Real Estate Outlook 2009: Thawing the Frozen Market

people are moving to the Puget Sound area, home prices are falling and selection is expanding. At first glance, these factors sound like they should help spur a new real-estate boom.

But there's a problem. Many still can't afford the mortgage payments, even at today's reduced prices. House values in the Puget Sound area have been out of whack for a while, and despite falling prices, they aren't going to drop back to more affordable levels.

According to the most recently available figures from the Northwest Multiple Listing Service, the median price for a single-family home or condo in King County was $380,315 in September 2008. The annual income needed to afford that home, assuming a 10 percent down payment, is $124,137, according to the Center for Housing Policy. In King County, the median household income ($63,500) falls far short of that figure. To afford the median-price home, a family would have to be very wealthy, or a group of people at the median income would have to pool their money.

"We're starting to see the [affordability] gap shrink," says Matthew Gardner, principal with land-use economic firm Gardner Johnson. "But while prices are coming down, the fact is that they still are out of reach for a lot of people."

Glenn Crellin, director of Washington State University's Washington Center for Real Estate Research, tracks the price of single-family homes through a metric called the "housing affordability index." In King County, he says, most people have a housing affordability index of 74, meaning that they earn only about 74 percent of the income required to purchase a single-family home. "For first-time homebuyers," he adds, "the index is 41 percent."

Wages would have to rise dramatically for this affordability gap to shrink, and few analysts expect that to happen. "The historical values will never be re-attained," says Crellin. "I don't think our market will ever get back to where it was in the early 1990s, when the housing affordability index, even for first-time buyers, was approaching 100."

Getting to a more sustainable index number, say 80, will require interest rates to remain low for a long time. "But more than anything else, it will require an increase in income levels," Crellin says, noting that, for the most part, incomes are only rising at the rate of inflation.

The other side of the equation, home pricing, isn't going to solve the problem either. Prices here would need to fall 36 percent for houses to be affordable for the median wage earner, according to a Wall Street Journal study of the national market. At best, real-estate industry watchers expect prices to fall between 12 and 20 percent.

For some Washington residents, these continued high prices may mean that those who rent will have to do so for much longer than they had hoped, or that a condominium will be their first home purchase. Those wanting to trade up to a bigger house may also have to wait until first-time buyers earn enough to purchase their houses.

The impact of the affordability index "certainly ripples through the entire marketplace," says Crellin. "But we do have an affordable condo marketplace. Even though the high-end market seems to receive all the attention, we have a significant affordable market and it does provide the best opportunity for first-time buyers."