March 8, 2012 — A new University of Virginia study analyzing the vitality of the housing market finds some good news, based on location, demographics and a bit of psychology.

Housing expert William J. Lucy of the School of Architecture found that in a majority of states, perceived housing values stabilized or increased relative to family income. "This confidence in home values by residents' estimates in these states should support steady and perhaps rising consumer spending," said Lucy, Lawrence Lewis Jr. Chair in the Department of Urban and Environmental Planning.

He cautions that owners' estimates of housing values may be overly optimistic. Nonetheless, they could translate into a boost for the economy as homeowners become more willing to reinvest in maintenance and improving their property – and to spend on other goods and services.

Lucy's report, "Housing Prospects in 50 States," looks beyond the usual metrics used to gauge the housing market. "An interpretation of obstacles to housing revival –unemployment, foreclosure and housing inventory – while pertinent, is incomplete," he said.

Rather, he analyzed relationships between house prices, income and rents; the differences between standard sales prices and distressed sales prices; unemployment and foreclosures; house values and paid-off mortgage debt; and the influence of changing age demographics and location preferences.

Lucy's comparison and analysis of trends show that, in many states, the housing market is considerably better off than the national average indicates. The national trends, he said, "are misleading and contribute to excessive pessimism."

For example, foreclosures, although down from 2010, remained high in 2011. But when distressed sales are separated from overall sales, standard house sales stabilized in 2011 and non-distressed home values rose in many states, Lucy said.

"Standard house sales prices probably were stable or rising in most states and many metropolitan areas during 2011," he said. "A number of studies have found standard prices are 15 to 20 percent higher than distressed sales, and Zillow found that standard sales were 28 percent higher than distressed sales, as a national average." (Zillow is a provider of consumer financial and property information.)

Another indicator of a strengthening housing market is the ratio of house values to rents. "High ratios signal a home ownership bubble in which prices had risen to unstable levels," Lucy said. "With such high housing purchase prices, fewer households would choose the purchase option over the rent option. This judgment would affect housing markets, prices and foreclosures."

Since 2007, house-value-to-rent ratios have readjusted to historic norms nationwide, he said. And Nevada, Florida, Arizona and California, the four states that had the highest foreclosure rates from 2007 to 2010, were returning rapidly to pre-housing-bubble norms of house value relative to rents. These trends indicate that "housing opportunities do not conform to a one-size-fits-all interpretation of national housing trends," Lucy said.

How homeowners feel about their properties affects consumer sentiment and economic activity. A surprising finding in the 50-state analysis is that between 2007 and 2012, perceived house values were stable or increased relative to family income in a majority of states, Lucy said.

"With 70 percent of economic activity flowing from consumer spending, over-optimism about house values should translate into more spending, increasing demand and supporting employment and other economic activity," he said.

Revitalizing the housing sector requires coming to grips with demographic and location changes, Lucy said.

For example, the population of 30- to 44-year-olds, where the biggest increase in home ownership historically occurs, declined by 3.7 million households in recent years. Those are prime child-rearing years for families, so demand for houses with four or more bedrooms has declined, leading to a glut of large houses in some areas. While 80 percent of those above age 55 own their own residences, most no longer want four-bedroom houses in the suburbs or exurbs.

Moreover, location preferences are changing. Younger people and retiring baby-boomers are choosing to reside in cities and inner suburbs, Lucy said, but developers and builders were slow to shift to this new preference.

By 2013, Lucy said, "housing revival will be contributing to general employment and economic revival." But the revival can begin sooner, he said.

What's needed? Lucy lists several things, including adjustments to mortgage loan underwriting standards; recognition by national institutions, banks and policymakers that one-size-fits-all policies are not the answer; continued low mortgage rates; a consideration of house value estimates nuanced by location; and attention to city markets created by altered age demographics.

– by Jane Ford