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The median home price in the U.S. has plunged nearly 40% in a little more than five years, but the worst is over: The market has finally wrung out the last excessive valuations born of the housing bubble. Before you break out the party hats, note that this doesn't mean prices across the nation are poised to rebound any time soon. (Bing: What's the median home price in your area?)
Alex Villacorta, director of research and analytics at Clear Capital, a provider of real-estate data, says the housing market is in a "suspended state," with positive and negative factors offsetting one another. But he says he doesn't expect another free fall in prices, assuming "things are left to work themselves out and there are no further shocks to the economy."
Although the percentage of sales of distressed homes is expected to rise, the federal government's latest loan-modification program might allow as many as 2 million homeowners to refinance, says Mark Zandi, chief economist at Moody's Analytics. Zandi says that further home-price declines nationwide will be limited to 3% to 5% and that 2012 will be the year that prices finally stabilize, setting the stage for gains in 2013.
Short-lived spikes in prices will affect some cities sooner. When housing markets touch bottom and begin to stabilize, price appreciation tends to be spread unevenly, creating a lot of confusion about where the recovery is occurring and when, says David Stiff, chief economist at Fiserv Case-Shiller. Even within a single city, more desirable neighborhoods will stabilize first, while prices in other neighborhoods may continue to fall.
Read: Finally, a bottom for home prices
Touching bottom
In the year that ended Sept. 30, home prices across the U.S. fell by 2.6%, and the median home price stood at $171,250, according to Clear Capital. That comes on the heels of a 2.5% decrease from September 2009 to September 2010. Since the peak of the market more than five years ago, home prices nationally fell by 38.1%.
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Detroit, down 74.7%, was the biggest loser, crushed by subprime lending, foreclosures and the struggling auto industry. A few cities enjoyed small price appreciation, largely because they missed the bubble to begin with: the Clarksville, Tenn., metro area; cities in upstate New York, including Syracuse, Buffalo and Rochester; and Pittsburgh.
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Houses haven't been this affordable since appliances came in harvest gold or avocado green. The benchmark of affordability — the ratio of median home price to median family income — has fallen to 2.6, below the historical ratio of 2.9, Stiff says. Another measure, the percentage of monthly family income consumed by a mortgage payment — principal and interest, using a mortgage rate of 4.1% — is 12% nationally, the lowest since 1971.
Homes in many cities are now substantially undervalued as measured by affordability, Stiff says. That could lead to double-digit bounces in prices as the natural optimists, especially investors with cash, jump in to catch the bottom. It might look like a bubble all over again, but it won't last long. A good example is Cape Coral-Fort Myers, Fla., where investors pushed up prices by 12% during the year that ended Sept. 30. Such a bounce is likely to be followed by a sideways drift, during which the "glass-half-empty" folks will slowly return to the market.
Theoretically, low interest rates should help push buyers to act. Predictions in the past couple of years that rates would rise were based on the premise that the economy would improve, says Guy Cecala, publisher of Inside Mortgage Finance, an industry publication. "As long as the economy remains stagnant, unemployment remains high, and the housing market is in the toilet, rates will remain near historic lows," he says. At least for the first part of 2012, he adds, rates should hover between 4% and 5%.
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Other positive signs: Existing-home sales increased during the summer and early fall of 2011, according to the National Association of Realtors, after a deep slump that followed the expiration of the tax credit for first-time homebuyers. Although the inventory of homes on the market and in foreclosure remains high, a lull in homebuilding over the past three years is gradually causing the surplus to ease. The months-supply figure, or how long it would take to sell the inventory of homes on the market at the current pace of sales, improved to 8.5 months in September. That ratio, however, still favors buyers; six months' supply represents a normal balance between sellers and buyers.
The lure of affordability and low mortgage rates hasn't increased buyer demand as much as one might expect. Some would-be buyers can't get a mortgage, given lenders' stiffer requirements. Many more are hesitant to pull the trigger on a home purchase for fear that home prices will continue to fall or that their job prospects are uncertain. Although the recession has technically ended, the economy doesn't feel better to many.
