Workers’ Earnings Key to Predicting N.H. Housing Market Future
Have you thought about buying a house recently?
If so, you may have experienced hesitation because you weren’t sure if the prices, which have been dropping, might be even lower next year.
Millions of Americans, and according to the New Hampshire Business Review, the Granite State is no exception. This is because houses have become more affordable - but also because consumers now believe that the price is not likely to go much lower.
That phenomenon is worth noting as it relates to the New Hampshire housing market. Many buyers — particularly those not in a hurry — are hesitating because they believe that prices are likely to be lower in the future.
This represents a significant shift in the real estate psychology of home buyers from a year or two ago, when most of them thought home prices would keep rising.
The key question is when will this hesitation-leaning consumer sentiment regarding housing start to turn into a now-is-the-time-to-buy attitude?
The issue of affordability is a complex one. Prices may not have reached their absolute lowest point, but they are significantly more affordable than they were a year ago. Whereas New Hampshire mortgage rates are about where they were 12 months ago, the real estate climate is different.
One way to measure housing affordability is to calculate the ratio between employee wages and home prices. The ratio between those two numbers was remarkably flat through most of the 1990s. In 1990, the median home price was 5.3 times the average annual private employment wage.
By 1992, that ratio had come down to 4.1, and even less in the Seacoast region of N.H. and Maine, with only slight variations it remained there until 2000, when the home price-to-wage ratio was still 4.1.
From 1992-2000, home prices, which increased 41.5 percent, virtually tracked wages, which rose 43.8 percent. But then in the first half of this decade, home prices jumped from 4.1-6.1 times average wages. The reason: Median home prices rose 74.8 percent from 2000-2005, while average wages increased just 16.4 percent.
Two important notes: Interest rates were at historic lows during the first half of this decade, so demand for home mortgage loans went through the roof. Second, vacation-home buyers in New Hampshire were far more abundant than they had been during the 1990s.
Unless there are significant interest rate cuts in the near future and mortgage rates fell to historic lows, it would be logical to expect home prices to track much closer to wage increases as this decade draws to a conclusion. But there are other forces at work.
We don’t know what will happen with regard to second-home buyers. There is some indication that rising equity prices in the stock market may fuel some additional buying of second or even third homes in New Hampshire, as well as fuel Vermont and Maine mortgage demand.
One additional factor is that older buyers with substantial equity are a larger fraction of home owners in New England than at any time in the region’s past. That makes it more likely that prices will track at a somewhat higher ratio to wages than they did a decade ago.
Perhaps more potential home buyers would think it was time to buy if the median home price-to-wages ratio here were to gradually return to 5.7 or what it was in 2003.
If next year’s wages were to rise at the same rate as they did last year (3.7 percent), that would mean in ‘07 the average wage would be $44,000 and the median home price would be $250,800, or about where it was in 2005.
The bottom line is that if average wages continue to rise and second-home buyers remain in the picture, then the consumers’ perception is likely to be that home prices are stabilizing and it is time to buy.