Take a look at this article from Irwin Kellner who is the chief economist for Market Watch and Capital One Bank.
PORT WASHINGTON, N.Y. (MarketWatch) — Here’s an all-points bulletin to prospective homebuyers: The protracted decline in home prices has made many houses more affordable than they’ve been in years.
You know what this means? Housing could shift from a buyer’s market to a seller’s market before you know it.
Now don’t get me wrong. I am not saying that all is copacetic when it comes to housing. Far from it.
I would agree with those who say that it will take many months before balance is restored between supply and demand. There are simply too many homes for sale at asking prices that are still too high for housing to do a 180.
Nor am I expecting another housing bubble to form, not in this decade anyway.
All I would like to point out is that, in broad macro terms, the average house is no longer as overpriced as it once was. That being the case, it is no longer prudent to assume that home prices have to fall a lot more before they stabilize.
For now, however, this is what most buyers believe. Knowing full well that there are a lot of unsold homes out there, most would-be buyers are waiting for a sign that prices have stopped falling and thus stabilized before making a bid.
They are waiting because history has conditioned them to do so.
Until recently, home prices used to go in only one direction, up, the only question being how fast. As a result, a house became just about the only item — large or small — that people would buy expecting its price to appreciate.
This kind of thinking does not apply to any other product the typical household purchases. Indeed, people routinely buy the latest cell phone, personal digital assistant, high-definition TV, or other electronic gadget fully expecting that those who buy after they do will probably pay less.
But housing is different – at least it used to be. Maybe now that people see that home prices can behave no differently than most other prices (They can go down as well as up), they will adapt a different attitude.
Getting back to affordability, loyal readers know that I believe that this measure is the best way to value a house.
I don’t care about the cost of land, labor, building materials or the house next door. What matters to me is the ratio of home prices to household incomes (see my column of Feb. 4).
As of the April stats, the typical existing home cost 3.4 times estimated household incomes, while median new-home prices equaled almost 3.8 times family incomes.
These are down from the peak of 4.2 reached in the bubble year 2005, although they remain above the 2.8 figure that prevailed in the 1980s, when housing sold at a brisk pace.
But home prices don’t have to get down to 2.8 times incomes to kick-start the market. A bit over three times might do it.
Remember, incomes are still rising, so home prices don’t have to fall as much as you think before buyers decide that they can once more afford the home of their dreams. Sooner or later, the fact that housing is more affordable will sink in. That’s when the market will turn.