In a recent JP Morgan report, entitled Market Insights, the authors say the United States has the “cheapest housing market in decades.” The recent S&P/Case- Shiller Housing Price Index states that housing prices have fallen to the lowest prices since the market top occurred in mid-July. The figures support the claim of cheap housing prices, with price an average of 35 percent off their high.
The report listed several characteristics of the current market that screams now may represent one of the best opportunities in recent history to become a homeowner.
Following are three of the attributes evaluated in the JP Morgan analysis:
1) Median Personal Household Income to Price Ratio
Data shows that the median price of an existing single-family home fluctuates between 150 percent and 251 percent of personal household income. Seventy-five percent of the time, the median price oscillates between the range of 185 percent to 230 percent of personal household income. In September 2011, the ratio registered at 153 percent. According to the report, home price would have to increase 27 percent to get to the average price to personal income ratio.
2) Average Interest Rate Down
Another way of deciding whether the timing is right to buy a home, in October, mortgage rates had fallen to an average annual interest rate of 3.94 percent. Buyers who can afford a 20 percent down payment, and secure a fix-rate mortgage would have a median mortgage payment of 6.9 percent of household personal income on a single-family home, compared to a 14.4 percent, on average, since 1966. This calculation for long-term appreciation by purchasing a home at average prices below the norm and mortgage interest rates hovering at historic lows.
3) Renting versus Buying
Beginning in the late 80s, the U.S. Census Bureau started accumulating data on property owners who owned vacant units and track whether they plan to rent or sell. In addition, the survey collected information on asking rents and sell prices. Again, based on a 20 percent down payment, and low 30-year fixed rate mortgage rates, it is possible to compute the median monthly mortgage to purchase the house or condominium.
Comparing the median monthly mortgage of vacant properties to the median rent price for the same homes, the numbers show that from 1988 to 2005, the monthly mortgage payment and the rent price moved in unison. The median mortgage payment average about five percent higher than the median rent payment.
From 2005 to the middle of 2007, the median monthly mortgage payment rose to an average of 50 percent higher than median rent. By the third quarter of 2011, the median mortgage payment declined to 78 percent of the median rent. Based on these numbers, home values would have to increase by 35 percent to return to the average ratio between median mortgage rates and median rents.