New study leads to predictions about positive and negative equity accumulations

Despite the housing bubble which has driven down price appreciation in many markets across the country, there’s good news to report for some Pennsylvania homeowners: A recent study suggests that in most of the large metropolitan areas in Pennsylvania where there were no bubbles, homes will develop positive equity accumulations by 2012.   

Philadelphia/Camden/Wilmington, Harrisburg/Carlisle, Scranton/Wilkes Barre, Youngstown/Warren/Boardman and Pittsburgh are expected to develop positive equity. Only the Allentown/Bethlehem/Easton area is predicted to suffer negative equity accumulations.

The initial spring 2008 study and its follow-up conducted by the Center for Economic and Policy Research and the National Low Income Housing Coalition examined the relationship between house prices and market rents since the now- recognized “housing bubble” (1996-2006) significantly changed the ratio between the two. Historically the ratio has been about 15 times rents for a long time (generally from 1895 until about 1995, with some movement here and there). In the late 1970s and again in the late 1980s, the ratio began to approach 20 times rents. By 2007, the ratio was 25 times rents.

Now, despite significant declines in house prices around the country, this ratio remains substantively higher than long-term averages. This is one of the major reasons why experts anticipate further declines in house prices before we bottom out. The authors attempt to use these changes to estimate when prices will stabilize.

Using the data in the study, the authors predicted that more than 60 of the metropolitan areas will accumulate less equity by 2012 if purchased now than homes owned six months ago. Thirty-three metropolitan areas will produce negative equity results by 2012 and all are in bubble markets.  Therefore, prices are still expected to fall significantly but urban areas without bubbles will likely accumulate positive equity.

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Tags: equity, housing

This entry was posted on Tuesday, March 10th, 2009 at 7:08 am and is filed under Economics. You can follow any responses to this entry through the RSS 2.0 feed.