Firm: Baltimore-area prices close to historical norm
Four years ago, a housing affordability index that stacks metro areas against their own histories showed the Baltimore area at its most unaffordable point on record.
Two years ago, it had worked its way down from the ranks of "significant affordability concern" to good ol' "affordability concern."
Now the index, put together by John Burns Real Estate Consulting, pegs the Baltimore region at just about its historical norm -- measured over a stretch of time starting in the early 1980s. It's slightly on the "underpriced" side now, making it an area of "less affordability concern," the California company says.
But the Baltimore area's price drops have been so muted compared with some regions that it's one of the least underpriced areas, compared with their own histories. Of the 183 areas John Burns tracks, 171 are more underpriced than Baltimore. More on that in a moment.
The index -- which melds prices, incomes, mortgage rates and down payments -- isn't meant to predict what home values will do at any given time, so you probably shouldn't hold your breath for a quick return to rising prices. (A separate Johns Burns analysis suggests a very large "shadow inventory" of distressed properties not yet on the market, for instance.)
But the company believes its index is a useful measure of where you can expect prices (compared with incomes and rates) will be long-term.
"Typically, things fall in line with their historical norms," said Erik Franks, a senior research analyst at John Burns. "That's basically true of any commodity."
Here's how the index works -- and how Baltimore compares with other regions:
John Burns compares median annual income in an area with the annual mortgage payment for the median-priced home, so changing mortgage rates over time affect the affordability index just as changing prices and incomes. (Rates are very low now and were very high in the '80s.)
The company calculates the mortgage payment off a 20 percent down payment, because that's what you always used to have to put down on a conventional loan. But it tries to account for that outlay by adding one-seventh of the down payment to the mortgage tally, under the rationale that people tend to stay in their homes about seven years.
When a metro area is at its least expensive time to buy, it hits zero on the affordability index. Most expensive warrants a 10. Five is the dividing line between overpriced and under-.
The Baltimore area is at 4.6 at the moment and has bounced between 4.5 and 5.5 since last November, Franks said.
Forty-one metro areas, meanwhile, are at zero -- the cheapest time in their histories. They range from the Sunbelt usual suspects, like Las Vegas, to Bridgeport, Conn. and Tacoma, Wash.
Eight places are on the overpriced side of the line. No. 1 on that list: Bethesda, at 5.7.
In case you're wondering, the Baltimore area's zero moment came at the end of the '90s, right before the bubble.
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Comments
"Burns compares median annual income in an area with the annual mortgage payment for the median-priced home"
I reached a similar conclusion within the past year. The emphasis is on payment affordability, as opposed to sales price affordability. The only way his overall index holds if/when rates go up, is if prices come down. That won't happen until a regime change.
Posted by: Josh Dowlut | October 3, 2011 9:15 AM
Ive mentioned this before here.But i think its worth repeating, that there is an incredible range of housing prices in Baltimore.
Yes, one can say that about most places.But Baltimore really does go to extremes. There are houses that go for $500,000 in the City.And there are houses that sell for $5,000. It really does cover an incredible span
So i feel that any statistics about Baltimore housing prices should be taken with a slight grain of salt. Especially if they are about the whole City or regional area.
Statistics that are about specific neighborhoods are far better to look at.But even they have wide differences in them. I paid $45,000 for my house in Highlandtown.Two years later someone paid $300,000 for a house two doors down from me. The house was the same size as mine.But the difference was that mine was unrehabbed [but livable] and thiers was rehabbed.
This is actually one of my favorite things about Baltimore. Baltimore does have many neighborhoods where doctors and lawyers live right next to construction laborers and dish washers.And all are homeowners. The doctors and lawyers simply have thier houses fixed up a little nicer.
But all of this does mean that one should be wary of City wide statistics on housing prices
Posted by: Pete from Highlandtown | October 3, 2011 9:58 PM
Good point, Pete. These statistics are regionwide, so the median price includes the effect of the suburbs.
Posted by: Jamie Smith Hopkins | October 3, 2011 10:03 PM
As someone who grew up in a suburb, Pete's comment made an impression on me, because it's exactly what I notice here in the city. You can find affordable places that are close to everything you need. And then, if you're doing well enough financially, you can fix them up, but it's not necessary. I guess it depends on everyone's personality, but I like living around all different types of people, as long as the area is pretty safe.
Moving on to the main point of this post, I think the firm is right, housing is not underpriced (yet) but it's already at a historical norm. The thing is, we're going to drop below the norm just because of all the deceit and smoke-and-mirrors that were used to reach the historic high prices. This isn't a normal average-price scenario, it's; one where there are too many foreclosures and bank owned properties for inventory to flow smoothly. And there has been a massive outsourcing of stable middle class jobs over the past generation or so. Psychologically, people don't feel that comfortable, even if their taxes say they have a middle class (or above) income. And this feeds into the psychology of things.
If you can find a place you're sure you want to live for about 10 yrs or more and you feel comfortable in your job (and not being relocated), then this is not a bad time to buy a home. I'd personally wait until December to start looking, just to let the sellers get it into their heads that the boom market is not coming back for a long, long time.
Posted by: chappy10 | October 4, 2011 12:58 AM
baltimore have the highest rental and the raggest placecs. places that use to be cheap are out rages high. can move down town unless your rich. and the city still have high crime and messey area.
Posted by: m jones | October 6, 2011 8:18 AM