Atlanta Housing Statistics Category
What does the Price to Income Study really Mean to Atlanta Real Estate?
In our last article: “Is Atlanta Housing Really 8% Undervalued?”, we talked about the study that Trulia released and the Wall Street Journal wrote up about the Linkage between Income and Housing prices between the pre-boom years of 1985-2000 and today’s current price to income ratio. The study was no doubt an interesting look at our housing markets today and one that I have not seen illustrated in this way. So what does the study really tell us though?The first thing that most home sellers are thinking is that prices are too low now so they should list their homes higher than other homes that have recently sold, right? That’s the danger of these headlines I think because in most areas of Atlanta, the last sale in the neighborhood is still the “Ceiling”, meaning the top price anyone will pay, so if you interpret this study that way, you will end up with an over-priced listing that will not sell in this market.
I think what this study means is that obviously, the price of real estate has come down from the peak (which in Atlanta was the third quarter of 2004) and that people are not leveraging themselves as much as they did back during the boom. What it doesn’t look at is the impact that our extremely low interest rates have had on markets. With rates hanging below 5% for quite some time now, compared to where they were in the 80′s and 90′s which was twice that, this study does not exactly compare the affordability of house.
For instance, in 1985, the average interest rate for a 30 year mortgage (according to FreddieMac.com) was 12.43% compared to today’s rate which is something like 4.25%. If I made $100k back in 1985 and bought a $300k home, for argument’s sake, lets say I was mortgaging the whole thing (which was not possible back then)…I would have been paying $3185 per month in Principal and Interest (30 year fixed amortized mortgage). If I’m making $100k today and buy a $300k home the mortgage on the same $300k would be $1475. That’s almost twice as affordable on the same income! A better study would be what percentage of people’s income they were paying for their house payment, if we really wanted to understand this. There is a study done by the National Association of Realtors called the Home Affordability Index that is released on a quarterly basis.
Let’s back up a minute now and consider the difference in the lending environments between 1985 and 2000 compared to now. The down payment requirement in the 80′s was pretty much 20% of the price of the home. Today most people are putting down between 5% and 10% for a conventional loan, and if you are buying a home via FHA financing, you can put down as little as 3.5%. Let’s illustrate then what the difference might look like between your standard loan in 1985 with a 20% down payment and your average run of the mill loan today with 10% down at 4.25%
As you can see, not only are people paying less of a percentage of their income on the down payment to purchase the home, but they are paying considerably less of their income on their monthly payment, which in the end, is what a home buyer is really buying. I don’t know about you, but to me, this makes a pretty strong case to buy a home right now doesn’t it?
Is Atlanta Housing 8% Undervalued?
In a Wall Street Journal Article dated August 17, 2011, Trulia’s study on the link between people’s income and the cost of housing claimed that Atlanta’s Housing Market is 8% undervalued. The study is a very interesting one and the ratio of income to home price has been largely ignored since the housing boom started in the US back in 2000.
Some background of the study:
The study compared the “Pre-Boom” period of 1985-2000 to the boom that started in 2000, peaked nationally in 2005 and then compares it to today’s “Post-Boom” (if that’s what we want to call it) housing markets. They derive a ratio of the average income to the average sales price in 130 housing markets across the country and compare the “pre-boom” ratio to today. Nationally, between 1985 and 2000, Americans were spending at 2.9 times their income on their home, so if a family was making $100k per year, they were buying about a $290k home. Nationally, this number peaked at 5.1 in 2005 so that same income earner was buying a $510k home while making the same amount of money.
I think it was obvious to most during those heydays, that if people’s salaries weren’t rising by anywhere close to the rate that housing prices were rising, that this was something that could not be sustained for long. Of course no one wanted to talk about that when they were seeing their home value rise by 30%+ in one year (which was happening in some parts of the country).
Trulia’s study compared the ratio “pre-boom” then to today’s ratio of income to house-price and found that in about 30% of the 130 housing markets in the US studied, real estate is currently “under-valued” compared to the days before things went crazy. Among that 30% was Atlanta, coming in at 8% under what people were making to spending between 1985-2000.
Let’s look at Atlanta specifically compared to the rest of the country though. In the Trulia study, Atlanta’s income to price ratio during 1985-2000 was 2.284 and it peaked at 3.2 in the third quarter of 2004. Today we have come down to 2.11 which is where they are getting the -8%. The study does illustrate the cooling off of the market that we’ve been experiencing and looking at it optimistically, may be an indicator that prices may start to rise in the near future.
The better indicator’s that we know drive pricing in a housing market however are absorption rate (also referred to a ‘Months of Inventory’) and the amount of distressed inventory on the market currently as well as the delinquency rate on mortgages which a large percentage of which will likely result in future foreclosures and short sales. We’ll cover that more in our next article titled The impact of Distressed Properties on Atlanta’s Housing Price Points.
The Impact Distressed Homes Have on Atlanta’s Housing Prices
It’s no secret that the large amount of Foreclosed properties and Short Sales had put downward pressure on home prices in Atlanta, but the impact of these “Distressed” properties is further reaching than most people see, especially those who are buying or selling in the higher price points.
When we look at the 2Q 2011 numbers for Metro Atlanta, we see that the majority of distressed sales are taking place in the under $200k price point, and less and less percentage of the sales in the over $200k price points are distressed sales. At first glance, if I’m trying to sell a $500k home, it doesn’t look like I’m all that effected by distressed sales, especially compared to the seller trying to sell his $100k home right?
Wrong! Economics 101 dictates that price is driven by supply and demand and there is no truer illustration of that than in residential real estate. What we actually have is a domino effect, and here is why…
The percentage of sales that took place in the under $200k market made up 64.4 percent of the total sales for Metro Atlanta in second quarter of this year. Of those sales, 53% of the sales in the under $200k price range were distressed sales. Now, distressed sale means a Foreclosure (where the bank has foreclosed and now owns the home) or Short Sale (where the Seller negotiates with the bank to take less than is owed on the mortgage instead of foreclosing on the owner). When a home owner short sales their house, there are usually credit implications that will prohibit them from buying another house immediately so these Sellers are exiting the housing market. When the bank sells one of its foreclosures, it is also exiting the market, meaning that it is not going to go on to buy another home, after all, their goal is to get these non-performing assets off their books as soon as possible so that they can use what money is left to lend and make money on which is the business they are in.
So looking at this another way, 53% of the sellers in this under $200k market, who would usually be going on to buy a home in the next price point, are exiting the market which means they are not going on to buy another house. The price point from $200k-$350k is generally a “move-up” price point meaning that it relies on the sellers from the under $200k price range to move up and buy a home in the next price range. The $350k-$500k market is relying on the price point below it to move up into a house in this price range so that they can move up in the $500k-$750k price range and so on and so on….
So you see that all price ranges are interdependent in our market and that high percentage of seller’s who are exiting the market in the under $200k price point is detrimental to all of the price points above it, especially between $200k-$750k. This is why it is so important that the we get the current glut of distressed inventory sold, regardless of the price point. Of course to do that we also have to stop the mortgage delinquencies from happening from here on out which is tied to a much larger problem that needs solving which is the high unemployment rate. When people don’t have jobs, they can’t make their mortgage payments.
Atlanta Real Estate Market Update – March 2011
Atlanta’s Spring Real Estate Market is Here!
What’s most notable about our Atlanta Real Estate Market right now is that as we enter the Spring seasonal market, we are witnessing a consistent drop in number of Active homes on the market each month since September of last year. At the end of September, Atlanta Metro had 29,624 Active listings. Each month that number has dropped to 25,303 at the end of February.
Another notable number is that the number of Pending sales, which are sales that are under contract and due to close sometime in the future, is at its highest level since October of 2009 which marked one of the first tax credit expirations from the government for first time home buyers, which we consider to a bit of a false market trend.
What does this mean? It’s GOOD NEWS! The number of pending homes and the ratio of pending homes to active homes is a great indicator of what the near future will hold. With a pending ratio of 20.5% at the end of February, we are likely to see the months of inventory come down. For Sellers and home owners, this is a good thing because we will not see prices increase as a whole until the months of inventory gets down to 6 or 7 months. We are currently at 11.1 months. As number of listings falls and number of pendings rise (without any government incentives) we begin to see reliable data that supply and demand are beginning to get back to where they need to be for home prices to rise.
Buyers, this is not time to sit on your hands. Interest rates have begun to rise and are expected to continue to rise. Home prices have been bouncing along the bottom for some time now, but as these supply and demand indicators reflect, their are less homes on the market which means more competition and less choice. With less choice and more competition, you Buyers will begin to lose some of your power in this Buyers market, so if you are thinking of buying this year or next, putting that off is probably not going to be your best financial decision. Contact me to set an appointment to discuss your housing needs and we can put a plan in place to best fit your specific situation.
January Atlanta Housing Update
The December 2010 Atlanta housing market statistics show a remarkable increase in the inventory level of homes for sale than the same time last year, mostly because last year’s December was a reflection of an increase in demand due to the first time home-buyer tax credit ending. This past December did not have any sort of artificial demand, nor did the other months of the 4th quarter. Read more
November Atlanta Housing Update
This month in Atlanta Real Estate, we are witnessing a rising housing inventory and a shrinking pending home ration. This is not all that unusual from a seasonal trend, but if you look at this time last year, our inventory was quite a bit lower and we had a very strong Pending Home Ratio (Homes that are under contract due to close in the future). When we look back to what was going on in November of last year, we have to recognize that there was a tax credit for first time home buyers that was expiring at the end of November last month. That acted as a motivator for many buyers and gave us a bit of an artificial bump in activity which brought inventory down and boosted the pendings up.
The “good” affects of the tax credit that ended this year in April served our market right up until September because First-time-home-buyers were only the first people to glean a benefit. They got an $8000 tax credit, but there was also a $6500 tax credit available for some Sellers that were selling and then buying again. Not only did this help them, but it also helped the Sellers that they purchased homes from, so there was a nice little domino affect that the tax credit had. That chain of activity is now considered over, and we are approaching the slower holiday season, so things are feeling rather flat from an activity perspective in Atlanta.
The biggest mistake I’m seeing people make right now is not seeing the value in the extraordinarily low interest rates. An interest rate in the 4% range beats the pants off of an $8000 tax credit any day of the week, and most buyers and sellers that are looking to buy and sell are ignoring this. Most experts believe that interest rates will increase by more than a point over the next 7 quarters so now is the time to take advantage of these rates, and if you are not looking to buy or sell, consider refinancing!
As always, I’m always here if you need some more insight on any of this, or if you know someone who could use my help.
