Mon, November 02, 2009

Signs That Housing Prices Are Stabilizing

Housing price trends are not merely regional, but local, often varying at the neighborhood level.  Several factors can give hints about the probable future health of a housing market.  The first six I’ll list are courtesy of AnnaMaria Andriotis’s piece over at SmartMoney.com, the last one is my own.

Falling Unemployment Rates
This one’s pretty obvious; people who don’t have jobs can’t buy houses.  If a local economy is strengthening, people are not only more likely to have the means to buy a house, they’re also more optimistic and more willing to take on the risks that go with owning a home.  The most recent Bureau of Labor Statistics update indicates rising unemployment in most of New England.  I indicated last week, prospects for the direction of the Massachusetts economy are hopeful but still uncertain.

Rising Incomes
A related measure: if people’s incomes are rising, they can spend more for a house.  My own addition to SmartMoney’s insight on this is that it can be a bit tricky – the ratio of housing prices to median income varies by region, and it can go up or down over time.  In Greater Boston, the ratio of median sales price to median income got as high as 6.7 in 2005 – well above its historical average.  It’s been dropping since then, mostly out of necessity.  Even an increase in median incomes may not portend immediate brightening of home prices.

Declining Foreclosure Rates & Foreclosure Sales
Foreclosed properties tend to depress prices; foreclosed properties tend to hang around the market longer.  In areas where there are several distressed properties, housing prices will have a hard time recovering.  In this regard, there are mixed signals.  On the one hand, the AP noted last month that foreclosures in Massachusetts are down 30% versus last year; on the other, the Boston Herald pointed out last week that the number of default notices – the first step in moving a house towards foreclosure – is up 20% for the same period.

So are foreclosures declining or not?  It’s probably too close to call, but the current level of foreclosures could easily be with us for a few more quarters. 

Declining Home Inventories
Remember the law of supply and demand?  If the number of available houses is falling, prices should start to firm up.  Trulia.com has some nice tools for looking at trends in housing prices and inventories, with the ability to drill down by city or zip code.  This is one of those indicators that is normally highly localized (unlike, say, income levels).

Ratio of List-to-Sales Prices
If houses are selling on average for less than their asking prices, but the margin between the two is getting smaller, that suggests a strengthening market.  For this kind of data, you need a good realtor.

Sales Price Declines
Actually, I was a bit surprised by the inclusion of this one, but the logic is this:  if price declines are slowing, it may indicate that housing prices are bottoming.  This one is a bit tricky; if you’re trying to discern the likely direction of prices, I’d view this in conjunction with the other indicators.  A strengthening local economy can help a housing market bottom, but if jobs are scarce or not paying high enough wage levels, housing prices will tend to weaken.

Proximity to More Expensive Communities
In parts of the country where housing prices are not exceptionally high, this actually may not be much of an indicator.  But in the Boston area and other parts of the Northeast, a less-expensive community surrounded by higher-priced areas can see its fortunes rise as buyers, priced out of the adjacent locales, gravitate towards nearby areas that are more accessible to them.  This also only works when the local economy is strong enough to support housing prices, but where these elements are present, housing prices in such an area may rise.