Zillow: Price-to-Income Ratios Still High in Some Markets

While an August report from Capital Economics states that housing values overall are undervalued by 20 percent, Zillow reports that many metro price-to-income ratios are still above their historic averages.

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The current price-to-income ratio for the U.S. is 3.3 to 14 percent above the historical average, according to new research from Zillow.

The Seattle-based company's chief economist Stan Humphries says ""more often than not, home values will eventually come back in line with incomes, according to the historic norms of that market.""

Thus, he says, price-to-income ratios are a good predicator of what's going to happen in a particular market.

Zillow measured the price-to-income ratio for 130 U.S. markets and compared it to their historic averages-from the first quarter of 1985 to the fourth quarter of 1999.

Eighty-five of the 130 metros were still above their historic averages, while 42 were below. Three metros matched their historic averages exactly.

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In fact, 62 metros are more than 10 percent above their historic averages, and seven markets are at least 40 percent above their historic averages: Knoxville (40%), Eugene (40%), Richmond (42%), Boulder (43%), Charleston (46%), Honolulu (47%), and Virginia Beach (49%).

Fourteen markets have over-corrected from the housing bubble and are now more than 10 percent below their historic averages. The most extreme over-corrections occurred in Manchester, New Hampshire (-19%), Las Vegas (-25%), and Detroit (-35%).

Markets such as these might experience an increase in demand if buyers take advantage of low values, which could lead to price stabilization and ultimately, appreciation, according to Zillow's Svenja Gudell.

On the other hand, prices with still-high price-to-income ratios may continue to experience falling prices before they stabilize.

Stating another possible scenario, Gudell says markets with price-to-income ratios that linger above their historic averages might experience stabilization relatively soon, though at low values. Prices might remain flat until an increase in income brings the price-to-income ratio back to normal levels.

""Generally, for markets which have had some stability in price-to-income ratios, deviations from long-term trends tend to be followed by a return to historical levels,"" Gudell stated in his brief on the data. ""This has clearly occurred in all markets that experienced a pronounced housing bubble.""

To calculate price-to-income ratios, Zillow relied on the Zillow Home Value Index and information from the Bureau of Labor Statistics.