Widening gap between incomes and home prices led to housing slump

WASHINGTON | An Associated Press analysis of new census data provides insight into the slumping housing market: Since 1990, homeowners have faced a growing gap between their incomes and home prices.

The widening gap in all but a handful of the nation’s 500 largest cities helped make the recent boom in housing prices unsustainable, according to analysts.

The rising prices were fueled largely by low interest rates and risky borrowing, rather than increasing incomes.

“We had an artificial economy,” said Brad Geisen, founder of Foreclosure.com, a Web site that lists foreclosure properties. “There was all this wealth created in real estate, and it wasn’t really created.”

Nationally, the median household income grew by about 60 percent from 1990 to 2006, roughly matching inflation. At the same time, the median home value more than doubled, to $185,200.

The gap between incomes and home values was even bigger in many cities.

For example, incomes in Miami roughly kept pace with inflation — meaning they were effectively stagnant — while the median home value quadrupled, to $315,900. In places such as Bend, Ore., and North Las Vegas, Nev., incomes about doubled, but home values increased fivefold.

In Kansas City, the median home value went up 134 percent, from $55,700 in the 1990 Census to $130,200 in 2006, while the median household income rose 53 percent. In Kansas City, Kan., the home value increase was 128 percent, from $40,700 to $92,800, and the median household income increased 54 percent.

Mark Zandi, chief economist at Moody’sEconomy.com, likened the current housing market to the dot-com boom and bust a few years ago, when stock prices for many high-tech companies soared — before some of them ever turned a profit — and then crashed.

“The parallels are quite similar,” Zandi said.

The Census Bureau released 2006 housing data for every state, county, metro area and city with a population of at least 65,000. Income data were released last month.

Together, the figures provide a snapshot of the country’s economy just as housing prices were peaking in many areas. Since then, housing prices have started to tumble in many markets, fueled by a crisis in the subprime loan market and dwindling credit even for some wealthier borrowers.

The AP compared the 2006 figures with data from the 1990 Census for the 499 cities that were included in both reports, providing an analysis of long-term trends that helped create today’s housing slump.

The analysis showed that homeowners in nearly every city were spending significantly bigger shares of their incomes on housing costs. From 1990 to 2006, the share spent on housing costs increased in all but 13 of the cities examined. Nationally, the share increased from 21 percent to nearly 25 percent for homeowners with a mortgage.

Home ownership rates are among historic highs, at 67.3 percent nationally.

Article Source