Could Lafayette’s red-hot real estate market chill?

Lafayette, Louisiana - For the past two years, the national media have portrayed the housing market as bad and getting worse.

Historically, housing markets are cyclical; however, more than a decade of unprecedented growth had produced a national housing euphoria that spawned speculation, rampant building, risky loans, over-borrowing and an ever-higher escalation of prices. In many areas of the country this long lasting era of housing prosperity began to unravel in 2005.

Interestingly, as had been typical in past downturns, this housing drop was not a result of the U.S. economy hitting a snag. According to the latest annual housing market report by Harvard University’s Joint Center for Housing Studies, the current housing downturn “has been driven by the market’s own excesses.”

This included an oversupply of new homes, speculative homebuyers who believed that the historically high rates of price appreciation experienced in many markets would go on infinitely, and risky loan products that encouraged consumers to buy homes they couldn’t afford.

So what does any of this have to do with Lafayette housing? Our local economy is booming. Housing sales remain at record levels and prices sure aren’t coming down. As has so often been the case, we seem to be experiencing the reverse of the rest of the country. To a large degree that is true, but there are some aspects of “the market’s own excesses” that plagued the rest of the country that we should pay heed to in our local marketplace.

Is there an oversupply of homes in Lafayette? Based on the overall level of demand the answer would be no, but there are indications that demand may be slowing. According to the Realtor Association of Acadiana Multiple Listing Service, the number of home sales reported from January through June 2007 over the same period of 2006 is up slightly more than 8 percent. However, the first quarter 2007 increase was up by 20 percent over the first quarter of 2006 while the second quarter of 2007 lagged behind the second quarter of 2006 by one-half of 1 percent. Clearly, demand in the second quarter has lessened.

Additionally, throughout the 1990s, the ratio of new listings coming on the market to the number of homes sold was in balance. In three of the 10 years of the 1990s, there were fewer homes coming on the market than were sold. In the other seven years, the ratio was between 1.1 and 1.2 homes being listed to every one sale reported.

Since 2000, the ratio of homes coming on the market to homes sold each year has consistently been in the 1.3 to 1.35 range. What kept the market tight was the increased demand that easily absorbed those increases in supply. Should the number of buyers in the marketplace diminish, obviously the result would be a chilling effect.

Is the current rate of housing price increases in Lafayette unsustainable? The median sold price for new construction in Lafayette Parish as of June 30, 2007, was $186,500. As of June 20, 2006 it was $181,000. That’s an increase of 3 percent.

The median sale price for an existing home sold in Lafayette as of June 30, 2007 was $166,000 versus $153,000 as of June 2006. That’s an increase of 8.5 percent.

A recent study conducted for the National Association of Home Builders sought to answer the question, “What happens to housing affordability in my city when house prices rise?”

Based on national underwriting standards, it is possible to estimate how many households that qualified for a mortgage before a house price increase, no longer qualify for one afterwards. Those are the households that are “priced out” of the market for a home.

The National Association of Home Builders applied this approach to 357 metro areas throughout the United States, including Lafayette, using typical assumptions about the mortgage, down payment, closing costs and median income for the metro area studied.

The result for Lafayette showed that for every $1,000 increase in median sale price, 287 households are priced out of the housing market. Based on an overall combined increase in median sale price of $7,600 in Lafayette Parish during the past year, about 2,180 households can no longer afford to purchase a home.

To those people, home ownership is no longer their American dream. If that number continues to grow, housing affordability may not only be their concern, but all of ours.

Bill Bacqué is CEO of Van Eaton & Romero Real Estate.