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Tuesday, February 12, 2008

WSJ: Homes Remain "Wildly Overvalued"

by Calculated Risk on 2/12/2008 11:46:00 AM

From Brett Arends at the WSJ: Homes in Bubble Regions Remain Wildly Overvalued

... the really bad news is that, even after a year of misery and falling prices, homes ... remain wildly overvalued compared to average personal incomes.

There is a strong long-term correlation between the two figures. And in many regions, house prices would still have to fall a very long way to get back into line.

How far?

Try around a third in Florida and Arizona -- and closer to 40% in California.
Price to income isn't a perfect tool, but it does provide a gross estimate of how far house prices are still above "normal".

This points out the mistake many homebuyers made during the boom - they only looked at the monthly payment, and not the price. With low teaser rates, optional negative amortizing payments, and other mortgage innovations, it was easy for a homebuyer to get into a home at 13 or 14 times income.

Imagine a home purchased at 13 times income, with a 10% down payment. Say the homeowner switches to a 30 year fixed rate loan with a 6% interest rate. Just the P&I (principal and interest) would equal 84% of the homebuyers gross income!

This is called being "house poor". (Owning a home, but not exactly enjoying life).