Housing prices in Columbus - Solid. Rock Solid!

Even though we've experienced lackluster appreciation this year, the Columbus region is still solid and the outlook is favorable according to the recently released Home Price Analysis for Columbus Region report from the National Association of REALTORS®.

Using data available through July 2006, the report evaluated a number of factors affecting home prices including the health of the local job market, the prevalence of "nontraditional" home financing options, debt-to-income ratios and net migration patterns.

According to the report, home prices in the region have risen at a moderate pace in recent years. Prices rose by only 1.1% in the first quarter of 2006. But there are few concerns about a price bubble or a large price correction given the highly affordable conditions in the region.

• In 2005 the median home price in Columbus was affordable at $150,100. 
• In the first quarter of 2006, the median price rose only 1.1% from a year ago. 
• If history is a guide, the recent job gains of 9,000 in the past 12 months will help support home prices. 
• Home prices have underperformed compared with the country as a whole. So there is an opportunity for a measurable "catch-up" effect in the upcoming years.

Rising mortgage rates - roughly one percentage point increase in the past 12 months - have not significantly deterred home buying. That is not surprising since the affordable markets (i.e. Columbus) are less sensitive to interest-rate changes and more dependent on job market conditions.

The affordable home price and the associated low mortgage servicing costs in the local region suggest that there is a good possibility of better-than-average price growth in the coming years, provided the local economy generates jobs at a respectable pace.

A recent reduction in new home construction is encouraging. Homebuilders need to be careful not to oversupply the market.

The ratio of price-to-income is in a comfortable range. By this measure, local home prices are under priced.

Home Financing
Mortgage lending in the region has been primarily to owneroccupied, credit-worthy borrowers who are least likely to quickly "dump properties" onto the market. The share of loans for nonowner-occupied properties was 11%.

The percentage of sub-prime loans (those carrying interest rates at least 3 percentage points higher than market rates) was 9% versus the 10% national average.

The share of adjustable-rate mortgages (ARMs) fell to 28% in the first quarter from 58% a year ago. Though ARMs are the best financing choice for some homeowners, they also carry risk in the current rising interest-rate environment. The reduction in ARM usage is, therefore, a positive sign in minimizing risk.

Only 18% of new loans had a loan-to-value ratio of greater than 90%. Therefore, prices would have to decline by more than 10% to have a measurable impact on foreclosure rates - assuming the job market has stabilized.

Local Job Market
Jobs suffered following the 2001 recession and only recently has the market turned positive. Cumulatively over the past five years, only 7,000 jobs were added.

Over the same time period, the region added 74,800 new housing units, of which 52,000 were single family units. However, local job growth has been on a recovery with steadily improving figures. The three-year job growth of 0.9% is still well below the national pace. But the local unemployment rate of 5.3% in the first quarter is an improvement compared to the recent past.

Job growth attracts additional potential homebuyers to the market. Furthermore, a positive immigration pattern into the region suggests that any price decline will likely be short lived.

Risks remain, nonetheless. High oil prices have raised inflation and have slowed economic growth. The Midwest economies generally tend to suffer more than the rest of the country during a recession due to a higher concentration of manufacturing industries in the region.

Therefore, should the national economy tip into a recession, job cuts in the local region are likely and could even be severe. Home prices would be dragged down as a result.

Conclusion
Home price declines are very rare. In fact, the national median home price has not declined since the Great Depression of the 1930s. Stock market collapses, OPEC oil crunch, economic recessions, and even wars have not negatively impacted national home prices since the 1930s.

There have been few times when local prices declined. In nearly all these cases, the price declines were accompanied by sharp prolonged job losses. It is difficult to foresee a price decline in a job creating economy.

Even in the unlikely event of prices declining by 5%, most homeowners will maintain sizable equity build-up in their homes. The table below shows the home equity gains if prices were to fall by 5% in 2006. A homebuyer who purchased in 2005 would suffer $5,600 in home equity loss. But homebuyers who had purchased in prior years would still retain significant housing equity gains.

A likely scenario is for home prices to rise, though at a much lower rate than in recent past years. The Housing Equity Gains chart show how gains under different though conservative price growth assumptions could affect home appreciation.

Homes trade far less frequently than financial assets (about one home sale every 7 to 10 years for most homeowners). There are also larger transaction costs associated with selling a home due to the lengthy careful examination demanded by home buyers and sellers. Therefore, home prices are not prone to fluctuations as in the stock market. There are neither panic sells nor margin calls associated with homes.

Many non-quantifiable factors could be important for Columbus in determining home prices. Access to cultural life, the quality of museums, nearby local and national parks, water views, exclusive neighborhoods, weather, the international airport, city vibrancy, restaurants, and a host of other non-quantifiable factors could have an important influence on the overall pricing.

There are immense tax benefits to owning a home. These tax considerations were not considered in the analysis. For example, the 1997 law permitting primary owner occupants to trade down without having tax consequences. Also most home sales results in no capital gains tax. In addition, long term capital gains tax rates were reduced in 2003, thereby providing higher return for home investors.

These positive benefits, if accounted for in the analysis, would have shown an even stronger case for housing fundamentals in supporting home prices.

Click here to view the full report.