Buying a home in Utah County is already more expensive than it has ever been, thanks to a double whammy of rising mortgage rates, and rising house values outpacing that of wage growth in the past few years.
Now it appears more homebuyers may be priced out of what one local economist says may be one of the least affordable areas in Utah for home ownership.
"Housing affordability in Utah County is in a worse shape than Salt Lake and Davis counties," Kelly K. Matthews, Wells Fargo's executive vice president and senior economist said in a study released Thursday. "Home prices in Utah County are almost as high as those in Salt Lake County, yet incomes in Utah County are noticeably lower compared with Salt Lake and Davis counties."
Illustrating what Matthews calls a "serious disequilibrium," Utah County's median affordability ratio was 0.8 in the second quarter, which indicates the median gross income in Utah County was 20 percent below what was necessary to afford median home sale prices in the second quarter, Matthews said in his Housing Affordability Analysis study Thursday.
"Investor and homebuying demand were too strong, and prices went up too fast relative to income. So there has to be an adjustment," Matthews said. He sees home prices in Utah County potentially dropping between 7 percent and 10 percent over the next two years.
According to the Utah County Association of Realtors, median sale prices in Utah County were $223,000 in June, up from $194,950 a year ago. The median household gross income in Utah County was about $58,850, according to the Wells Fargo study.
Affordability issues
Compounding the affordability issue is a shrinking number of cheaper homes in Utah County.
Only 6.5 percent of single-family homes in Utah County are available for less than $200,000, said Kevin Call, executive vice president of Utah County Association of Realtors. That's a much lower figure than two to three years ago.
"There's just not much workforce housing left," he said. That's housing that's affordable to joint households making 80 percent of the median gross income of $58,850.
"We're clearly seeing an affordability issue with more young families opting for condo properties instead of single-family homes," Call said.
For the first half of the year, condominium sales in Utah County jumped 1.9 percent to 699 units.
Keeping home prices high in Utah are a combination of factors including strong investor demand, robust population growth and job growth, he said.
"We already have a lot of demand generated from our own population growth and the strong economy. Creating that extra demand is investor demand, or people buying homes to resell them for a quick profit. Add to that aggressive lending practices for subprime and adjustable rate loans in the past few years. That had enabled people who didn't qualify for mortgages under normal circumstances to buy homes, therefore lifting home prices more than they should have," Matthews said.
But there are signs the market is starting to cool.
Although home prices haven't dropped, the number of homes sold in Utah County fell 24 percent in the second quarter and inventories of homes for sale are climbing. Statewide, sales of all residential units dropped more than 20 percent in the second quarter, while single-family housing starts or the number of permits taken by builders fell 18 percent.
"Either we make it more affordable for people to buy homes or the homes won't get sold. If people can't sell their homes, then their listing or asking prices will drop. But that hasn't shown up in sale prices yet," Matthews said.
While median sale prices haven't dropped in Utah County, median list prices or asking prices have fallen because of the increased inventory, Call said.
"There are more homes for sale now in the last six months. At the higher-end of the market, homes over $500,000 are starting to see more price negotiation."
If mortgage rates fell, or wages grew faster, or home prices dropped, that could help increase affordability, Matthews said. But if that doesn't happen, then the number of housing starts will drop even more because builders won't build homes that can't be sold, he said.
Encouraging the development of more affordable high-density multi-family housing is another possible solution, Call said.
"Cities and towns need to be more open to different types of housing. You can't continue to build only a-third or half-acre lot homes. You need more mixed-use housing projects so you can spread costs over many units instead of just one. That will help with the affordability mix," Call said.
Impact of subprime mortgage meltdown
While the subprime mortgage meltdown has pummeled the housing market nationwide, analysts in Utah say the situation isn't as dire here.
"Most homebuyers here are conservative. Most of them tend to go for fixed rate mortgage loans because they don't want to mess with adjustable rate loans in a rising interest rate environment," said Melissa Wright, president with SLC-based mortgage lender Axiom Financial. "Our exposure is limited because only 10 percent of our loans are subprime or high-risk loans."
The turmoil began when mortgage defaults among the riskiest borrowers began to spread as many weren't able to meet higher mortgage payments when their adjustable-rate mortgages reset at higher rates.
Higher mortgage payments plus tighter lending guidelines in recent months have also made it harder for buyers with poor credit scores and lower income to qualify for home loans, Wright said.
"But they can improve their credit situation by clearing up derogatory credit, or establishing new credit to make on-time payments. That will help them to move to a better mortgage program," she said.
The adjustment in mortgage lending practices will be painful, but necessary, Call said.
"It's a necessary correction because it helps to protect the homebuyer from foreclosures," he said. "Between 2000 and 2004, Utah had one of the highest foreclosure rates in the nation. Because of aggressive lending practices, people could buy homes but couldn't afford to make payments. But the tightened lending criteria will help lower foreclosure rates."
This story appeared in The Daily Herald on page D1.