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2011-01-25 09:52:12
December Issue of 'Utah's Economy'

Since World War II there have been two severe contractions in the local real estate market; 1979-1982 and 2007-2010. The primary causes of the 1979-1982 collapse were severe overbuilding, 13 percent inflation rates, and 18.5 mortgage rates.

Compare these conditions with the current contraction; modest overbuilding, two percent inflation rates and four percent mortgage rates. Remarkably, in the current contraction we have the lowest inflation and mortgage rates in 60 years combined with 15 to 20 percent declines in home prices, these have done little to stimulate demand for housing. The current weakness in Utah’s housing market is due primarily to a loss of demand, rather than any imbalance on the supply side.

What does this mean for Utah's housing prices?

A look at the three measures of housing prices in Utah; Federal Housing Finance Agency Index, National Association of Realtors and Wasatch Front Regional MLS shows that over the past three years housing prices have declined between 11-21 percent, Table 1.

 

According to the local MLS the median sales price of a home in Salt Lake County peaked in the third quarter of 2007 at $256,000. Prices then drifted down over the next three years to $230,000 in second quarter 2010. However, the rate of price decline has narrowed substantially in the past two quarters as shown by the upward bend, Figure 2.

Prices will likely be unchanged through the first two quarters of 2011 with perhaps slight gains in the third and fourth quarters. Continued price pressure from foreclosures and short sales will prevent upward movement in prices in 2011. In the end, any meaningful rise in home prices depends on a pick-up in housing demand, which will require an improvement in the job market, higher levels of household growth and fewer foreclosures. These conditions will gradually be satisfied over the next few years but in the meantime housing prices are likely to remain stable, with more downside risk than upside potential.

Information taken from the December issue of 'UTAH’S ECONOMY' - a monthly report Produced for COMMERCE REAL ESTATE SOLUTIONS by Jim Wood, Bureau of Economic and Business Research University of Utah. Download the full report (PDF).

 
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