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Mainers Behind in Home Buying

June 17, 2009 - PORTLAND -- Despite falling home prices, roughly six of 10 Maine households lack enough income to afford a median-priced home by today's lending standards, government figures show.

The gap between home prices and income in Maine widened during the housing boom that began early in the decade. It began to narrow following the peak in 2005, as prices moderated and income grew. That made it possible for more people to buy homes considered affordable, based on their earnings.

But there are signs now that the affordability gap may start to widen again.

Median household income, which had been inching up, may be leveling off or even falling in the wake of widespread job layoffs and pay cuts during the recession. And although median prices have been declining throughout the year, experts say there's little chance they will fall far enough to close the gap. Median indicates the midpoint – half of all homes selling for more, half for less.

"Affordability is still a huge problem in Maine," Bob King, a senior research analyst at the Maine State Housing Authority, told the Maine Sunday Telegram.

That assessment seems at odds with recent national outlooks.

Pending sales of U.S. homes jumped in April, and the National Association of Realtors says housing affordability is at a historic high. First-time homebuyers, lured by distressed sales, new federal tax incentives and, until recently, record-low interest rates, have been driving much of the activity.

The explanation, King said, has to do with differences in how prices and income behaved nationally compared with Maine over the decade.

Home prices were the biggest variable. They rose faster on a national average and have since fallen at roughly double the rate seen in Maine. Income also rose faster nationally than it did in Maine. Taken together, King said, Maine's affordability situation hasn't changed in equal proportion to the national figures.

At the request of the newspaper, King updated through early June sales price data for homes in the Portland-Biddeford labor market, collected by the Maine Real Estate Information System. Updated median income figures aren't available yet for this year, however; the most recent are the averages for 2008.

In relative terms, King said, homes today are about as affordable as they were in 2004.

"It's better than it was in 2007, but it's not good," he said.

A BUYING VOID

Here's why.

Median home prices in Maine rose 62 percent from 2000 to 2008. Median income, though, rose only 22 percent. In the Portland-to-Biddeford area, home prices went up 69 percent during the period, while income rose 22 percent. That leaves a void between what homes cost and what the average household can pay, when applied against an index used by the housing authority that calculates affordability.

The index is a ratio of home prices that are affordable at a household's median income to the area's median home price. It assumes a 30-year mortgage at prevailing interest rates and includes taxes and insurance.

To be affordable, costs must be no more than 28 percent of income. An index of less than "one" means the area is generally unaffordable.

For instance: The Portland-Biddeford market covers communities from Kennebunk west to Waterboro and north to Gray and New Gloucester. The ratio improved from 0.66 in 2005 to 0.77 last year, but didn't reach "one."

In 2008, the median home price in the area was $219,900. Household median income was $55,275. That meant 65 percent of households were unable to afford a median priced home. To be considered affordable, home prices would need to nosedive to $170,353, or income would need to jump to $71,352, according to the agency's calculations.

The affordability gap is wider still in southern Maine cities. In Portland, where the median home price last year was $217,000 and the median income was $43,064, more than seven in 10 households can't afford a house priced at the mid-point.

The most affordable community in the area – the only town where the index exceeded "one" – is Standish. The median home price there was $199,900 and median income was $63,426.

ON THE HOUSING INDEX

Maine homes tend to be more affordable where prices rose the least during the boom, even though median income also may be low. On a countywide basis, Piscataquis tops the housing authority index; the median home price there last year was $84,500, while income was $34,781. Somerset and Aroostook came in second and third most affordable.

Lincoln County was the least affordable; the median house price was $193,000, while income was $45,675. Cumberland County was a close second; the median home price was $225,000, while income was $55,558. York and Hancock were tied for third and fourth least affordable.

On one hand, affordability has improved in the first half of 2009, as prices fall.

In the Portland-Biddeford market, for instance, the median home price now stands at $205,000 – down nearly $15,000 from last year's average.

Median prices are expected to continue falling for the next year or so, according to Charles Colgan, a University of Southern Maine economist who helps develop economic forecasts in New England. A contributing factor, Colgan said, is the high percentage of foreclosures and distressed sales that make up the mix of homes being offered for sale. These troubled properties are exaggerating the fall of home prices.

But it's highly unlikely prices will fall far enough – into the $170,000 range – for the affordability index to reach "one" in southern Maine, he said.

A MOVING TARGET

Median income – the other side of the equation – is more difficult to nail down.

The forecast in Maine is for personal income to rise 1 percent this year, although wages and salaries are expected to fall by a similar amount.

This projection is a moving target, Colgan said, as the jobless rate continues to slowly rise. Median income may actually fall in 2009, he said.

Colgan's assessment doesn't surprise David Flaherty, president of Flaherty Realty in Brunswick.

In his market area, which includes Bath, Wiscasset, Topsham and Richmond, the median home price was $195,000 last year, and median income was $49,872.

Home prices would need to fall to $151,238 to hit "one" on the affordability index.

"Housing prices would have to collapse to close that gap," said Flaherty, a past president of the Realtor's information system.

Flaherty doubts that will happen. Prices are beginning to bottom out, in his view. One possible indicator: The number of Maine homes under contract was up sharply in May, compared to last year.

Prices will start rising again at some point, Flaherty suggested, but he doesn't expect income to grow at a comparable pace.

By TUX TURKEL, Staff Writer, Portland Press Herald, June 14, 2009


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