Friday, March 16, 2007

A Call for P/E Research on Home Prices to Buyers' Earnings

I have been vocal in my belief that this "sub-prime" malaise goes beyond the sub-prime market and includes good-hardworking people who had to be shoe horned into mortgage products in order to afford a home.

To prove the point, it would be an interesting study for a financial journalist (and in fact, I might just send this prompt to the WSJ) to take 5 states (e.g. CA, VA, FL, TX, MI) where there is a stated problem and pick perhaps 5 counties in various parts of the state that have different housing/population demographics---hot v. cold spots if you will. Then, they ought to look at the average home price in 2000 v 2005 compared to the average qualifying earnings to purchase a home in 2000 v 2005. In fact, a wonderful barometer would be to conduct a P/E ratio--price of the home divided by annual, qualifying earnings. (I've written about this on Barry Ritholtz's blog, but still have not seen anyone do it).

One doesn't have to be a genius to make a few guesses about what the data will show for this simple reason: Incomes have not gone up all that much from 2000 to 2005 BUT we know that housing prices have gone up (in some areas) quite a bit. Accordingly, I wince at the unfair characterization of these people whose lending status went from prime to subprime just because they could not qualify for a bloated housing price.

I may nose around to find out if I can find any comparative statistics. I did find some information here .


Larry Nusbaum said...

"Accordingly, I wince at the unfair characterization of these people whose lending status went from prime to subprime just because they could not qualify for a bloated housing price."

Huh? I'm not sure they did....

~ Gemma Star said...

The only "good" news is that, soon enough, those bloated housing prices are going to lose bloat....

I feel very bad for people (like a young family member in his late 20s with three kids and a fourth on the way) who bought an undistinguished, small house in California at over half a mil -- but that was the "going" price some three years ago. They needed a bigger place, used the equity build-up in their condo to buy a bigger, bloated-value property.

Fortunately, last year I helped persuade another family member (two small kids) NOT to buy. My cousin was already feeling cautious -- and he's shrewd, thoughtful and smart -- so when they sold their home, they moved into a rental while they waited to see how the wind would blow.


I think this is going to turn super unpleasant soon, not to say ugly.

Seamus said...

Hey, nice site.
Congratulations and good luck!

Reference the housing market, Michigan is a different situation than the other states. It didn't have the big price increases, slowed down before the others and the auto industry had (and continues to have) a huge effect. Also, I think it's the only state that has lost population of those listed. FWIW.

Leisa said...

As I was looking through a state by state index, the results are quite varied. Given my years in the furniture industry, I have a few friends in MI that I continue to keep in touch with.

The data that I eventually used in my subsequent post was just on US. I couldn't easily see where I would find comparable median income statistics by region without spending more time than I really wanted to give this. I'm confident that the variations would be huge. And also, for depressed areas, the median income just wouldn't be as meaningful unless it was also slapped up against the unemployment. An flat or slightly declining median income against a quickly rising unemployment rate has very different meaning than if compared to a static unemployment rate.

Seamus, thanks for visiting. You know how much I appreciate your comments on Bill's blog.