Home Price Analysis for Akron, OH

With home prices rising sharply in most parts of the country, there has been widespread media coverage on the possibility of a housing market bust. A thorough analysis of the Akron metro market, as detailed below, reveals that there is very little danger of this. In fact, the local housing market is in good shape with a potential for significant housing equity gains, particularly for homebuyers who plan to remain in their house for the long
run. The Akron market has very favorable home price-to-income ratio and even better mortgage servicing cost-to-income ratio. The latter ratio is currently below the local
historical average. It implies no widespread financial overstretching to buy a home in the area. Any respectable gains in the local job market will translate into substantial home price gains.

Price Activity

The current price of $119,800 is about 40% lower than the national average.

The median home price fell in 2004, but made a 4% gain in the past three years.

Home price growth in recent years has been much weaker compared to the rest of the country. That also means there should be much more upside potential, particularly if the job market gets on track as recent data appear to imply.

Affordability

Affordability conditions are one of the best in the country. The price to income ratio has been remarkably stable over several years. It has, in fact, been declining in the past two years.

Mortgage rates declining to 45-year lows have been a major force in raising home prices in recent years. Lower rates allow homebuyers to obtain a larger loan without necessarily increasing monthly mortgage payments.

A more relevant measure for assessing the risk of a home price bubble is the median mortgage servicing cost relative to the median income. This ratio is well below the
local historical average. It implies no widespread financial overstretching to purchase a home in the region. It in fact implies a capacity for a robust rise in home prices.

Local Fundamentals

Jobs are returning. There have been 1,200 payroll job additions in the past 12 months to July. Many new job holders seek their own housing units.

In the past five years, the region added an estimated 15,000 new housing units of which 12,000 were single-family units.

The ratio of five-year job gains to five-year new home construction shows the "hangover" impact of the housing shortage, or housing surplus. In our case, the local
market is suffering from a housing surplus as the ratio is below zero. (Note, low mortgage rates and low mortgage servicing cost negated the negative impact of housing surplus). With recent job gains and the expected continued economic expansion, the jobs-to-new home ratio will steadily improve.

Other Factors

The use of ARMS and interest-only loans have risen across the country, including in large Ohio markets. Though data are not readily available, a comparable trend is likely taking place in this local market. Therefore, some homeowners could feel the pinch of higher rates over time.

The baby boomers are in their peak earning years and have been busy purchasing second homes, which many consider their future retirement homes. The baby boomer
impact could continue for another decade.

With many top retirement destinations becoming quickly unaffordable in the past five years, some retirees may turn to more affordable regions of the country. Similarly,
investor purchasers could be forced to look in affordable places. Perhaps, the local region gets a slight lift as a result.

Stress Test

Price declines in the local market are unlikely according to our stress test.

The local housing market will experience a price decline of 5% only under extreme unlikely scenarios. For example, mortgage rates rising to 18% in combination with 2,000 job losses could lead to a price decline.

Additional Discussion Points

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, the 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 decreases were accompanied by sharp prolonged job losses. It is difficult to foresee a price decline in a job creating economy.

Homes trade far less frequently than financial assets (about one home sale every 7 to 10 years for most homeowners). There are also bigger 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 this metro market 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 tremendous tax benefits to owning a home. These tax considerations were not considered in the analysis. For example, the 1998 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.

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