Price Analysis for the Salt Lake City Metro Region
October 2007
Home prices in the Greater Salt Lake City Metro Region are still booming. The market was a late-comer the boom, but annual appreciation rates of around 20% have been quite exceptional. Job gains are continuing at a robust pace. Home price appreciation; therefore, will likely to continue to be in the positive territory, though, not likely at the recent double-digit pace. One consequence of fast-rising home prices will be fewer home sales. New-home construction will need to trend downward as a result.
Despite some media reports of the worst housing market conditions since the early 1990s, or even since the Great Depression, home prices are not declining at the local level. All real estate is local. Also, unlike past local housing downturns, which were accompanied with severe job cuts, the local and national economy continues to add jobs. Mortgage rates have also been falling recently and stood near a historic low of 6.5% for prime borrowers. Rates could be even more favorable in upcoming months as the Federal Reserve cuts the fed funds rate in late 2007 and in 2008 as there are clear signs of contained inflation. A revival in FHA loans, which had lost substantial market share to the risky subprime market, will provide funding for low-to-moderate
income households at much more attractive mortgage rates. If a modernization of FHA loans is implemented including lower initial payment requirements, higher loan limits, and risk-based pricing then there could be a surge in FHA loan usage. The outlook is positive. Homebuilders having drastically cut production will help minimize prolonged oversupply conditions. Further production cuts by builders, which is encouraged. On the demand side, job gains have added to the number of potential homebuyers. Historical relationships imply roughly one additional
homeowner for every two additional new jobs. Since the peak of the housing market two years ago, the local market added 55,000 net new jobs (August 2007 vs August 2005). After tapering off in prices, home sales could again begin to strengthen.
Price Forecast Scenarios
The home price forecast in the local region will vary depending upon alternative assumptions regarding mortgage rates and the sustainability of mortgage debt levels. Prices could climb 7.6% in 2008 (Path 1) if mortgage rates remain relatively stable at around the current 6.4% in 2008. The price increase largely comes due to the rise in income (assumed to rise at the same pace as in 2006) while mortgage rates remain stable. The current mortgage debt servicing capacity is assumed to remain at the current manageable level given continued job gains. If jobs are cut, then one assumption would be falling mortgage debt servicing capacity - but this case is not considered here.
Foreclosure rates have been falling in Utah - bucking the national trend. The decrease has also been occurring for subprime loans. But the prevalence of subprime loans (those loans with rates at least 3 percentage points higher than the market rate) soared in 2005. The data for 2006 is not yet available, but it is likely that similar mortgage origination activity took place last year. The recent cleansing of bad lenders will hold back homebuying, but it will be good for healthy market conditions over the long run. The market shares for GSE and FHA loans will surely rise as a result.
Summary
Sales activity has come down notably because of the fast rising home prices in Salt Lake City. The local economy is quite strong and is generating jobs at a solid pace. The national economy is also fundamentally sound due to rising exports and business spending. Consumer spending will be a bit weaker because of stagnant home price and its accompanying wealth impact. Also, the recent subprime fallout is a concern, though the shakeout will be good for the housing market over the long-run as the market eliminate bad mortgage lenders. Inflation appears to be contained. Both the headline and the core consumer price index decelerated to 2.8% and 2.1%, respectively, over the past 12 months to September. Better yet, most economists anticipate a further deceleration of inflation in 2007. Such an outcome could well lead the Federal Reserve to cut the federal funds and prime rates down the road. A federal funds rate cut is no guarantee of a fall in mortgage rates, but the signal that inflation is contained will force bond buyers to demand lower inflation premium, and hence, lead to lower mortgage rates as well.
With job additions continuing and mortgages rates hovering at about 6.4% as of early October 2007, the home sales are poised to slowly climb back. If, however, mortgage rates were to rise to 7.5% or higher, then the housing market would continue to limp along with the possibility that home prices and overall housing wealth could rise only minimally. If rates were to move lower, then the market will advance at an even quicker pace.
National Association of Realtors®