Brent Nyitray is director of capital markets for iServe Residential Lending, a multistate residential mortgage bank. A
chartered financial analyst, Nyitray also is the author of a
blog on finance, economics and real estate called the Daily
Tearsheet ( thenadtearsheet.blogspot.com). Nyitray has a
bachelor’s degree in economics and a Master of Business
Administration in finance. Prior to iServe, Nyitray was an
analyst at several hedge funds. Reach him at
email@example.com or (203) 817-3614.
Homes Are not Overpriced
Historical data provides the answer to renters’ bubble concerns
By Brent Nyitray
One of the most frustrating aspects of the housing industry these days is the state of first-time homebuyers, who have been missing in action. According to data from
the National Association of Realtors, first-time homebuyers accounted for just 31 percent of closed sales this
past August. Historically, that number has been closer
to 40 percent.
Despite soaring rental inflation, many potential
young homebuyers are choosing to stay put in rentals
instead of buying. One of their biggest concerns is
affordability, along with student-loan debt — which
is a separate issue. This reluctance to purchase on the
part of many renters should concern mortgage originators. The big question is, are renter’s affordability
It is true that most home-price indices have recouped their bubble-era highs, and it seems like we are
hit with fear-mongering articles every other day warning of another real estate bubble — and another bust
right around the corner. What should originators say
to potential buyers who are on the fence about purchasing a home? Will they be stepping into a trap?
Luckily, it seems their fears of another residential real
estate bubble are probably overblown.
Bubbles are generally rare and unique phenomena,
driven by psychology on the part of investors and
bankers, along with cooperation from a central bank.
Everybody needs to believe that an asset is “special”
and will always experience price appreciation. We saw
that psychology in action during recent real estate
bubbles, when investors cried, “Buy real estate; they
aren’t making any more land.” We also saw it during
stock market bubbles, when experts exclaimed, “Don’t
worry about price-to-earnings ratios; just buy and
hold quality companies.”
Once the market comes back to earth, as it inev-
itably does, the psychology that drove the bubble
evaporates and doesn’t return for a long time. We will
probably never see another U.S. residential real estate
bubble like the one that preceded the Great Recession
in our lifetimes. Perhaps our grandkids will.
Even if we aren’t in another bubble, however, are
property prices still too high? With home-price indices back at peak levels, it is reasonable to ask that
question. Unfortunately, these indices don’t tell the
whole story. They have all sorts of measurement issues.
For one thing, home-price indices generally aren’t
adjusted for inflation. In addition, houses aren’t
homogeneous — remodeling will make even the
same house not comparable. Plus, metropolitan statistical areas with a high number of transactions tend
to distort the numbers. Just as the Dow Jones Industrial average isn’t necessarily a great proxy for
how an individual’s 401k performs, the Case-Shiller
Index isn’t necessarily representative for how a local
housing market will perform.
So how can originators approach the question of
home prices and affordability? One way to attack the
affordability question is to compare home prices to
incomes. It makes sense that house prices and income
levels would correlate, and it turns out that the corre-
lation has been reasonably close. At the end of 2016,
the median household income was roughly $59,000,
home price was $232,000, according to the National
Association of Realtors. This correlates to a 3. 9 ratio of
median home price to median income.
Historically, that is a high number. If you calculate
this ratio using data from the pre-bubble days back to
the mid-1970s, you will find that in general, the ratio
stayed between 3.1 and 3. 5 before skyrocketing during the bubble years.
Taking the 2016 median income of $59,000 and
applying the historical 3.1 to 3. 5 ratio, the “fair value”
of a median home should be between $182,900 and
$206,500. In other words, the 2016 median price
of $232,000 would seem overvalued by historical
Note, however, that the ratio peaked at 4. 8 in
2005, when the median income was $46,300 and the
median home price was $222,300. So, even though
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