Will Hot Louisiana Housing Market Chill Out?

For the past two years, the media has portrayed the housing market as bad and getting worse.

Historically, the housing market is cyclical.

However, more than a decade of unprecedented growth had produced a national euphoria that spawned speculation, rampant building, risky home loans, over-borrowing and an ever-higher escalation of prices.

In many areas of the country this long lasting era of housing prosperity began to unravel in 2005.

Interestingly, as had been typical in past downturns, this housing market drop was not a result of the U.S. economy hitting a snag.

According to the latest housing market report by Harvard University’s Joint Center for Housing Studies, the current housing downturn “has been driven by the market’s own excesses.”

This included an oversupply of new homes, speculative buyers who believed that the historically high rates of price appreciation experienced in many markets would go on infinitely, and risky home loan products that encouraged consumers to buy homes they couldn’t afford at mortgage rates that shot up fast.

So what does any of this have to do with the Lafayette, Louisiana housing market? The local economy is booming. Housing sales remain at record levels and prices sure aren’t coming down.

As has so often been the case, the area seem to be experiencing the reverse of the rest of the U.S.. To a large degree that is true, but there are some aspects of “the market’s own excesses” that plagued the rest of the country that Louisiana mortgage holders and prospective applicants should pay heed to in the local marketplace.

Is there an oversupply of homes in Lafayette?

Based on the overall level of demand, the answer would be no, but indications show demand may be slowing. The number of home sales reported from January through June 2007 over the same period of 2006 is up slightly more than 8 percent.

However, the first quarter 2007 increase was up 20 percent over the first quarter of 2006, while Q2 of 2007 lagged behind Q2 of 2006 by less than 1 percent. Clearly, demand in the second quarter has lessened.

Additionally, throughout the 1990s, the ratio of new listings coming on the market to the number of homes sold was in balance.

In three of the 10 years of the 1990s, there were fewer homes coming on the market than were sold. In the other seven years, the ratio was between 1.1 and 1.2 homes being listed to every one sale reported.

Since 2000, the ratio of homes coming on the market to homes sold each year has consistently been in the 1.3 to 1.35 range. What kept the market tight was the increased demand that easily absorbed those increases in supply.

Should the number of buyers in the marketplace diminish, obviously the result would be a chilling of this sector of the Louisiana housing market.

Is the current rate of housing price increases in Lafayette unsustainable? The median sold price for new construction in Lafayette as of June 30, 2007, was $186,500. As of June 20, 2006 it was $181,000.

That’s an increase of 3 percent.

The median sale price for an existing home sold in Lafayette as of June 30, 2007 was $166,000 versus $153,000 as of June 2006.

That’s an increase of 8.5 percent.

Based on underwriting standards, it is possible to estimate how many households that qualified for a home mortgage before a price increase, but no longer qualify afterwards.

Those are the households that are “priced out” of the market for a home.

The National Association of Home Builders applied this approach to 357 metro areas throughout the U.S., including Lafayette, using assumptions about a Louisiana mortgage, down payment, closing costs and income.

The result for Lafayette showed that for every $1,000 increase in median sale price, 287 households are priced out of the housing market.

Based on an overall increase in median sale price of $7,600 in Lafayette during the past year, about 2,180 households can no longer afford a home loan.

SOURCE: The Daily Advertiser