Lower prices not helping affordability

Scott Andron

Jul. 27, 2008 (McClatchy-Tribune Regional News delivered by Newstex) -- Lyssa Fordin works two jobs so she can save up for a down payment on a home. Her husband, Greg, often works six-day weeks at a car dealership. They live at his mom's house in Miramar.

But even after recent drops, she says, home prices in older neighborhoods of South Broward County remain out of reach for the couple who married a year ago.

"It doesn't look good anytime soon," said Lyssa Fordin, a teacher at Apollo Middle School in Hollywood. "The prices combined with the taxes and the insurance are outrageous. . . . I'm a college graduate, 35 years old but living with Mommy."

The couple's example raises an important question about South Florida's housing market: How long can prices remain so high that most people can't afford them?

Broward and Miami-Dade County home prices are now down more than 20 percent from their 2005 peaks. But prices remain startlingly high in relation to local incomes, suggesting that they still have further to fall.

Experts agree: It's economically unreasonable for local home prices to remain for long at prices out of reach for most buyers. When most potential buyers are priced out of the market, demand fizzles and prices fall.

Local incomes are not the only factor that affects home prices, and at least one expert -- the economist for the national association of real-estate agents -- is predicting that other variables will actually push prices higher in South Florida.

He's in the minority right now, however.

'AFFORDABLE' HOUSING

Consider history: From 1975 to 2000, the median American home price stayed squarely in the range of 3 to 3.5 times median household income, according to a Miami Herald analysis. The median is the price at which half the homes examined sold for more and half for less; median income is also the midpoint.

After 2000, however, interest rates fell sharply and lenders lowered their standards. These two factors effectively made homes affordable to people who otherwise could not have bought them. That meant more buyers competing for the available supply of homes, and therefore higher prices.

This, in turn, attracted speculation, inflating prices even more.

The result: By 2005, the median American home price peaked at 4.73 times median income.

Data for South Florida were not available before 1997. The ratios in Miami-Dade were a bit higher than the national average even then, with the median house costing about four times median income.

But after 2001, the relative cost of housing grew much more sharply here than in the nation as a whole. In 2005, the ratios peaked at a whopping 9.46 in Miami-Dade and 7.75 in Broward.

Such numbers are "clearly untenable," said William Hardin, director of real-estate programs at Florida International University. Of eight experts interviewed for this article, all but the Realtors' economist had similar views, although they varied in how strongly they felt.

"Ultimately, people who live here and work here have to pay for the median house," Hardin said. "The typical house has to have some connection to the income of the people you're selling to."

What's more, our high property taxes and insurance rates make the cost of ownership higher than the home price suggests.

PLAYING IT SAFE

As an example, consider Paul and Elodie Segarra of Kendall. Paul, 43, is a ramp agent for American Airlines. (NYSE:AMR) Elodie, 35, works in the reservations department at Carnival Cruise Lines. (NYSE:CUK) (NYSE:CCL) Between them, they make about $76,000 a year -- about 160 percent of the median Miami-Dade household income. And they've managed to save $15,000 for a down payment. They have no debts to speak of.

Based on those numbers, they should be able to afford a monthly house payment of about $2,000, including taxes and insurance. That works out to a house costing between $200,000 and $250,000, depending on how much debt they're willing and able to take on.

Paul looks at all the families that overextended themselves during the boom, and figures it's best to play it safe.

"Look at what happened to all these people. They borrowed the maximum. . . . All of a sudden, they owe more than their property is worth."

So, the Segarras' real-estate agent, Frank Pulles of Coldwell Banker, has been showing them foreclosure and short-sale properties. There are plenty in their price range, but some were stripped bare by the former occupants. And the short sales entail weeks or even months to complete a deal, because lenders must agree to accept less than the full amount of a mortgage owed.

Paul Segarra is optimistic in light of the falling prices.

"I think it's a natural adjustment," he said. "I've been here in Miami so long, and you kind of get a sense of what you can get for a certain amount of money. When something changes so dramatically like that, you gotta know something's wrong."

Professor Hardin thinks families will have more options in the months ahead.

He thinks, conservatively speaking, that prices will fall to about 4 to 4.5 times median income, which would put us at about the high end of historical national averages. That's a little more than $200,000 in Miami-Dade, or $225,000 in Broward, assuming the higher ratio. That's a drop of about 30 percent from current levels.

If $225,000 seems unrealistically low, consider that that was about the median in 2003.

It's also about the price you'd pay for a house if home values had increased at the healthy rate of 6 percent a year from 2000 to 2008.

Not everyone agrees with Hardin, however.

The most common arguments against a large additional price drop are that the supply of homes is growing scarce and that buyers from outside South Florida come here and bid up prices.

THE OUTSIDERS

The argument goes like this: We all know that foreigners come here and buy vacation homes and investment properties. And retirees come here and buy property. The true wealth of these buyers is not reflected in local income figures.

"They are coming with a sizable wealth that is not a part of their price-to-income ratios," noted Lawrence Yun, chief economist for the National Association of Realtors. He called this "invisible wealth -- we know it exists, but it's hard to compute."

What's more, South Florida has few large tracts of developable land that can still be converted to housing. That makes it more expensive to build new homes.

"We've run out of easy options," said Mark Vitner, an economist who follows the South Florida market for Wachovia. (NYSE:WB)

That said, Vitner sees prices falling an additional 15 percent before bottoming out. In other words, he sees price-to-income ratios coming closer to pre-boom levels, but not all the way back.

Yun was the one economist interviewed who saw prices increasing in South Florida in the near future. He predicted a rise of 30 percent over the next five years.

There is a precedent for home prices remaining at very high price-to-income ratios for long periods. It has happened in places like Boston, New York and San Francisco.

Yun points to a widely cited 2002 economics paper in which three Ivy League experts argued that prices can soar in relation to income under certain conditions -- specifically in markets such as San Francisco and New York City that are highly desirable and where the supply of land is very tight. The authors dubbed them "superstar cities," which also was the title of their paper.

Said Yun: "Miami is becoming or has become a superstar city. The superstar cities defy all those ratios."

But Todd Sinai, one of the authors of Superstar Cities, said the Miami area still has too much room for growth to be a superstar in the sense used in the paper.

South Florida still has opportunities for so-called "infill" development on smaller tracts in otherwise developed areas, and it has acres of land available for redevelopment.

Indeed, vacant homes and condos have become a problem in some areas, resulting in thousands of unkempt yards and a rash of squatters.

Sinai predicts that South Florida home prices will continue to fall for now, but that prices could rise relative to earnings as it becomes harder to add to the area's housing stock.

"I think the Miami house prices have a ways to come down," said Sinai, a professor at the University of Pennsylvania's Wharton School of Business. "But over the long run, those issues are going to come back."

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