October 23, 2012
The bubble in the US real estate market has virtually disappeared. Prices are back in a range that makes economic sense. Affordability, measured as the ratio of house prices to income, has returned to pre-crisis level. Foreclosures and unemployment, while still high, are beginning to fall, but risks remain nonetheless. (For more: US housing market stabilising)
Comparison of metropolitan statistical areas
Development of house prices in the metropolitan statistical areas of the US was very mixed over the past ten years. Many areas did not experience a price bubble. However, the economic crisis of 2008/09 did weigh on house prices even in these areas. In many cases they are low relative to income. If one takes unemployment rates as an indicator of demand and foreclosures as an indicator of supply-side pressure, many of these areas are attractive: see the ranking in Table 1 in which lower unemployment rates, foreclosures and lower price-to-income ratios are reflected in better rankings. At the top of the list are Minneapolis, Dallas and Cleveland, which had relatively small price bubbles or none at all. Of course, we are quite aware that with such an approach the complexity of price formation and special regional developments are not captured in full.
By contrast, several coastal areas still appear to be pretty expensive. On the west coast this applies to Portland and Los Angeles in particular, on the east coast, to Tampa, New York, Charlotte and Miami. These areas are marked by a relatively high price level in relation to income, high unemployment rates and/or large foreclosure inventories. It looks as if prices are set to continue falling there and this trend could drag on for several more quarters. The latest price hikes are probably just a blip on the screen, partly reflecting anticipation of the Fed's recent announcement of a resumption of quantitative easing.
For more information: Presentation US Residential Property
The Affordability index is an important metric to gauge the market situation, and it is defined by setting the house price index in relation to income. If house prices climb faster than income, their affordability decreases: the index rises.
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