Economist's Commentary: March 11, 2008

Take Another Look — You Might See Something Different

By Ken Fears, Manager, Regional Economics

Based on newspaper headlines, one would think that every housing market in the US is experiencing a major slump. In fact, this is not the case. The sharp decline in interest rates from 2000 to 2005 caused an explosion of sales and then prices in high priced markets on the East and West Coasts. The reason: low mortgage rates pushed down monthly payments which resulted in bidding wars. This boom was reeled in when affordability withered after 2005.

Why didn't we see this same sales and price explosion in the Midwest, Northwest, and Southwest? Employment matters more to home sales in these markets. Since the median home prices in these later markets are low, most homes are purchased when a buyer has a steady income and equity — buyers in these areas don't have to wait for a change in interest rates to unlock affordability. The high priced areas tend to have strong employment, but the median income and equity for these areas are not enough to cover monthly payments, so lower mortgage rates are the key to sales.

Employment growth has been quite strong in some of the markets outside the high priced Northeast and West. The economies of these portions of the United States were slower to rebound after the recession in 2002. As a result, they have experienced more employment growth in recent years than the rest of the country. In fact, there are many markets under the national median price where employment growth has far exceeded the national average. This reserve of new workers combined with strong affordability in these markets will, with time, find the equity and confidence to make purchases. The table below shows the markets that could see solid gains in home sales or home prices or both in 2008.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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