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Are home prices still too high?

Some economists see the direction of home prices as a key factor for the fledgling economic recovery. The big question both sellers and buyers want to know is with prices down almost 30 percent over the past three years, have they reached the bottom yet? Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

“Good question. … Ask 10 economists, you may get 10 different answers. But one of the long-term statistics that economists have used to judge the level of home prices is to look at the average price of a home compared to average household income — that simple measure. And if you look over the last 50 years, let’s say, that number has been around four. That is, the average house cost four times more than the average household’s income. At the peak of the housing boom that number got up to 5.2. That’s why many economists say this housing boom is not sustainable. … Right now that number is 4.4.

“So we are clearly a way down from the 5.2, but we are still a little bit above that four. And that’s why some economists — not all, but some — economists think that on average housing prices may have a little bit of room yet to go down.”

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