Tag Archives: National Association of Realtors

JCHS: How Helpful is the Price-to-Income Ratio in Flagging Bubbles?

How Helpful is the Price-to-Income Ratio in Flagging Bubbles?

 by Rocio Sanchez-Moyano
Research Assistant
With the continued growth of house prices across the country, talk of a housing bubble is beginning to reappear in the headlines. House price-to-income ratios are often used to indicate a bubble, as prices have historically had a relatively stable relationship with incomes (both mean and median).  In the US, nationally, the price-to-income ratio remained relatively stable throughout the 1990s.  It began to increase around 2000 and surpassed its long-run average of 3.65 by 2002 (Figure 1).  The national price-to-income ratio continued to increase in the mid-2000s, reaching a high of 4.63 in 2006 before rapidly declining in 2007 and 2008 and eventually hitting a low of 3.26 in 2011.  The classic bubble shape is clearly visible in this trend.  Recent price gains, viewed in this context, do not seem to indicate the return of a bubble; price-to-income ratios today match their early 1990s rates and still have some room for growth before reaching their long-run average.  (Click chart to enlarge.)
 091613_Rocio_figure1
Notes: Prices are 1991 National Association of Realtors® Median Existing Single-Family Home Prices, indexed by the FHFA Expanded-Data House Price Index.  Incomes are median household incomes.
Sources: JCHS tabulations of FHFA Expanded-Data House Price Index;  US Census Bureau, Moody’s Analytics Estimates.
However, despite the seemingly straightforward relationship between house prices and incomes in Figure 1, this indicator can be difficult to interpret.  To start, many data sources are available for measuring prices.  One used frequently is the National Association of Realtors ® (NAR) Single-Family Median Home Price as it is widely available for many metros and provides an actual house price (rather than an index showing change in values) that can be compared to income levels.  The disadvantage to this measure is that NAR house prices also capture changes in the types of units that are being sold over time and so does not reflect how the value of the same home changes.  Repeat sales indices, like the Federal Housing Finance Authority’s (FHFA) Expanded-Data House Price Index, which was used to produce the figures in this post, are designed to take into account changes in the values of homes themselves by tracking sales of the same homes over time.  However, the FHFA index can be more difficult to interpret since, as an index, it does not provide information about current prices.  Price-to-income ratios using this data must peg the index to a starting or ending house price.
Furthermore, identifying bubbles or other price anomalies from price-to-income ratios can be difficult because it is not clear what is an appropriate baseline value of the measure for comparison.  Even in the aggregate US case, where the ratio did not fluctuate more than one percent in either direction for much of the 1990s, the linear trend is not flat and the long run average is above the 1990s levels.  This becomes even murkier when observing trends at the metro level.  Some metros, like Dallas, had stable price-to-income ratios over the last two decades (Figure 2).  Dallas did not experience a significant bubble in the mid-2000s and its long-run average mirrors the linear trend.  In other metros, like Phoenix, the boom-bust period led to significant fluctuations in the price-to-income ratio after having been relatively stable in the 1990s.  If the 1990s levels are to be considered normal for Phoenix, then current price-to-income ratios remain below average and recent growth in prices can be considered a return to normal after an overcorrection.
For other metros, the price-to-income trend is more difficult to interpret.  Ratios in Cleveland are well below their long-run average, but the historical trend has been drifting downwards, so ratios in recent years could be indicating a reset of the ratio in Cleveland to lower levels.  At another end, San Francisco has experienced a wide range of price-to-income ratios in recent history.  Price-to-income ratios boomed in the late 1980s, decreased throughout much of the 1990s, and then surged through the mid-2000s.  Compared to its long-run average, ratios in San Francisco are above historical norms, but, when the historical trend is considered, prices can continue to increase before they appear “too high.”  Finally, if a fundamental relationship exists between prices and incomes, it is unclear why the ratio can vary significantly from metro to metro.  The national average is around 3.6.  In the metros observed here, Cleveland and Dallas both have historic averages below 3.0 while San Francisco’s is double the national average. (Click chart to enlarge.)
 091613_Rocio_figure2_sm
Notes: Prices are 1991 National Association of Realtors® Median Existing Single-Family Home Prices, indexed by the FHFA Expanded-Data House Price Index.  Incomes are median household incomes.
Sources: JCHS tabulations of FHFA Expanded-Data House Price Index;  US Census Bureau, Moody’s Analytics Estimates
Given this variation, what can we make of the price-to-income ratio?  On a national level, this ratio does a relatively good job of identifying substantive shifts in the market.  In the aggregate, there appears to be a “normal” price-to-income ratio and prolonged deviation from this trend can signal an underlying shift.  However, on a metro-by-metro level, where it can be difficult to identify an appropriate baseline value, long-run historical context is necessary to interpret point-in-time estimates.  In markets like Dallas and Phoenix, historical trends are consistent enough that it can be useful to compare the current ratio to past ones.  In others, like Cleveland and San Francisco, the price-to-income ratio on its own is not especially helpful since there is no clear way to identify a “normal” price-to-income ratio.

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JCHS: Despite Rising Home Prices, Homeownership More Affordable than Ever

Despite Rising Home Prices, Homeownership More Affordable than Ever

 by Rocio Sanchez-Moyano
Research Assistant
For those able to obtain loans in today’s constrained credit environment, the monthly cost of homeownership is at historic lows, thanks to low interest rates.  Though the National Association of Realtors’ median single family home price increased by 6 percent in 2012, falling interest rates have made mortgage payments cheaper: assuming a 20 percent down payment and 30-year fixed-rate mortgage, monthly payments on a median priced home in 2012 were $644. Compared to median incomes, payments are lower than they have been in more than two decades.

Sources: JCHS tabulations of Freddie Mac, Primary Mortgage Market Survey; National Association of Realtors;  US Census Bureau, Moody’s Analytics Estimates.

The record low interest rates available in 2012 helped reduce monthly mortgage payments in 82.9 percent of metros from 2011 to 2012; payments also declined in 80.3 percent of metros that experienced price gains.  Even in metros with substantial price appreciation, such as Phoenix (24.6 percent) and San Francisco (11.9 percent), growth in mortgage payments was muted, rising 13.3 and 1.7 percent, respectively.  In fact, interest rate declines over the last year were enough to offset price increases of up to 10 percent price appreciation.

The current interest rate environment would keep payment-to-income ratios affordable for median buyers in a majority of cities even under much larger price increases.  Following the methodology used by the National Association of Realtors (NAR) in calculating their housing affordability index, a mortgage payment is considered affordable if it represents no more than 25 percent of monthly income.  Using this as a threshold, mortgage payments on a median priced home were affordable in more than 95 percent of metros in 2012.  Even if house prices were to rise by 20 percent, without a change in interest rates, 91.5 percent of metros would remain affordable to the median buyer.  In fact, the cost of a nationally median-priced home would have to increase by more than 56.7 percent to become unaffordable at the median household income.  Interest rates are so far below their historical average that few metros would become unaffordable to the median buyer even with moderate changes in interest rate.  For example, if interest rates increased to 5 percent, comparable to rates in 2009, only 2 percent more metros would become unaffordable to the median buyer.

Though mortgage payments are at historic lows, purchasing a home is still unaffordable for many prospective buyers.  In some traditionally expensive markets, such as the large California metros and Honolulu, monthly mortgage payments were already too costly for the median homebuyer in 2012.  For first time homebuyers, whose payments are approximated using a 10 percent down payment on a home priced at 85 percent of the median, and incomes of 65 percent of the median, 17.1 percent of metros were unaffordable.  The effect is more pronounced in the largest 20 metros, as 35 percent of them are unaffordable to first time buyers. (Click table to enlarge.)

Notes:  Payments and payment-to-income ratios for the median homebuyer assume a 30-year fixed-rate mortgage with 20 percent down payment on a median priced home and median income for the metro; for a first time homebuyer, payments and payment-to-income ratios assume a 30-year fixed-rate mortgage with a 10 percent down payment on a home priced at 85 percent of the median and an income of 65 percent of the median, as per the NAR first time homebuyer affordabilityindex. Sources: JCHS tabulations of Freddie Mac, Primary Mortgage Market Survey; National Association of Realtors; US Census Bureau, Moody’s Analytics Estimates.

While it is likely that homeownership will remain affordable in the short term, these historic levels of affordability may not last.  Prices increased in 86.6 percent of metros from 2011-12 and interest rates were slightly higher in the first months of 2012 than at the end of 2012, according to thePrimary Mortgage Market Survey issued by Freddie Mac.  Buyers who were waiting for the best deal as prices and interest rates continued to drop before entering the market may be spurred by current trends to think that this may be the ideal time to buy.

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Eye on Housing: Pending Home Sales Increase Modestly

Pending Home Sales Increase Modestly

by Stephen Melman Eye on Housing 

The Pending Home Sales Index, a forward-looking indicator based on signed contracts, increased 1.5% in March 2013 to 105.7 from a downwardly revised 104.1 in February. The March 2013 PHSI reported by the National Association of Realtors (NAR) was 7.0% higher than the same period a year ago.  NAR reported that pending home sales have been above their previous year levels for the past 23 months.

Pending Home Sales March 2013

The modest increase in the PHSI mirrored last week’s reported total1.5% increase in March new home sales. The March PHSI was consistent across the regions. The PHSI was flat in the Northeast and increased 0.3% in the Midwest, 2.7% in the South and 1.5% in the West. By contrast, March new home sales increased sharply from the previous month in the Northeast and South, but decreased in the Midwest and West. Year over year, the PHSI decreased 4.3% in the West, but increased 6.3%, 13.7% and 10.4% in the Northeast, Midwest and South respectively.

NAR attributed the modest PHSI increase to limited inventory, despite reporting a slight increase in the March inventory level. Rising prices will continue to induce more homeowners to place their homes on the market and broaden choices for potential home buyers. Rising prices might also dampen the enthusiasm of all-cash investors, and further ease the pressure on inventory.

If contracts closed at the same time they were signed, this graph would be the correspondence between sales and the PHSI. So the PHSI is a good indicator of what will likely happen to existing home sales when the contracts close in coming months. We anticipate that the April 2013 and May 2013 existing sales data will reflect today’s pending sales report, suggesting continued moderation in existing home sales as we move through the spring.

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CR: Pending Home Sales index increased in January

Pending Home Sales index increased in January

by Bill McBride on 2/27/2013 

From the NAR: January Pending Home Sales Up in All Regions

The Pending Home Sales Index, a forward-looking indicator based on contract signings, increased 4.5 percent to 105.9 in January from a downwardly revised 101.3 in December and is 9.5 percent above January 2012 when it was 96.7. The data reflect contracts but not closings.

The January index is the highest reading since April 2010 when it hit 110.9, just before the deadline for the home buyer tax credit. Aside from spikes induced by the tax credits, the last time there was a higher reading was in February 2007 when it reached 107.9.

The PHSI in the Northeast rose 8.2 percent to 84.8 in January and is 10.5 percent higher than January 2012. In the Midwest the index increased 4.5 percent to 105.0 in January and is 17.7 percent above a year ago. Pending home sales in the South rose 5.9 percent to an index of 119.3 in January and are 11.3 percent higher January 2012. In the West the index edged up 0.1 percent in January to 102.1 but is 1.5 percent below a year ago.
emphasis added

Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in February and March.

Also the NAR economist lowered his forecast for sales in 2013 to 5.0 million.  With limited inventory at the low end, and fewer foreclosures, we might see flat or even declining existing home sales this year. The key for sales is that the number of conventional sales is increasing while foreclosure and short sales decline.

Read more at http://www.calculatedriskblog.com/2013/02/pending-home-sales-index-increased-in.html#eG2G5qmgdz6zjMY5.99

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CR: Housing: Inventory down 22% year-over-year in early February

Housing: Inventory down 22% year-over-year in early February

by Bill McBride on 2/04/2013  

Inventory declines every year in December and January as potential sellers take their homes off the market for the holidays – and then starts increasing again in February. That is why it helps to look at the year-over-year change in inventory.

According to the deptofnumbers.com for (54 metro areas), overall inventory is down 22.2% year-over-year in early February and up slightly from January (on a monthly basis).

This graph shows the NAR estimate of existing home inventory through December (left axis) and the HousingTracker data for the 54 metro areas through early February.

NAR vs. HousingTracker.net Existing Home InventoryClick on graph for larger image.

Since the NAR released their revisions for sales and inventory in 2011, the NAR and HousingTracker inventory numbers have tracked pretty well.

On a seasonal basis, housing inventory usually bottoms during the holidays and then starts increasing in February – and peaks in mid-summer.  So inventory will probably increase for the next 6+ months.

The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker.

HousingTracker.net YoY Home InventoryHousingTracker reported that the early February listings, for the 54 metro areas, declined 22.2% from the same period last year.

The year-over-year declines will probably start to get smaller since inventory is already very low.

One of key questions for 2013 is Will Housing inventory bottom this year?. Since this is a very important question, I’m also tracking inventory weekly this year.

If inventory does bottom, we probably will not know for sure until late in the year.  Ben at Housing Tracker (Department of Numbers) has provided me weekly inventory data for the last several years and this is displayed on the graph below as a percentage change from the first week of the year.

Exsiting Home Sales Weekly dataIn 2010 (blue), inventory followed the normal seasonal pattern, however in 2011 and 2012, there was only a small increase in inventory early in the year, followed by a sharp decline for the rest of the year.

Note: the data is a little weird for early 2011 (spikes down briefly).

The key will be to see how much inventory increases over the next few months. In 2010, inventory was up 8% by early March, and up 15% by the end of March.

For 2011 and 2012, inventory only increased about 5% at the peak.

So far in 2013, even with the slight decline last week (probably noise), inventory is already up 3.0%.  The next few months will be very interesting for inventory!

Read more at http://www.calculatedriskblog.com/2013/02/housing-inventory-down-22-year-over.html#Y8WJpwsdX3TrvrkF.99

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CR: Pending Home Sales index declines in December

Pending Home Sales index declines in December

by Bill McBride on 1/28/2013  

From the NAR: Pending Home Sales Down in December but Remain on Uptrend

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, fell 4.3 percent to 101.7 in December from 106.3 in November but is 6.9 percent higher than December 2011 when it was 95.1. The data reflect contracts but not closings.

Lawrence Yun , NAR chief economist, said there is an uneven uptrend. “The supply limitation appears to be the main factor holding back contract signings in the past month. Still, contract activity has risen for 20 straight months on a year-over-year basis,” he said. “Buyer interest remains solid, as evidenced by a separate Realtor® survey which shows that buyer foot traffic is easily outpacing seller traffic.”

Yun said shortages of available inventory are limiting sales in some areas. “Supplies of homes costing less than $100,000 are tight in much of the country, especially in the West, so first-time buyers have fewer options,” he said …

The PHSI in the Northeast fell 5.4 percent to 78.8 in December but is 8.4 percent higher than December 2011. In the Midwest the index rose 0.9 percent to 104.8 in December and is 14.4 percent above a year ago. Pending home sales in the South declined 4.5 percent to an index of 111.5 in December but are 10.1 percent higher December 2011. In the West the index fell 8.2 percent in December to 101.0 and is 5.3 percent below a year ago.

Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in January and February.

As I’ve noted several times, with limited inventory at the low end and fewer foreclosures, we might see flat or even declining existing home sales. The key for sales is that the number of conventional sales is increasing while foreclosure and short sales decline.

Read more at http://www.calculatedriskblog.com/2013/01/pending-home-sales-index-declines-in.html#2hx5u5QhL7xdcTtJ.99

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November Pending Home Sales Continue Upward Trend

November Pending Home Sales Continue Upward Trend

by Stephen Melman — Eye on Housing

The Pending Home Sales Index, a forward-looking indicator based on signed contracts, increased 1.7% in November 2012 to 106.4, up from the downwardly revised 104.6 in October. The November 2012 PHSI was 9.8% higher than the same period a year ago, and reached the highest level since April 2010 when the home buyer tax credit was expiring.

Regionally, the National Association of Realtors (NAR) reported mixed results for the November 2012 PHSI. The Northeast and West showed the most improvement, with respective monthly increases of 5.2% and 4.2%. The Midwest was up 0.1% in November and the South was unchanged from the previous month.  Compared to a year ago, the Northeast and Midwest were both up 15.2%, and the South was up 13.9%. The November 2012 PHSI in the West was down 3.2% from the same period a year ago.

Pending Home Sales November 2012

If contracts closed at the same time they were signed, this graph would be the correspondence between sales and the PHSI. So the PHSI is a good indicator of what will likely happen to existing home sales when the contracts close in coming months. We anticipate that the December 2012 and January 2013 existing sales data will reflect today’s pending sales report, suggesting that existing home sales are likely to rise as we move to 2013.

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