Housing market still falling, or at the new normal?

Despite several years of falling home prices, the gap between income levels and home values in Hampton Roads is wider than before the housing boom, according to a recent report.

The median home value in the region during the first quarter of this year was roughly 3.67 times the median annual household income, according to Zillow Inc., a real estate data firm. Median means midpoint with half higher and half lower.

That's up from an average ratio of about 2.5 between 1985 and 2000, the Seattle-based company reported. Zillow called that 15-year period a time of equilibrium between incomes and home prices, and used it as the reference period for its study.

The bottom line: Home prices could continue to fall in Hampton Roads for some time, wrote Svenja Gudell, a senior economist at Zillow, in the report.

"Markets in which the price-to-income level is still substantially above historical levels may see further declines in home values before stabilizing," she wrote.

Another option, Gudell wrote, is that home values in markets such as Hampton Roads may stabilize but stay flat for a longer period of time, waiting for incomes to catch up.

"Interpreting price-to-income ratios is part art and part science," she wrote. "Generally, for markets which have had some stability in price-to-income ratios, deviations from long-term trends tend to be followed by a return to historical levels."

Of the 130 metro areas that Zillow studied recently, the price-to-income ratio in Hampton Roads was 49 percent higher than its historical average - the largest deviation in the country, Zillow reported. On the other end of the spectrum was Detroit, which had a ratio of 1.37, about 35 percent below its 1985-2000 average of 2.1.

Some economists agreed with the basic premise behind Zillow's report but were less certain about what will happen with the region's home prices.

"It is absolutely a sound theory that home values will be highly correlated to income levels over long periods of time," said Tom Law-ler, an independent economist in Leesburg, Va., who studies the national housing market.

"If you looked at data from the 1970s to 2000, home prices tended to go up a little more than inflation, but a little less than income," he said. "So real home prices had a slight positive direction."

Greg Grootendorst, chief economist at the Hampton Roads Planning District Commission, said that, despite the higher price-to-income ration in the region, he's not sure things will return to pre-boom levels.

"It's looking at the historical average, and the past certainly doesn't dictate the future," he said.

The Zillow report showed that, for the nation as a whole, the price-to-income ratio was 3.3 at the end of the first quarter of this year. That's about 14 percent above its 1985-2000 ratio of 2.9.

After Hampton Roads, other metro areas that had gaps much wider than 1985-2000 norms were Honolulu, Hawaii; Charleston, S.C.; Boulder, Colo.; and Richmond.

After Detroit, on the other end, Las Vegas; Manchester, N.H.; Merced, Calif.; and Stockton, Calif., had price-to-income ratios far lower than before the housing boom.

In Hampton Roads during the early months of 2006, the home price gap grew to nearly five times the median income, according to the Zillow report, before dropping to its current level.

During the past decade, income levels in Hampton Roads were expanding. From 1999 to 2009, median household income in Hampton Roads rose from roughly $42,000 to $55,000, according to U.S. Census Bureau data.

For its report, Zillow used census data on income, which includes all forms of pay, including housing stipends received by military personnel. It compared that data to its own home value index, which is created from home price estimates from metro areas across the country.

"We can quibble with whether that's the correct equilibrium or not," said Vinod Agarwal, an economist at Old Dominion University. "But regardless of how we look it, this report does show that prices are still too high in this area."

Agarwal said he suspects that prices will continue to decline in Hampton Roads.

"Are we still somewhat overpriced in this area? Yes. How much, we do not know," he said.

One thing holding up prices in Hampton Roads and elsewhere in the country is low mortgage rates, Agarwal said.

Despite home prices being considerably higher, low interest rates have had the effect of making monthly mortgage payments roughly the same as they were a decade ago, he said.

"From a housing-affordability point of view, in 1999 median payment for a median-priced home as a percent of household monthly income was 21.5 percent," he said. "In 2011, it was the same. And it's because of the mortgage rates."

He said that monthly payments are more meaningful to home buyers than the overall price of a home.

Ron Foresta, president of Rose & Womble Realty Co.'s resale division, agreed.

"All of these statistics I don't see as relevant," he said. "Are we going to be able to predict future home prices by this? I don't think so."

He added: "Right now, I do know this: If a house is priced properly, with the interest rates where they are, people are going to buy it."

Josh Brown, (757) 446-2318, josh.brown@pilotonline.com