Home prices outstripping income gains

The FDIC--the federal agency that regulates many banks--released a report on Tuesday that got scant attention but offers interesting insights as to whether we can sustain the kind of appreciation in home prices we've seen in recent years. The FDIC report nominally analyzed banking and economic trends in every state, but devoted a lot of attention to real estate, since that represents a growing share of bank lending.

Cut to the chase: The FDIC noted that in many states, the gap between home prices and income has reached a record level, which suggests that we could be entering a long stretch where home prices--at best--do nothing, while incomes try to catch up...

Consider the situation in Florida, which has seen a spike in home prices, fueled in part by speculation. Home prices in the Sunshine States have risen to a level that is 4.4 times income levels of 2004. In metro Miami, the average price of a home is now more than six times income levels.

Contrast that to the old rule of thumb that real-estate agents and mortgage lenders use in qualifying buyers: For the longest while, most lenders wouldn't qualify buyers to spend more than three times their annual income.

My take is that with this kind of gap, there's no way homes can continue to appreciate. And as for the future, that means that we could be facing a decade--or more--where homes in markets like Florida don't appreciate a nickel (and that's the best-case scenario)while incomes try to catch up. That could be bad news for buyers who are buying in late on the assumption that home prices only go up, up, up.

To check on the FDIC's analysis of conditions in your state, click over to: http://www.fdic.gov/bank/analytical/stateprofile/index.html

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