Happy New Year, one day early.
I thought I would end the year with a look at the statistics. Looking back from this year all the way to 2005 we can see that the volume and the price have both been dropping since 2006. But they have not been dropping at the same rate.
We can see that median prices have dropped only about 1 1/2% since 2006 while the total volume of sales has dropped by 32%.
|Year||Total Sales||Average Price||Median Price||DOM|
The obvious question is why do prices drop so much slower than the sales volume? That is because people don’t want to lose money on their houses unless they absolutely have to.
So there is resistance to the lower prices and those prices will likely not drop quickly unless we have massive job losses caused by a crash in our oil based economy.
It’s easy to look back to see what prices have done, but what are they going to do in the future is the question. I like this article that basically says the only way to make sure you are not wrong about future housing prices is to keep silent. Edward Glaeser the author of the article and a Harvard Economics professor used both technical and fundamental analysis to make a few general predictions. But one of the comments at the end brings up a more important issue in my mind…that is affordability. Buyers generally commit if they think the house will be affordable.
So what would be an affordable price for buyers in the Mat-Su Valley? We have to start somewhere and the old FHA ratios are a good place to start. When I began real estate in 1991 the ratio was 29/39. This means that the total house payment should be less than 29% of a persons total gross monthly income and the total house payment plus all the other debt payments should be less than 39% of the total gross monthly income.
I‘m going to focus on the 29% ratio since I am interested in houses not in all the other things we might buy on credit. The median household income of Mat-Su residents as of 2008 was $72,966. Divide that number by 12 months, ($6080) and multiply that by 29% and you get $1,763.
Now plug the median price of $203,000 into a mortgage calculator, assume $2,800 a year for taxes and $1000 a year for insurance and you will come up with a monthly mortgage payment of $1,406.42 based on a 5%, 30 year fixed mortgage.
So….based on that numerical mumbo-jumbo I would say that house prices are currently “affordable” in the Mat-Su Borough.
Anytime I start throwing numbers around Grace breaks into french, “Les hommes – ils aiment les chiffres”. The men, they love the numbers.
Actually, the future of real estate prices is based on something a lot more esoteric than “les chiffres”. It is based almost entirely on emotions and feelings. How do people feel about the future of the economy and the security of their income in Alaska. If they are fearful of the economy they will not push that 29% ratio at all and will stay significantly under it.
Most buyers that I talk to today are very careful. I would say that they aren’t going to want to approach the 29% ratio which will keep prices from going up much…but since they are by FHA’s definition, “affordable” now, I don’t think they will drop much either.
Anytime you start going into these scenarios all the unknowns start rearing their ugly heads. What will the national economy do? What will oil do? Will they shut down the pipeline? Will they actually start getting serious about a gas line? I could go on and on with questions and any one of the answers could make all my numbers worth no more than trash…
Based on information from AK MLS, Inc. for the period Dec 1-7, 2009 but not compiled or published by AK MLS, Inc. Data maintained by AK MLS, Inc. may not reflect all real estate activity in the market.