A contributing member of the Pennsylvania Association of Realtors, Jacob De Rooy, Ph.D of Penn State University’s School of Business Administration, provides insight into the statewide housing market. The following is an excerpt from his review.
Within Pennsylvania some regions are experiencing early signs of weakness as price growth is slowing or is turning negative. Economists have been predicting deceleration of house prices for at least the last couple of years, but they ate humble pie as prices continued spiraling upward. Now the signs of deceleration are finally appearing.
Here are the precursors of what will be the end of rapid price escalation and a return to a quieter home market.
* The average home price paid in some regions was lower in 2005 Q2 than in earlier quarters. These declines, although currently isolated, reversed the steady upward movement of the past few years.
* Higher inflation will certainly lead to rising mortgage interest rates and greater monthly loan servicing costs, thereby reducing affordability of homes.
* Among younger buyers, the rent-or-own decision in housing is beginning to tip toward renting, given high house prices. The relative attractiveness of owning, during the last few years, reduced demand for renting; as rents went down some rentals now look like bargains.
* Supply of housing has caught up with demand as developers hold inventory longer.
* Lenders and regulators are showing some concern for the increasing mortgage risk coming from the use of innovative loans that offer low initial payments. Examples of these riskier mortgages are 40 year fixed rate loans and loans with interest-only payments for a part of the loan term.
* Homes are becoming less affordable.
The affordability of homes in Pennsylvania took a dive last quarter. The fact should have grabbed some headlines, but it did not. The NAR’s state-wide Affordability Index for the Commonwealth went to 134. This was the lowest level in more than three years. One reason that homes are becoming harder to buy for the average consumer is that the average house price rose 13% in the last quarter, while average household income was flat. Compounding the issue was a slight rise in the mortgage interest rate and that lenders, becoming more conservative, were demanding much higher qualifying income from buyers. (While the average house price rose 13% from 2005 Q1 to 2005 Q2, qualifying income rose by 24%.)
NAR’s economists have traditionally been more sanguine than their peers in making forecasts. But what they now see ahead is sobering, although not alarming. Housing affordability will decline slightly as we go into 2006 and the rate of growth of new home prices will decline to +4.6%. That is actually below the long term average annual house price growth of close to 6%.
Main Line and Beyond 
Posted on September 30, 2005
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