Home prices have declined significantly this year. The median price in the Los Angeles area has declined over 26% during 2008 according to the S&P/Cash Shiller index. As a result, prices are getting closer to their historical relationship to median income. This can clearly be seen in the NAHB/Wells Fargo Housing Opportunity Index, which measures home affordability. This number is basically the percentage share of homes that are affordable to people earning a median income. The index rose to 26.9 last quarter for the Los Angeles area (it reached a low of 1.9 during the second quarter of 2006!). My rough estimate of an average during normal times (pre-bubble) is around 43. So, affordability is getting back to historical average, but it is not quite there yet.
Despite significant declines, prices may have farther to go. Goldman Sachs, for example, recently said that even though national home prices are back to pre-bubble norms, there is still downward pressure on prices. Inventory is still high, and completed homes are outpacing sales, which does not help matters. Adding to the supply of homes on the market, Goldman Sachs expects that 25% of all mortgages will default. That's just astounding.
A more immediate factor for me personally is the continually-deteriorating economy. The U.S. economy is in a free-fall, and we have not seen the worst yet. The employment picture is particularly troubling. Some economist expect unemployment to reach just below 10%.
Given the underlying economic picture, still high inventory levels and still lower-than-average affordability, there is little reason to think that home prices will go up in the near future. I do not expect any help from interest rates, which are already at historical lows.
My conclusion is that it may be a good time to start looking for "too good to pass up" deals, but err toward waiting a bit longer.
Despite significant declines, prices may have farther to go. Goldman Sachs, for example, recently said that even though national home prices are back to pre-bubble norms, there is still downward pressure on prices. Inventory is still high, and completed homes are outpacing sales, which does not help matters. Adding to the supply of homes on the market, Goldman Sachs expects that 25% of all mortgages will default. That's just astounding.
A more immediate factor for me personally is the continually-deteriorating economy. The U.S. economy is in a free-fall, and we have not seen the worst yet. The employment picture is particularly troubling. Some economist expect unemployment to reach just below 10%.
Given the underlying economic picture, still high inventory levels and still lower-than-average affordability, there is little reason to think that home prices will go up in the near future. I do not expect any help from interest rates, which are already at historical lows.
My conclusion is that it may be a good time to start looking for "too good to pass up" deals, but err toward waiting a bit longer.
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