Recalibrating Affordability Expectations By Liam Denning The Wall Street Journal 09-21-2009

Recalibrating Affordability Expectations
By Liam Denning
The Wall Street Journal
September 21, 2009

Before the housing bubble, a quaint notion held sway that homeowners should be able to afford the houses they live in.

One measure of affordability is to compare property prices with per capita personal income. Karl Case, co-creator of the Case-Shiller Home Price indexes, has tracked this for 20 major metropolitan areas. During the 1990s, most held steady in a range of four to six times income. But lax monetary policy and credit standards after that helped throw the notion of affordability out the window.

Cities like Miami and Phoenix are particularly noteworthy. After a long period of stable midsingle-digit price-to-income ratios, these exploded.

Most cities now have returned to "normal" ranges. Even so, don't bank on this portending a house-price rebound.

Sanity hasn't returned everywhere: Los Angeles still boasts a ratio of nearly 10 times. Moreover, the collapse of the bubble should recalibrate expectations. The relative stability of price-to-income ratios prior to the bubble, together with stagnant incomes and rising unemployment, suggests prices in many areas are about where they should be.

Against this stands Uncle Sam. Some four-fifths of new residential mortgages this year have benefited from government support, said trade journal Inside Mortgage Finance.

Government interventions remain a wild card. But it is worth noting that efforts to date have helped stabilize price-to-income ratios in their normal range. Without this, prices likely would have plunged further. In Detroit, the ratio has dropped below the historic range of four to five times. Banking on a big housing bounce-back on the back of Washington's grand fiscal experiment looks highly questionable. Quaint, even.