Housing Prices vs Income

"It is clearly a good thing if you own a home, because you're wealthier now; the value of your assets has gone up," said David W. Berson, chief economist for the Fannie Mae, a mortgage buying agency in Washington. "It's clearly not a good thing if you don't own a home and want to buy."

A government index (based on single family conventional mortgages of up to $359,650 that were bought by Fannie Mae and Freddie Mac) shows:

• Rhode Island ranked 10th in the nation and led New England in house price appreciation during April, May and June.
• Massachusetts 22nd nationally for house price appreciation, at just under 12 percent;
• Connecticut ranked 16th, at 13.6 percent.

Historically low interest rates have made it more affordable in recent years for Americans to buy houses, driving home-ownership rates nationally to nearly 70 percent. Now, as interest rates have begun to approach 6 percent, economists say, the question becomes: How much longer can middle-income Americans afford to buy?

• Rhode Island's single-family house prices have been rising at double-digit rates for five years, far outpacing the growth in income.
• Rising house prices have prompted buyers to take on bigger mortgages with adjustable rates or years of interest-only payments betting that their house value increases
• The longer that prices appreciate at this rapid rate the more certain there will be a turnaround in the market.

To gauge how far out of whack house prices are with income, Clayton-Matthews has developed an index that charts the ratio between the two over time. The housing affordability index he created for the New England Economic Parnership divides average house values (what homeowners told census takers their houses are worth) with per capita income. In Rhode Island, house values last year, on average, were 6.9 times per capita income -- ahead of Massachusetts and the national average. That's roughly the same ratio as during the last housing boom, in 1989. In the years that followed, house prices plummeted.

Clayton-Matthews remembers that time well. He bought his first home, a condo, during the 1989 boom -- and sold it, seven years later, for "tens of thousands of dollars less than what we paid for it." It could have been worse, he said. He and his wife had enough equity in the house so they could walk away from the sale with "a couple hundred bucks."