

Posted by: Sirocco at July 10, 2005 07:39 PM

As an executive recruiter in Miami I can verify first hand the great divide between local salary ranges and local condo prices.

To start our average professional will see somewhere between 60-75K. Our local condo, NOT a house, is selling in the mid 300s to 400K range. If we "do the math" then it becomes quite clear we are headed for a meltdown locally.

The astounding thing is that there are more and more high rises going up all the time. This would cause a rational person to panic if they were heavily invested in this market. But the real estate industry is coming together and claiming that our market will continue to appreciate. You see according to these self appointed gurus: "Local income doesn't matter." We have a lot of foreign money here. The 60,000 NEW units currently under construction or planning will be bought by these people or baby boomers from up North cashing in and moving South.

Call me chicken little, but these real estate "professionals are either hopelessly misled, or just trying to squeeze what little life there is out of this market before they pack up their snake oil and move on to the next group of suckers...Ummm I meant clients.

Posted by: Veritas at July 13, 2005 10:29 AM

I have lived in the most 'wanted' place to live in Florida for over 23 years.

And well boys who commented above, you forgot supply & demand. Everyone wants to live here! I mean EVERYONE. Which unfortunate for us poor slobs- means the well-to-do.

The retired folks- the successful business folks- and yes - now comes the influxe of the rich & famous. As long as the people with money want our state- they have it. Look at Calif. and tell me that Florida is not now the 'new calif.'? !!!

All I do is pray that somehow- someway- someday- I can find a town that is just how my town was many moons ago, and move there.

By- good luck- & NEVER FORGET Miracles Do Exist. I have proof !!!!!!!

Posted by: Serena at February 19, 2006 10:51 PM


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