Merrill analyst sees housing price fix

WASHINGTON (Reuters) - Prices in the hot U.S. housing market are poised to decline as demand dries up due to the inability of first-time buyers to afford a home, a Merrill Lynch analyst said in a research report on Monday.

"The housing market has become so stretched that the affordability ratio for first-time buyers, the folks who drive the incremental demand in the real estate sector, has deteriorated to levels last seen in the third quarter of 1989," wrote David Rosenberg.

The price of an average starter home in the United States has climbed 14 percent over the past year, while the average income for the first-time buyer family has risen just 4 percent, Rosenberg said, calling that an "unprecedented gap."

In the third quarter of 1989, bids evaporated and new home sales dropped 20 percent the following year in response to lofty prices that first-time buyers could not afford, the analyst said.

The inventory of unsold new homes rose to a 8.4 months' supply from 7.1 months' and that inventory buildup led to a 5.8 percent drop in the median price of a new home, he said.

Low mortgage rates have supported the U.S. housing sector for five years, driving sales and construction to record levels. Robust demand has sent prices soaring, up more than 50 percent on average over the past five years, according to government data.

That has led some analysts to wonder whether the market is a bubble set to burst, although many economists note that price softness will materialize locally and not cause a nationwide decline in home prices.