You are viewing the printer-friendly version of Home Price Analysis for Jacksonville, FLHome Price Analysis for Jacksonville, FLWith home prices rising strongly 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 Jacksonville metro market, as detailed below, reveals that there is very little danger of this. In fact, the local housing market is in excellent shape with a potential for significant housing equity gains, particularly for homebuyers who plan to remain in their house for the long run.Because prices have risen faster than income, the ratio of price-to-income is currently above the historical norm. This measure is frequently cited to imply that there is a housing market bubble. But this ratio is a misleading measure in assessing bubble prospects. A more relevant measure is the mortgage servicing cost relative to income. This ratio is only minimally higher than the local historical average. This implies that there is no financial overstretching to purchase a home in the region. A high usage of interest only loans and ARMS places a greater exposure risk to interest rate changes. But the risks are mitigated from recent job additions of nearly 32,000 in the past five years. Furthermore, well-off retirees are continuing to move into Florida at a robust pace. Price Activity The current price of $166,600 is 20% below the national average. The median home price rose 14.9% in 2004 and 42% in the past three years. Home prices had been relatively flat for most of the 1990s. So part of the recent increase is attributable to the "catch-up" effect. Affordability Because the prices have risen faster than income, the ratio of price-to-income is currently above the historical norm. This measure is frequently cited to imply that there is a housing market bubble. Mortgage rates declining to 45-year lows have been a major force in boosting home prices in recent years. Lower rates allow homebuyers obtain a larger loan without necessarily increasing their 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 lower than the local historical average. It implies no widespread financial overstretching to purchase a home in the region and a potential for further significant price gains. Local Fundamentals A total of 16,400 jobs were added in the past 12 months to July. Many new job holders seek their own housing units. The region added an estimated 80,000 new housing units of which 62,000 were single-family units in the past five years. 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 slightly oversupplied in this respect as the ratio is about 0.5. Other Factors Interest-only loans accounted for 23% of all loans, while ARMS accounted for 40% in 2004 in the local region. The figures are likely to be modestly higher in 2005. Therefore, some homeowners could feel the pinch of higher rates over time. But due to the fact that only 21% of the loans have loan-to-value ratios above 90%, the foreclosure risk is minimal. (That is, prices would have to decline by more than 10% to have a measurable impact on foreclosure rates.) The baby boomers are in their peak earning years and have been active in purchasing second homes, which many consider their future retirement homes. The baby boomer impact could continue for another decade. The region is a prime retirement destination. The local market will benefit from second-home purchases by U.S. baby boomers as well by wealthy foreigners. 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 16% in combination with local job losses totaling 12,000 could lead to a price decline. The local market is more likely to appreciate at an above-normal rate because of the strong job growth and the steadily rising number of retirees over the next two decades. 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 declines 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 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 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 immense 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. aa |