Housing Market- A Look At Income And Valuations

There has been so much written and talked about concerning when the housing market will reach the bottom. One way of valuing real estate is to compare it with income.

Ned Davis research and CNBC published a chart recently that looked at valuation ratios of home prices to median income from 11/30/1976 to 3/31/2010. The chart showed a high of about 5.2 times in 2005 and a low of about 3.5 times on during the 1983 recession.

The mean valuation multiple was 4.1 times during the period described above. As of March 2010, the ratio stood at 4.3 times. The recent stabilization can be attributed to the recent federal government intervention.

Does this mean we are near the bottom as we approach the mean valuation multiple?

Well, a few factors should be discussed. One is the federal government has let some of its incentive programs expire, such as the first time homebuyer credit.

Another factor is psychology of the consumer. With unemployement holding steady in the mid-9% range and continued increases in distressed properties could damage consumer sentiment. The most recent US Consumer Sentiment Index hit 66.6 in September from 68.9 in August; this was the lowest level in a year.

With the housing bubble continuing to deflate, unemployment being at sustained high historic levels and tougher lending requirements, it's not unlikely that we will see the valuation multiple dip below the average in the near-term.

Nonetheless, if you are a first time homebuyer and plan to live in the home for a sustained period of time, now might be a good time to purchase a home. If interested, please see our post on the advantages of homeownership versus renting. Mortgage rates are near historical lows and it is still a buyer's market.

Please feel free to contact me about South Florida real estate. I represent buyers, sellers, renters and landlords. I also work with distressed homeowners and investors.

Michael Friedman
Realtor, Certified Distressed Property Expert (CDPE)
Lang Realty
561-989-2100