house prices moved above their fundamental values only to fall below them for a while. While this simple analysis can help to identify areaswhere house prices appear to be out of line with incomes, it can’t tell us when a correction will occur.
As a result, while some areas appear to have already fallen well beyond their fundamental values, they could still fall further. What the analysis does say, however, is that at some point, there should be a recovery in house prices in these markets that will bring them back into balance with incomes.
States where house prices are too low, although they had no bubble Indiana is a good illustration of a surprising pattern seen for areas where prices tracked incomes quite closely even during the housing bubble, but then still got hit by declining house prices as a result of the Great Recession. Other states
with similar patterns include Arkansas, Kentucky, Kansas, Iowa, Mississippi, Nebraska, Ohio, Oklahoma, South Dakota, Texas, and Wyoming. It is likely that house prices in these areas will recover along with job growth, which is already happening in manufacturing and agriculture.
Since disposable income is not available at the state level, we made a minor adjustment to the state-level per capital income data by adjusting it for how national disposable per capita income compares to national per capita income over time.
There are many measures of affordability, some based on prices relative to monthly house costs, including taxes, insurance and mortgage payments, while other measures compare house prices to rents. Here, we compare house prices and adjusted per capita income1 in order to study how they evolve over time. Over time, house prices and income should grow at similar rates, otherwise housing would become either increasingly affordable or unaffordable. We used two different measures of house prices, the CoreLogic House Price Index (HPI) built on all transactions and the CoreLogic HPI excluding distressed sales, since they tell somewhat different stories.
States where house prices have over-corrected from the boom and are very affordable Michigan is an example of a state that had a housing boom, with prices moving upward at a pace much faster than the capacity of homeowners to pay for them – but where prices appear to have significantly over-corrected.
The data for Michigan suggest house prices were overheated in the decade before 2007, but have since
overshot too far to the downside of income, both relative to a 1995 base year of 100. 1995 as the base year because it was a relatively stable period for both housing and the overall economy). An index value of 120, for example, would signify that income or the HPI is 20 percent higher than it was in the base year of 1995.
Since there is some concern that the house price indices which include distressed sales undervalue properties not sold as short sales or from REO, we also show the CoreLogic HPI that excludes distressed sales.
Comparing the different HPIs, the index that excludes distressed sales lessens the underpricing
seen in most areas, but it only explains a portion of the under-pricing relative to incomes. Other states that have a broadly similar pattern to Michigan include Alabama, Georgia, Idaho, Illinois,
Missouri, Montana, Nevada, New Mexico, and West Virginia.
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