Will housing prices rise in 2011?

The true answer to this question is: who knows? The most important factor in any market is investor psychology, which can not really be predicted with much accuracy.

Rather than predict, we can at least see where a few housing statistics stack up against long term averages. The most thing to remember is that valuations always revert to the? mean in the long run - there is always a magnetic pull toward sanity.

There are three fundamental housing numbers to look at for comparison sake:

1. Price to income: Housing prices are based on what people can afford to pay, so to judge today's valuation, one can look at that ratio over the past twenty years. In 1990, the ration of price to income in the US was one to one. For the next ten years the ratio dropped to almost .9 to one. By 2001 the ratio had risen back up to one to one and continued rising until 2007, when the ratio hit 1.6 to one in the Case Shiller Housing Index. Since that period the ratio has dropped like a rock, and in 2010 it finally hit one to one again. In the past two years the reversion to the mean has been ferocious, and price to income levels are now roughly 6% above long term averages after being as much as 60% above the trend in 2007. The decline has been made up of 30% drop in home prices and just a 5% rise in average incomes since 2006. With unemployment high and looks like it is staying high large income gains are not going to happen, which means home prices are mort than likely to fall in order to bring the ratio back to reality.

2. Mortgage payments as percent of disposable income: The Federal Reserve chart shows that taking 9.5% as a standard, we are today a full percentage point above the norm. The Fed chart is important because it shows that a homebuyer's abilityto leverage up and drive home prices higher is limited by mortgage payments. In the early 90's buyers were over mortgaged, so they scaled back and housing took a downturn. Then ten years ago, the mortgage markets allowed this ratio to lever back up and people took immediate advantage. Today we are in another situation where people can no longer take on larger mortgages, so borrowers are trying to cut monthly payments, so the ratio starts dropping again.

3. Months of housing supply at current sales prices: The most simple of all concepts is Supply and Demand. As we all know, there are still more houses on the market than there are buyers. The Census Bureau indicates that we have an over supply of 10 months inventory, and that does not include what is known as 'shadow inventory' or homes that should be on the market but are not. They state that anything above six months inventory causes prices to fall. One solution is to stop building and that apparently is what is happening. Housing starts in 2010 averaged one third of starts in 1959. Excess inventory is being sucked up. We also could form more households? and the Joint Center for Housing Studies at Harvard seems to indicate that new formations will average 1.5 million over the next decade - yet another positive sign for the future.

All in all, since inventory is still up, prices will probably still stay lower for the next year, which is a good thing for investor/buyers. However, don't expect to sell your new house during that time until we see a turnaround in 2012.