MARKET WATCH: Another Argument for Housing
Over the past couple months, we’ve been arguing favorably for leveraged residential real estate. Much of our logic has been based on value and comparative advantage. On the latter, we recently noted how real estate is becoming attractive compared to the stomach-churning volatility of the stock market.
This week, we offer a value argument. The Wall Street Journal reports that many hard-hit real estate markets have fallen far below pre-bubble levels. Relying on data provided by Zillow, the Journal states that “property prices in one-third of nearly 130 housing markets across the nation were undervalued, when compared with residents’ current income and the pre-bubble trend.”
How does the Journal and Zillow know? From 1985 to 2000, home prices averaged 2.9 times income. During the housing boom, this price-to-income ratio peaked at around 5.1 in 2005. Today, the national average is around 3.3 times income. Still a little high, to be sure, but less so when factoring in the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI). The HOI indicates that 72.6 percent of all new and existing homes sold in the second quarter of the year were affordable to families earning the national median income of $64,200.
Then again, real estate is local, and Zillow’s data suggest that many markets – a third – offer enticing value on owner-occupied and investment properties. Couple that with after-tax financing costs below 3.5 percent, and it becomes increasing difficult to argue against buying real estate and leveraging it at a cost unseen in 50 years.
