Are houses cheap now? Chief Economist Irwin Kellner sometimes boldly goes where no man has gone before, to cite an old Star Trek phrase, and a current topic is one example: Kellner argues that U.S. home prices are now cheap.

The average home now costs about 2.8 times the average household income – down from four times household income during the housing bubble, Kellner noted. How cheap is a 2.8 multiple? You have to go back to 1986 to find home prices lower relative to median income.

What's more, home mortgage interest rates are much lower today than they were in 1986. In 1986, the effective interest rate averaged a whopping 10.2 percent, Kellner noted, compared to the 4.73 percent average for a 30-year, fixed-rate mortgage today, according to data compiled by the Mortgage Bankers Association.

Credit is flowing, but . . .

One major impediment to home purchases today? Access to mortgages, at least for the bulk of potential home buyers. The Fed's quantitative easing and the U.S. Treasury's toxic asset removal programs have prevented credit markets from collapsing, but credit conditions remained constrained: credit is flowing, but not at normal levels.

Moreover, the pool of adults and families eligible for mortgages today is considerably smaller than it was during the housing bubble, but as Kellner notes, for those who conform to the mortgage qualification standards of the 1980s, they might not find it much harder to secure a mortgage today than 20 years ago.

Those qualifying standards include: 1) a 20-25 percent down payment, 2) several years of documented income (usually U.S. and state income tax reports), and 3) a home appraisal that reflects current market value based on recent sales of comparable homes in the neighborhood.

Time to make the move?

So, the paramount question is, for those who can jump the hurdles, given that homes are cheap, in real, historical terms, is now a good time to buy a house?

Kellner doesn't overtly say it, but he strongly suggests that housing prices have not found a floor yet. He reiterated his call from a year ago for the U.S. government to create an agency that would be ready to buy any home at not more than 2.8 times the median income in each market, with the federal government renting homes, until the market improves in each market to sell the homes at a profit. (The price the federal government would pay would of course vary depending on house size, mansion to Cape Cod style, etc.) This will help to put a floor under home prices, he argued.

Another skeptic is Yale Economist Robert Shiller, co-author of Case-Shiller Home Price Index, who, while discussing the March index, told Bloomberg Radio he sees "substantial [negative] momentum in home prices." While underscoring that he doesn't give quantitative forecasts, Shiller added that, "Home prices are not stock prices. The real estate market is not efficient. It moves in trends."

And here's a third data point: the supply of existing and new homes. At current sales rates, as of February, nationally, there was a 9.7-month supply of existing homes and a 12.2-month supply of new homes on the market. Further, although home sales in both categories may have hit a bottom, the above totals represent an enormous inventory of homes: a normal, healthy market contains a 3-5 month supply of each. Tat points to, at minimum, a market with little pricing power; at worst, it suggests that further, substantial price declines are ahead.

Housing Sector Analysis: Housing affordability indicators and a U.S. median existing home price of $165,400 are inviting, but unless you must purchase a house or you've found your dream house that you can't pass up, on a price basis it makes sense to wait, as prices are likely to drop further. The market will receive data on March on new and existing home prices and inventories over the next two days, but one month will not change underlying conditions. It will take at least three or four months of data to discern a home price bottom.
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