The "new normal" for home prices may be the old normal.
In a note to private banking clients last week, economists at HSBC Bank USA compared the trajectory of home prices since the early 1990s to those of rents and personal incomes and found that "after the painful correction of recent years, home prices, on average, are moving closer to being normal."
The researchers indexed home prices and rents to their levels in March 1991 and found "the two variables moved in lock step" until 1998. After that, "home prices took off, widening the gap to rent significantly during 2004-2007, when the housing market was most speculative. As the market corrected, the gap narrowed considerably," and by the second quarter of this year was back to about where it was in 2001. Similarly, prices trailed (but closely tracked) incomes during the 1990s, only to overtake them by a wide margin during the bubble years. Incomes are back in the lead now.
Many economists consider rent a relevant benchmark for owner-occupied homes because, "since renting is often a competing alternative for potential homebuyers, the value of a property should not deviate far away from the present value of all future rents if it were on a rental market," HSBC noted. Income, of course, determines people's capacity to pay the mortgage — a consideration that fell by the wayside when stated-income loans were all the rage.
Compared to those heady days, HSBC said, prices now look "more reasonable."
Robert Klein, chief executive of Safeguard Properties Inc., a Cleveland company that looks after repossessed homes for lenders, said he is seeing what could be called a normalization of prices in some areas, but not across the board nationwide.
"It's a very tough call to make," he said. "In some areas we definitely see that happening. Rentals are definitely on the rise."
… and Falling
Meanwhile, prices on average are still falling.
The Federal Housing Finance Agency reported Wednesday that its index of national home prices slipped 0.5% in July from June, and 3.3% from a year earlier. The agency revised its figure for June's month-to-month decline to 1.2% from 0.3%.
The index is now off 13.8% from its April 2007 peak.
"I have had students tell me in continuing education classes that they have been ordered to ignore physical deficiencies such as missing kitchens, damaged walls, and inoperable mechanical systems. Many of those students then stated that by failing to violate the Uniform Standards [of the appraisal profession] and Florida law they lost clients.
"The story I have heard most often is the client saying he could not use the appraisal because the value was [not] what they needed. This is twisted logic as the appraisal is intended to help the client make … well supported decisions, not to accomplish a preordained goal."
— Dennis J. Black, a Miami appraiser, at a Financial Crisis Inquiry Commission hearing Tuesday.