Saturday, November 18, 2006

'Please Someone Explain This to Me'

A Sacramento Land(ing) reader recently made this comment:

I need some help understanding how a mid-level professional working in Sacramento making $55,000 per year can afford to purchase a home in, or around Sacramento. I see the ads and the something for nothing promotions. What I just can’t get around though, regardless of how much I try, is the fact if I take one third of my gross pay, and apply a market rate of interest to a 15, or 30 year fixed rate loan (I will not do neg am, etc.). The present value of those terms and payments is on average $50,000 less than the price of a home in the worst neighborhoods. (The Hood) How do we rationalize, or explain those basic facts away? Please someone explain this to me. Use all of the charts and graphs that you need.
Is anyone up for the challenge?


Gary Anderson said...

It is easy. We could be facing the biggest housing crash this nation has seen, or at least next biggest to the depression. Professionals making 55k need to rent and invest the rest. It is a no brainer. If the average guy would quit trying to compete with speculators, prices would cave and housing would no longer be expensive. If you want to waste your money, that is up to you, but I would, and do rent, in Reno.

Anonymous said...

I started to write a response earlier today, but I stopped because it sounded too obvious.

The truth is, CA has always been an expensive market for the 1st time, single buyer. It was that way 20 years ago and it is even more so today (although, 20 y ago you had to have a 20% down payment and that is apparently no longer true today). Without a pile of equity from a previous home, it takes two incomes to buy the median-priced SFR in CA. Single folks with average incomes can build equity by buying a fixer or condo.

However, the recent boom in Sac and almost everywhere else has priced out almost all 1st time buyers, whether they have one or two incomes. Even with historically low interest rates, exotic mortgages, and "stated income" loans, there aren't enough qualified buyers at the low end of the market to allow move-up buyers to move up. That's why so many deals with home sale contingencies end up being cancelled. The 1st time buyer supports the whole market. How does this get fixed? 1) incomes go up, 2) interest rates go down, and/or 3) prices go down. But, I think 1st time buyers with one income will always have a tough time in CA.

patient renter said...

The tone of the question seems like it can be summed up as: "how is it possible for a first time home buyer to get a home in this area?"

The only answer is to use an interest only, ARM, option-ARM, etc. loan, which as most of us know is a BAD idea in most circumstances.

Sacbee has a recent article: "First-time buyers make it happen". From the title of the article you would think something optimistic, like maybe it is possible for a first time buyer to make it. Read in the article down a ways and you'll see that the first time buyers in the article used interest only loans.

For those of us wise enough to stay away from these toxis loans, our only options are to wait until prices drop or move out of the area. Don't worry though, people who went for these types of loan products and fell into the greed and hysteria of a booming market will all get burned, and prices will continue to come down.

Gwynster said...

I went and viewed the Riva and the Ironworks complexes today. Remind me never to do that again please. I actually laughed at one salesperson. Poor sap is just trying to make a living in bad situation like everyone else.

In answer to the poster's question, I can say that it is impossible to buy anything yet unless you use some voodoo loan. My husband and I have saved a lot for a down, both make more then the median salary for the area and yet we still can't afford anything but a suicide loan.

I will say that I have finally had it with CA. My husabnd and I can damn near pay cash in KY or TN. I came home and told him it was time. Now to book some flights and scout out new jobs. Staying in CA where I was born is starting to make me bitter >; )

karl marx brothers said...

After living all over the nation & world I chose to come back to the Sac area for good .. just in time for the run-up in prices in 1999!
Thats ok though because after the first doubling of prices I refused to buy into the insanity & just rented & waited.
Yes, I was a ' bitter renter ' which Im proud of, but at least I'm not a 'screwd homeowner ' of which to be ashamed of ... !!

Anonymous said...


Anonymous said...

Evidently, I you want to be a selfish, demeaning, rude idiot, you can afford to buy 3 houses in Fremont.....

Anonymous said...

You cannot rationalize the prices. Get out of the state is the best answer. I'm down here in arizona waiting out the bubble up there.There is a buuble in areas here too but you can still buy a house for under 200k. Lived in sacramento area for 20 years and just cannot believe the overpriced homes up there. Why rent when you can go to another state and buy much cheaper and own your house?

Anonymous said...

For everyone who recommends leaving CA, I sympathize with your predicament and I realize that there may be other personal reasons for leaving CA, but as I've said before on this blog, once you leave CA, you probably won't come back unless a big pot of money suddenly comes your way. So think hard about your decision. I know several people who left and regretted it. The people who come here or were born here and find a way to stay are the ones who most appreciate this very special place.

AgentBubble said...

Here's an article I posted on the Sacramento Real Estate Statistics blog (

Last weekend, we had dinner with some friends who wanted me to look over their escrow documents and answer some questions about their property tax bill. I'm not one to pass up a good mean, so I eagerly accepted the invitation. They showed me a supplemental assessment they received from the county for around $3,000. I explained to them why they received it and that they are responsible for paying it, not the lender through their impound account. That was a pretty easy question and I was ready to eat dinner. But, they then told me they refinanced and didn't really understand the loan they received and had some questions about it and the property tax bill they received for the 2006/07 year. The property tax bill was over $6,000, and it was stamped copy, which usually means the lender will pay the tax bills from their impounds. I quickly glanced through their original loan docs, and they elected to have impounds instead of paying the tax bills and homeowner's insurance themselves. I noticed their refinance included an increase from the original loan amount by over $100,000. It wasn't until they said their mortgage payment went down after refinancing that I decided to take a closer look at their papers. Their previous payment was about $4,100 a month, which was an interest only loan at around 7%. After refinancing just two months later, their new payment was now around $3,500 a month. The interest rate was about 1/8% higher too. It was also an interest only note. Anyone care to guess why the loan payment went down? No, it's not an option ARM either. Here's the deal, and trust me, this one is a very sneaky trick the lender was involved with...

The owners built their own house. When you build a house, the county is usually a little slower at assessing the value and the county tax records sometimes aren't updated for up to two years after the house is built. This means the value of the land when it was purchased is all that shows as the assessed value when you examine the tax records. Lenders are aware of this and know that they should estimate the tax liability for the owners when refinancing from a construction loan. We built our own house twice, and both times the lender knew to take out enough money to cover the taxes for us in our impound account.

Well, this particular lender decided that he was going to estimate their taxes based solely on the value of the land as it showed in the current tax record. Yes, that's right, he gave them an impound account, but only for $800 a year. At this point, I asked my friends if they personally knew the lender that had set this loan up. Right then, the wife looked at the husband and gave him a dirty look and said "I told you something wasn't right with your friend. I knew he was out to get us." I looked at the husband and explained to him his loan. I told him, which I assumed he knew, that his loan was interest only for the first 7 years. The problem is he didn't know it was interest only. The look on his face was of complete disbelief and shock. I explained that he would be paying approximately $3,500 a month for the next 84 months (almost $300,000) in interest only and his loan balance would still be over $600,000 as when he took it out. Next I told him that his lender decided to only take out $79 a month instead of closer to $525 for his property taxes, which meant that the bill stamped "copy" for over $6,000 would in fact have to be paid by him. The good news, if you can call it that, is that "only" $3,000 of it was due by December 10th. He would have until April of 2007 for the other $3,000. The wife wanted to kill her husband at that time and they started to get into it right there in front of me.

The real issue here is that I don't think they could qualify for the new loan amount since they raised it over $100,000 and the lender knew this but wanted/needed their business. They make about $80,000 a year combined. Their mortgage payment should be around $4,700 a month for a fixed principle/interest mortgage with property taxes and insurance. A $4,700 a month house payment is nearly 60% of an $80,000 a year combined salary.

I wonder how often this same situation is being repeated throughout Sacramento...

Anonymous said...

This is what has always amazed me. Back when I was thinking of buying I thought the home was expensive at about 350K. That home was 500+K at its peak. I didn't buy at 350K because I couldn't understand how people with a median income can buy a house.

However, I think Sacramento's housing is booming because of all the people with equity from Bay Area homes. Since the Bay Area is much larger, I can see this trend continuing. You just need a trickle from the Bay Area to hold things steady in Sacramento.

A crash in real-estate will happen only if the economy takes a dive and people start losing jobs. Right now, with businesses flush with cash from profits, I don't think that will happen.

So it looks like a soft landing it is, but those days when someone can own a house on a single person's income are gone. You need at least 2 incomes. In th Bay Area, 3 or 4 friends get together and buy a house so that they can build equity. With population growth, I don't see that trend changing any time soon. Again, the key is the job market. If that goes bust, all bets are off.

Dreamer said...

Ok agentbubble it is a deal! SOLD!

If I take your client’s $80,000 per year salary and purchase your starting East Sacramento home, ah two beds one bath, one car garage built in the 40’s, at about $400, 000 for this dream house/dollhouse/cottage/charmer, here is what I come up with:

One third of gross pay per month = $2,200

Take home pay should be around =$5,250

My Excel 2003 template says that a 30 year fixed rate loan @ 6.25 on $400,000 is at $2,500 per month rounded.

Property taxes will be at least $4,800 per year, or $400 per month.

Utilities at least $150 per month.

PMI? for less than 20% down say $200 per month?

Health insurance, family of at least three $400

Food at least $400 per month

Car payment(s) $400 per month. No Escalade here.

Auto insurance $150 per month at least for two cars

Gasoline Oil $200 per month combined two cars.


I come up with average household expenses of $4,800 against $5,250 take home pay and $450 per month left over to cover everything else. Anyone, please feel free to correct me in these assumptions.

Gwynster said...


That is exactly what I mean. my husband and I make just about 78k a year with 66K for a down payment and we'd never have gone for that loan.

I'm so tired of having to compete with these idiots. And I'm sure the CA gov will feel the need to bail them out and I want mo part of that (everyone will call me an evil rep but actually i'm so far left of the Dems I'm Green).

Waiting and renting alone isn't what's drving me out of the state. I'm also pretty disillusioned about how UC does business. I'm watching the state turn into the upper-middle class vs. the working poor. It has to be better elsewhere.

No_Rush said...

I'd like to start off with a big "Thank you" for your time and effort to put this blog up on the net. It's nice to see people agree with me on this matter.

I sold my house in Folsom in October 2004 in and have been renting ever since. About every 6 months I go through "withdrawal shakes" and do some math to see if I can afford something here again. However, the math just never works out and then rent for another 6 months. But in my calcs, I use 30% of my gross as a payment limit.

What I've found out recently is that my 30% limit is dead wrong in this new era. One of my subordinates at work recently entered into escrow on a house in El Dorado county and he was very open with me about his financing deal and this is how his has been set up.

The first mortgage lender has allowed a 48% limit of his gross income to be dedicated to the loan payment. This was told to him by his mortgage broker. However, since he had limited down payment money, he needed a second. As a side note, the existence of this second loan is never told to the lender of the first. So now he has a total ratio of 58% of his income taken up by these two loans.

There were some other facts of the financing deal that were interesting as well. He rolled his cars and school loans into the total mortgage amounts as well. When he told me all of this I felt sick, but in his defense his salary is rising rapidly and in three years he should be comforatable. It's just the first three years coming up that I fear for him.

So now you know why a median income can afford a median house here. It's sad but the reality of the times. I for one will not participate in this craziness and so I miss out on gorgeous homes and perfect lots with a view to build on. It's maddening.

Gwynster said...

I did the math and sure we could buy something on 50% or more of our salary but we also plan on continuing to invest in other ways then just the purchase of a house (401ks, CDs, etc) because nothing scares me like illiquidity.

Ok I feel a little better about renting now >; )

AgentBubble said...

"A $4,700 a month house payment is nearly 60% of an $80,000 a year combined salary."

I made a mistake here...It's actually 70% of their combined salary.

Anonymous said...

The lure of Sacramento was cheap housing compared to the rest of CA...

The Speculation and Hype has driven prices outta sight, even in Oak Park as reported here and elsewhere...

One used to get into the market by purchasing a "starter" home or buying junk, like in Oak Park and fixing up the fixer upper...

but when the fixer upper is priced at $325k even in Oak doesn't make sense...

Move to New Mexico

Anonymous said...

We should press our elected officials to fix the CA housing problem once and for all. Simply put, the problem is the Bay Area has too many jobs (skyscrapers) and too few houses (building restrictions). When you get out of the Bay Area the situation reverses. The speculator run-up in prices didn't help.

To solve the problem, office space in the Bay Area needs to be converted to homes and those jobs transferred elsewhere (incl. Sac). Doing this helps not only with correcting the jobs/housing imbalances, but also reduces the need for new highways, highway bonds, etc.

Anonymous said...

This overpriced housing market will correct itself without government intervention. There's no reason to screw up the Bay Area to benefit the people who chose to live in 2-story stucco boxes with 4-car garages in the valley. If companies want to move to the burbs or the valley, they can make that choice on their own (and some have done so already).

jb said...


that story scares me to death. I think we are starting to pay the price for a society with poor math skills.

Dreamer said...

House payment issue solved.
Two words will solve the monthly payment shortage for a home purchase. Are you ready????
Think about it. You go to your white collar 10 hour per day job on salary and still come up short of enough money to cover your house payment. The answer is to come home and eat a sandwich, get out of your $200 dollar outfit (with dry cleaning), and shoes. Then go out to that LEASED entry level MZB or BMW, SUV, etc, that you just buried yourself in, and put the PAPA JOHN’S sign on the top. It should not be too hard, and now you are driving a nicer car than when you did the same job in high school and college.

Marin Family Guy said...

I agree. The government should do something about this situation. THey should raise everybody's wages above the median. Hey wait then nobody makes below median and we are all successful!
The idea of having the government FORCE people to CONVERT commercial buildings to residential and FORCE employers to relocate is called collectivism. Stalin tried it in the 30's and millions of people died.

No_Rush said...
This comment has been removed by the author.
Anonymous said...

1 word for you sir. Remember 1997 (or was it 95 or 96 ... whatever - remember that).
It will fall to the $100 a sqft range, and its over priced at that $$$. Land is over 100,000 a 1/4 acre lot. that has a loooooong way to drop. Clear into the 20K IMHO.

patient renter said...

Anon 10:13:

"A crash in real-estate will happen only if the economy takes a dive and people start losing jobs. Right now, with businesses flush with cash from profits, I don't think that will happen."

I think you're a bit out of touch with what's happening and what will continue to happen with the economy. Home builders, mortgage companies, realtors, and dozens of other types of companies that profit from home construction, upkeep and sales are all getting killed right now and will continue to get killed for the forseable future... many going out of business. There are signs of this all over the media with local and national companies reporting huge losses, and already starting to lay off employees.

The cover article on Mish's blog right now discusses this exact thing, and quotes research from the Center for Econimic Policy. The conservative estimated cited in the bloc is that 600,000 jobs related to housing will be lost due to the bubble. Again, this is the conservative estimate.

There will be no soft landing and if you ask the people who have already been layed off (see WaMu Sacramento) I think they'd agree.

Anonymous said...

The data and stories that I've looked at do not show that job losses in the housing industry have affected the economy at all. The data that you referenced, from Mish's blog, show the housing industry continuing to add jobs through June 2006. The unemployment rate in CA is at historic lows. If jobs are being lost in the housing industry (and one would presume that they are, just based on declining home sales, if nothing else), they are being absorbed by gains in other areas of the economy. I'm rooting for a hard landing, but so far, job losses in the housing industry don't seem to be part of the picture.

patient renter said...

Anon: 9:37

The Sacramento area didn't hit YOY median decreases until May. It's perfectly understandable that jobs were being added through June and even much longer than that since jobs are a lagging indicator and it takes companies a while to react to the changing market.

There are various statistics floating around dealing with the percentage of jobs created in California over the last few year that are tied to housing/construction/lending/etc industries, and the percentage is high, around 25%. If/when these companies need to downsize, there's no way that the rest of the job market can absorb a hit to such a large number of jobs.

Anonymous said...

I'm willing to bet that soon, we will see "numbers" from jobs created in Oct/Nov for the Sac area. Although what will be conveniently left out is that the x "number" of jobs created during that time period were seasonal retail jobs. I just love how you can paint a pretty picture even when leaving out the details. So with this said, I'm willing to bet that a) housing related jobs will be on the downfall and b) retail jobs growth will be up (all those big box and strip mall stores in the new developments finally opening up!).

Anonymous said...

In the last recession (1991/1992), about 20% of construction/real estate jobs were lost. That'd be about 20,000 jobs, raising the unemployment rate 2 ticks (from 4.+ to 6.+ %). I expect it to be higher this time, though, who knows.