Home Prices Approaching Those of Some Cars

If you've been new car shopping lately, you know that paying over $30,000 is not unusual. If you want a new all-electric Chevy Volt, for example, be ready to pay in excess of $40,000.

Then again, you could use the money to buy a house. That's right, a house. For what you could spend on a new car with all the options, you could buy a four-bedroom, two-bath home, across from a park in Indianapolis, Ind. Asking price, $45,000.

Also in that city, Zillow.com is advertising a "package" of eight homes for the total price of $355,000, which would not have purchased a “McMansion” four short years ago.

Earlier this month CoreLogic reported that U.S. home values had posted their largest quarterly decline since the first quarter of 2009, falling 2.6 percent as the temporary stimulus of the home buyer tax credits wore off. The Zillow Home Value Index declined 5.9 percent year-over-year in the fourth quarter to $175,200.

Less than a used car

But in some U.S. cities, homes can be purchased for much less than that. In Grand Rapids, Mich., a two story, three bedroom home on Congress Avenue is listed for $29,000 -- less than some used cars.

At 1,264 square feet, that works out to $53 a square foot. One builder's Website estimates the cost of building a new home at between $80 and $200 per square foot. That may be why some builders have a hard time selling new homes.

With the end of the homebuyer tax credits in mid-2010, home value declines accelerated toward the end of the year. When they were in effect, Zillow says the credits tempered home values declines -- nationally, home values fell only 0.9 percent from the first to the second quarter of 2010 -- but values resumed their decline after the credits' expiration, falling 2.6 percent from the third to the fourth quarter.

Delayed the bottom

"While the tax credits did not hurt the housing market, they did delay its bottom by interrupting the housing correction that was taking place," said Dr. Stan Humphries, Zillow chief economist. "Home value trends in the fourth quarter remained grim, but the good news is that these declines, while painful in the short-term, mean we're getting closer to the bottom. The housing recession is likely in its death throes, and we expect to see sales pick up in early 2011. That will lead the way to home values stabilizing and an eventual bottom later this year, although it will take several months of increased sales activity before values begin to respond."

If the housing market rebounds, it may be helped by some of the bargain prices on homes, unthinkable during the boom years of the last decade. But as buyers are being drawn back to the market, the problem facing sellers is finding buyers who can meet today's tighter lending standards.

And its not just higher credit scores and income requirements that are holding would-be buyers back. Many simply can't come up with the higher down payments now required by lenders.

No money down

During the housing bubble many people bought homes with no money down. Lenders often lent more than 100 percent of the purchase price, convinced the property value would continue to skyrocket.

As a result of the crash, some lenders are demanding a minimum of 10 percent down, to protect themselves if home prices continue to fall. The Obama administration is said to be considering 10 percent as a minimum on conventional loans.

But lenders appear to be encouraging much higher down payments. According to the Wall Street Journal, the median down payment in nine major U.S. cities last year was 22 percent, meaning the purchaser of a $200,000 home had to come up with $44,000, plus closing costs.

Absence of qualified buyers

Not everyone can afford that, of course, and the absence of those buyers has been a big factor dragging down home prices. As an alternative, a growing number of buyers have applied for FHA-backed mortgages, which still only require a 3.5 percent down payment. According to the research firm Zelman & Associates, FHA loans were used for close to half of all home purchases in 2010.

If Zillow is correct, and the housing market will bottom this year, something must push it off the bottom. It could be the rock bottom prices that make many cars look expensive by comparison.