What was the old standard is the new standard, for now

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Published: June 29,2009

In 1985, an outlook for the future conference was held in Jackson. Experts made predictions about growth trends, land use, transportation and real estate in the metro area.  There was much speculation about the supply and demand for various types of housing based on demographics, economics and consumer preferences.  During the question and answer session, one of the premiere homebuilders in the state stood and with a modest grin said, “It doesn’t matter about demand.  As long as there is a lender that will finance it, a builder will build it.”

His point was that the forces of supply and demand in the real estate market are heavily, if not overly, influenced by financing.  The two-and-a-half decades following that day serve to amplify his prescient comment.  Most observers say the relaxation of credit standards was the primary cause of the housing bubble and bursting of that bubble.  

Almost all prospective homebuyers are more concerned with the monthly payment and the down payment than with the price of the property itself.  Affordability in home ownership is more associated with monthly cost rather than the total price.  It gives credence to the old adage, “I’ll pay any price if you allow me to set the terms.”  

Real estate financing has had a tremendous positive influence on this country.  Prior to implementation of the Federal Housing Administration (FHA) Acr in 1934 home ownership for the average person was truly a dream.  Those who did own homes back then had paid cash or made substantial down payments.  Mortgage loan terms were generally limited to 50 percent of the property’s market value.  The term of the loan was usually three to five years, with a balloon payment at the end of the term. The country and the housing industry were in a major recession.  The United States was a nation of renters.  Since then, the home ownership rate has risen from around 40 percent to a high of just over 68 percent in 2001.  FHA alone has insured over 34 million mortgage loans since its creation.  Conventional lenders have generated millions more loans.

So what happened?  Simply put, because home ownership seemed like such a good idea and created such economic stimulation, public policy regarding home ownership changed so much that people who could not afford homes were encouraged to buy homes.  The market is now in the process of resetting.  For some parts of the country, the situation has caused economic turmoil.  Areas where overbuilding and overselling got out of control are suffering the consequences.  Other parts of the country are faring better, but are still in a “reset” mode.

Meanwhile, back to the affordability issue.  Because home prices are so affected by financing, homebuyer income plays a major role in home prices.  For many years, the rule of thumb was that a person could afford two-and-a-half times his or her annual income.  The ratio of per capita income and average home price remained rather constant.  That was true from 1995-2000.  When per capita income rose, home prices rose accordingly.  But then came 2000-2005 and average home prices nationally rose three times per capita income.  In metro areas, the rate was 3.2 time per capita income; in rural areas the rate was 1.8, according to a 2008 report by the Federal Reserve Bank of Kansas City.  Also, that ratio of home price increase to per capita income growth was very different for different parts of the country.  For example, in the West Coast states of California, Oregon and Washington, the ratio was 4.6 in metro areas and 3.3 in rural areas, while in the more rural states of Mississippi, Alabama, Tennessee and Kentucky the ratio was 1.3 in metro areas and 1.2 in rural areas.  Consequently, average home prices have not fallen as far or as fast in rural states like Mississippi.  

Average home prices have now fallen for 11 quarters in a row.  Bankrate.com reports that the average home price in Biloxi-Gulfport fell 4.5 percent from the first quarter of 2008 to the first quarter of 2009, while in the Jackson metro area the average home price fell 0.8 percent during the same period.  The average home price reported in the first quarter of 2009 was $132,800 in Biloxi-Gulfport and $122.600 in Jackson.  

So what is the outlook for the remainder of 2009?  According to the National Association of Realtors (NAR), increasing affordability is helping pull first-time homebuyers into the market. First-time homebuyers accounted for half of all U.S. home sales during the first quarter. First-quarter sales do not yet reflect the potential sales impact of the federal government’s new $8,000 tax credit for first-time homebuyers, according to the NAR.  Lawrence Yun, NAR chief economist, said contract activity and buyer traffic have increased over the past couple of months, a trend he expects will continue.  

One number to watch will be per capita income growth, which has a relationship to average home prices as mentioned above.  Nationally, per capita income growth fell 0.5 percent in the first quarter of 2009, according to the latest Bureau of Economic Analysis report.  Mississippi’s per capita income growth was up 0.2 percent, ranking it in the top five nationally.

Overall, I would say that the positive outweigh the negatives for Mississippi residential real estate for the remainder of 2009.

 

Phil Hardwick is coordinator of capacity development at the John C. Stennis Institute of Government. Contact him at phil@philhardwick.com.Contact him at marty@sig.msstate.edu.

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