Where should real estate values be in Salt Lake County

Often you hear different theories in regards to where real estate values should be. The reality is often different then what one may hear. For years I've been under the impression that real estate is a function of supply and demand. You have a certain number of homes, and a certain number of buyers, and that will dictate value. There may still be some truth to this theory, especially when you look at over built Florida, California, Nevada and Arizona. But is it really just an issue with supply and demand?

Could the real issue be income? That's right, what you claim on your taxes each year. Income pure and simple is the barometer of what housing values should be in the United States. Until the late 1990's and early 2000's, income had been used primarily to determine a borrowers ability to pay their mortgage. With the advent of stated income loans, this barometer was chucked out the window, and we're now dealing with the aftermath of this mistake.

So how do you determine values and what should be a red flag when looking at real estate? Good questions, and there of course is more to evaluating a house then this simple formula, but this you may want to use as a baseline in evaluating real estate in the future. Most experts agree that one should take the median income in a particular region, and then find out what the median real estate values are for that same area. If the real estate values is greater then 2.8 times the medium income, then the property is in what most would consider a real estate bubble.

Example, in the state of Utah, 2008 real estate values in October were $218,000 for the state of Utah. However, the median income level was just below 59,000. If you take the income level, and times it by 2.8, you come up with $165,000. This would suggest that values are 25% higher then income levels in Utah as a whole. This of course is statewide, and each region in the state is going to be somewhat different, but as a whole you can see that values are still not in line with income. The other factor that has not been computed yet into these raw numbers is the shift in income that will occur in 2009. Many Utah jobs were related to the construction, real estate and mortgage industries. The median income number will most likely fall again from it's high in 2007 of $63,000.

So what does this mean? It means that Salt Lake and Utah values may continue to slide in 2009. I wouldn't be surprised to see an adjustment of 15-25%. The closer you get to the 2.8 factor in relationship to income will determine which housing values will drop the most. Those homes that are 5 to 6 times median income levels may suffer the most. I think Salt Lake's employment situation may save it from dropping 25%, but a 10-15% further adjustment maybe in line before normal real estate conditions can take place.