Schafer: Housing 'recovery' doesn't mean new records

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: July 18, 2013 - 8:01 PM

In March 2000, the Nasdaq composite stock market index closed at an all-time high of 5,048.62 and then promptly rolled off the table, losing nearly 80 percent of its value by October 2002.

One way to look at it — the way real estate people look at the for-sale housing market — is that in more than 13 years the Nasdaq composite has never “recovered.” It’s still down more than 25 percent from its peak.

The thing is, stock market people didn’t usually talk about the Nasdaq composite in terms of recovery after the Nasdaq bubble burst, maybe because they were simply too embarrassed. So why is “recovery” the word just about everybody uses when discussing the housing market?

This is more than a complaint over a word choice; the language broadly used to describe financial assets and choices for consumers really does matter. Talking about a recovery suggests some sort of natural level for housing prices, much like a rainy spring after a drought leads to a recovery of lake water levels.

But it’s batty to imply that any asset should quickly reach its previous high in valuation as more normal times return, not when the old high reflected prices that were fundamentally unhinged from reality.

One of the people who agrees with that view is Svenja Gudell, senior economist at the real estate information services firm Zillow Inc. She pointed out that “a lot of times we will not see peak levels for many, many years to come. There was a housing bubble, and those home values were totally overblown.”

Seattle-based Zillow produces estimates of value or rental rates for about 100 million residential properties in the nation, including almost all properties in the Twin Cities metro area. The Twin Cities had a bubble, Gudell said, just one that wasn’t as intense as what was seen in some other markets.

Zillow’s estimate for May 2013 for the Twin Cities market is a median house value of $185,300, up 11 percent over the previous year but still down 23 percent from the March 2006 peak. And, Gudell added, about 30 percent of Twin Cities owners owe more on their mortgages than their houses are worth, which is more underwater owners than the national average.

Does this mean that the “recovery” in the Twin Cities has a long way to go? Not necessarily.

In fact, by one common measure of valuation — the median value of a house as a multiple of median household income — the market may already be overvalued.

Zillow has tracked price-income data using its own valuation estimates, and from 1985 through about 1999 the Twin Cities market was remarkably stable. It pretty consistently bumped along at prices that were 2.4 times the median household income.

As Gudell pointed out, “you can really see the bubble here quite nicely” if you look at the chart of the price-income ratio since 1999. About midyear 1999, it began to pull away from the old long-term average and it kept going up, peaking at four times median income.

But even as the air leaked out of the bubble and housing values declined in the Twin Cities, that ratio of price to median income never quite got back down to the old stable average of 2.4. As of the fourth quarter of 2012, Gudell’s latest data, the price-income ratio stood at 2.6. She expects when the numbers are reported for the June quarter it will be closer to 2.8, or even farther above that old long-term average.

Gudell is not arguing that the Twin Cities housing market is overvalued, exactly, because by other measures it still is not. Historically low interest rates on mortgages, for instance, have kept the ­percentage of a person’s monthly income that goes to principal and interest payments on a mortgage lower than historical averages in the Twin Cities.

But like a lot of other market observers, Zillow expects mortgage rates to continue to increase. And increasing mortgage rates are one reason Zillow expects appreciation in the Twin Cities housing market to slow dramatically, with a forecast over the next 12 months of a 2.6 percent increase.

Herb Tousley, the director of the Shenehon Center for Real Estate at the University of St. Thomas Opus College of Business, also produces closely watched real estate market data. This week he was preparing his June report on the Twin Cities market.

In looking at conventional sales, by which he means a real estate deal that wasn’t through a foreclosure or a short sale, the median price in June was $232,000. That’s inching very close to the peak of the bubble, a median price of $239,000 in June 2006.

There are some unusual factors in the market this year pushing prices in this segment up, he said, including a very tight inventory. But, while he’s not predicting another near-term bubble, his numbers are another indication of how much values in the housing market have increased.

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