WESLEY CHAPEL, Fla. — Donte and Anjoli Hill postponed their honeymoon indefinitely and squirreled away cash wedding gifts in order to afford the down payment on the four-bedroom house they bought a few months ago in this Tampa suburb.
In the process, they weren’t just securing a home where they could start a family one day. They were helping the United States housing market return to normal pricing after 15 years of yo-yoing insanity.
A decade ago the market was unquestionably too hot. Four years ago it was too cold. Now, by a wide range of measures, nationwide home prices look relatively normal when compared with incomes, rents and other fundamentals — and are rising at similar low, single-digit rates.
In contrast to the periods of irrational optimism and pessimism, the market is settling into a balance in which buyers are comfortable spending what they can afford given their income and savings, but aren’t willing (or able to persuade lenders) to stretch beyond that. Among buyers there is neither a sense of desperation to buy now on the assumption prices will rise rapidly, nor of fear they will plummet.
For a while in 2013 and early 2014, national home prices were rising at a double-digit percentage rate, which if sustained could have rapidly led housing back to its bubble-era extremes. But the reality — of caution on the part of home buyers and their lenders — soon set in. In the 12 months ended in March, the S.&P. Case-Shiller national home price index rose only 4.1 percent, not much higher than the rise in Americans’ incomes and broadly consistent with longer-term trends.
“The market is coming back, but we’re not having astronomical growth,” said Thomas O’Bryant Jr., the chief executive of the Greater Tampa Association of Realtors. “We’re having the kind of growth that is going to be sustainable, and any time you have steady growth it’s much better than having bubble growth.”
Prices have risen faster than incomes and rents since the beginning of the last decade, and by those measures remain high by historical standards. But a downward march in mortgage rates has made housing more affordable on a typical American’s income. Add it all up, and Fitch Ratings calculates that American housing is currently 3 percent overvalued, which counts as sustainable in the firm’s analysis. (It was 26 percent overvalued versus economic fundamentals in early 2006 and 7 percent undervalued at the end of 2011). Similar calculations by economists at the real estate website Trulia this year found the national housing market was 2 percent undervalued.
As always with housing, each local market has its own dynamics. An online calculator from The New York Times, first published last year and newly updated, makes it easy to analyze a buy vs. rent decision incorporating the details about the purchase price, equivalent rent and other factors in your location.
Analysis from Fitch suggests that there are signs of excessive home prices in the Bay Area and other coastal markets, and of continued underpricing in parts of New England and the industrial Midwest. And there are plenty of markets where both rents and home prices have risen much faster than incomes over the last generation, so affordability is an issue in much of the nation for both for-sale and rental homes.
But to see how home prices are now lining up better with fundamentals, consider the transaction history of the yellow 2,700-square-foot house on Spoonflower Circle where the Hills have been busy installing new door fixtures and a ceiling fan with help from how-to videos on YouTube.
It was built in 2006 and sold for $304,388, then was in foreclosure limbo for years before selling for $141,000 last year while it was in need of improvements. The Hills, who married last September, paid $192,000 in March, and were able to move in to a house with new appliances and fresh paint.
A person earning the 2006 average weekly wage in Pasco County, where the house is, would have had to pay 73 percent of her income to buy the house, assuming prevailing mortgage rates and a 10 percent down payment. At its foreclosure last year, that fell to 22 percent, given the lower sale price and mortgage rates, plus inflation and income growth. The mortgage on the price the Hills paid in March equaled 29 percent of an average county resident’s income, about the level financial planners recommend.
After a long round trip, the price of the house in this particular middle-class suburban subdivision pretty much makes sense given the incomes of middle-class people in the surrounding county.
Donte Hill, 31, sells insurance for a living; Anjoli, 33, works in marketing. Their decision to buy after years of renting embodies the new era of balance in the housing and rental markets. They were conservative in sorting through what they could afford.
“You want stability, and so you want to make sure you can afford it and sustain the debt you’re taking on, so that you have something no one can take away from you,” Ms. Hill said.
She made spreadsheets to figure out what they could afford; he researched risks of things like sinkholes and flooding. By their math, renting a house with the equivalent of their mortgage payment would have covered a somewhat smaller house, and the total costs of renting versus buying — incorporating things like homeowners’ association fees — are roughly equivalent.
Their lender, they said, carefully vetted their income and where their savings from the down payment had come from. They were ultimately approved to buy a place for $215,000, 11 percent more than they ended up paying.
“They verified three years of employment and checked all our stocks, mutual funds, bank accounts,” Mr. Hill said. “They wanted to know where it came from, why we transferred it. That helps you feel comfortable that they’re looking at it in depth.”
A decade ago, Brenna Eddins, who was the Hills’ real estate agent for the home purchase, worked for a builder. Every Saturday morning, a line of people would be at their model homes, to ensure their names were first on the list to purchase newly released houses for sale. “It was the most frenzied situation I’d ever seen,” she said, “like a Walmart on Black Friday.”
In 2005, home prices in Wesley Chapel rose 29 percent, according to data from Zillow, a year when rents in the Tampa area rose less than 3 percent, according to Labor Department data, meaning that homes became far less affordable relative to a similar-size rental that year. Over long periods of time, those numbers would be expected to move roughly in tandem.
The collapse that began in 2007 created a different set of problems, as the lengthy process of foreclosures and short sales dragged out, and the only buyers in the market seemed to be investors looking to buy cheap houses to rent out. Wesley Chapel home prices fell 49 percent from mid-2006 to early 2012, a span in which Tampa-area rents rose 10 percent.
Now, investors are retreating as prices recover, and people buying houses to live in are returning — though not with the fervor and pay-anything sensibility of a decade ago. “I’m seeing younger buyers being more cautious and approaching this as a longer-term investment,” said Ms. Eddins, who works at Seven Oaks Realty. “I don’t see a mind-set of ‘we’ll be here a couple of years and we’ll flip it.’”
Still, the fact that the relatively balanced housing prices of today are dependent on mortgage rates being near historic lows does create some risks, argues Michelle Meyer, deputy head of U.S. economics at Bank of America-Merrill Lynch. If rates were to rise abruptly, it could sharply reduce housing affordability and push down prices.
It all depends on why rates rise, and how quickly. “If rates are rising because of stronger economic growth, the housing market should be able to absorb the hit and it will be perfectly manageable,” she said. “But if mortgage rates rise for external factors or for reasons not warranted by growth in the economy, it would be damaging.”
In other words, a reversal in the era of low interest rates and cheap money wouldn’t have consequences just on Wall Street. It could matter a lot on Spoonflower Circle as well.