What happened to our markets?  What happened to home prices?

These are questions that homeowners and home buyers are asking, and if you read in the media, depending on the source, you will see that “home prices are falling” or “home prices are steading.”  National trends in real estate are not necessarily representative of trends here in Utah.  But what is really happening in our market?

Taken out of context, month to month statistics can easily show that real estate prices are going up, or are steadying, or are going down.  However, when you look at the “big picture” of nearly 14 years of monthly statistics, you will see some interesting trends.

Pictured here, you can see what the actual MLS statistics what the average price of homes sold in Utah County has been over the past 13+ years.  Perhaps better than any other report, these MLS statistics show the real estate bubble.

Monthly Average Price of Homes Sold in Utah County

Wasatch Front Regional MLS Statistics

It doesn’t take a statistician to glean some very interesting information from this chart.

1.  From December 1995 (when the current MLS started keeping regular monthly statistics) through July 2005, there is a fairly steady trend in increasing home values.  In December 1995, the average home price in Utah County was $130,326.

2.  From 1995 through 2005, home prices appreciated by approximately 4.6% annually.

3.  The average home price in July of 2005 was $195,429.  In July of 2007, it was $289,031.

4.  In 2 years, average home prices increased by $93,602.  Or home prices increased by 48%.

What happened was easy lending.  Adjustable Rate Mortgages, Subprime mortgages, stated income loans, interest only loans (or negative amortization loans), and 100% (or even 125%) financing all contributed to money being very easy to get. Because money was so easy to borrow, anybody and everybody could get a loan, and real estate sales boomed, as well as the price of homes.

A lot of people made a lot of money.

In economics, however, what goes up must come down.

From April through September of 2009, home prices have been relatively steady.  This may look like a sign that real estate prices are steadying, but typically during those 6 months, real estate prices increase.  So, what happens to our local market now that we enter the winter season when prices seasonally drop?  Real estate values will likely continue to drop.

The government is doing its best to prop up home prices, to curb foreclosures, keep people in their homes, and to keep people buying homes.  But are these levels natural?  In Economics 101, we learned that in a perfectly competitive economy, then supply and demand determine price.  Any time the rules change, then the “market” is affected.  Going back to 2005, what happened that would cause home prices to suddenly increase by nearly $100,000 in 2 short years?  It was reduced regulation that permitted easy lending.

It is ironic that the exact regulations that were lowered to allow everybody the opportunity to buy a home made homes unaffordable.  Loans were easy to get, but now home prices are still unaffordable.

Based on these statistics, I would say that it will be a long time before we reach home prices when the market peaked in 2005.  Many people are underwater in their homes now, owing more on their homes than what their homes are worth, and with government stimulus programs coming to an end, and foreclosures on the rise, I think it is safe to say that housing prices drop even further.