Monday, February 05, 2007

A Little History

If you haven't already, take a look at these news headlines from the last housing boom/bust. Anything sound familiar?

More from Housing Bubble 101:

26 comments:

Real said...

Seeing how nobody wanted to touch these facts on the last thread, I thought I would give you another chance.

Here are some random thoughts and stats for Sacramento:

Average HH income of a home-owning HH: $87,919*
Average HH incomes of a home-owning HH is 48% higher than the statistical average for Sacramento ($59,548)

Median exising HH sales price:
$339K or 3.9x the average income. For larger cities, you will find a range of 4x - 16x.

Typical Payment on $339K loan (assuming financed on an ARM in 2005/2006 timeframe): $1,800 ($1000+ in interest)

% of HH Income assuming 100% of purchase price is mortgage: 25% of pre-tax income or around 20% of pre-tax income assume interest tax savings

Total home-owning HH in area covered by http://www.sacrealtor.org/documents/about/statistics/zipcodes_1206.pdf

= 296K

Amount of existing homes sold by year:
2006: 4.4%
2005: 7.3%
2004: 7.7%
2003: 6.5%
2002: 6.4%

Assuming that prices have receeded back to Dec. 2004 level, maximum number of homes that are underwater assuming 0% down on all homes ~11.7%.

For those renters thinking housing is unaffordable: is your HH income greater than $88K/year? If it is not, you are not likely to be a homeowner.

* source: US census data on total HH by zip code and 'average' income/HH per homefair.com
Income distribution per: http://www.comcastspotlight.com/sites/Default.aspx?pageid=11276&siteid=111&subnav=2

Assumes top 61% of the income brackets are home owners per HH ownership statistics (my assumption of top 61% - this is an upwards bias, however, average income is a downward bias as I assumed top income bracket is $200K-$250K.

patient renter said...

The Shiller graph in particular should be a requirement for everyone who wishes to discuss housing.

Real, welcome back. I'm not sure what argument or conclusion you're making with your data.

Real said...

I'm not sure what argument or conclusion you're making with your data.

My argument is that:
1.) Housing in Sac is still very affordable at <4x average income. If you can afford to buy the median priced home at 100% financing for less than 20% of your pre-tax income (at the average income), there is still plenty of room to move upwards in the market.

2.) Total sales of existing homes <11.7% of the installed base of homes over the last 2 years. I think we can safely say anyone that bought before that currently have equity appreciation in their home. Of the 11.7% that turned over, I would assume a very small % would be new home owners and hence the 'average' buyer likely has significant equity in their home via downpayment. Basically, these guys are not even close to being under water.

3.) Those renters making the 'median' income for Sacramento thinking that homes are over-priced because they can not afford them are 100% in that THEY can not afford them as the 'average' home owners has an income nearly 2x the median. So, if you think prices need to come down by 50% so you can afford to buy a home before the market is rational, you need to better understand your true ranking in the larger financial picture.

In summary, the '50% crash and don't catch falling knives' crew are pretty clueless when it comes to the reality of the market. A last piece of info that I did not put into the original post is that a vast vast majority of listing activity is for the newer non-established areas which typically require long commutes and undesireable neighbors. The areas that are established are holding up in value. The old saying is 100% - Location, Location, Location

anon666 said...

Real,

Interesting post, but why did you use average income of home-owning HH instead of median income? You're comparing it to the median house price. As you know, all it takes is a few very, very high income earners to skew the averages (weighting).

For example, if 1% of home owners earn $1 million per year and 4 % earn $500,000 and 95% earn $60,000 you come up with the same $87K average but it doesn't paint an accurate picture of what is really happening. The example is a little simplified but it is just to make a point about using averages. More people may be over-extended than you think.

Max said...

1.) Housing in Sac is still very affordable at <4x average income.

No it's not. What you said is housing is affordable to those who already own a house. It's not the same thing.

If the average income in Sac is ~$60K, then the "affordable" house should be priced at $235K. (3.9 * $60K, your numbers, not mine.) That would mean the median house is still $100K overpriced. Not quite 50%, but over 30%.

Some questions:

1. What percentage of Sac residents are house owners?
2. What is the percentage of house owners that earn less than $87K and bought within the last three years?

Your stats are less "random thoughts" and more cherry-picked to prove a point.

Real said...

Interesting post, but why did you use average income of home-owning HH instead of median income?

You can do it either way, go to the link that I provided. I use the top bracket for income of between $200 - $250K (the reports just says $200K+) so there are no high end data points skewing up the numbers as I foresaw the same issue as you (which is why I say there was a downward bias by applying the top end cap). In all, I think it paints a very accurate picture of the 'average' home buyer and how much money they have available for housing. Basically, a renter making the median income is probably priced out of the market - but I don't think that means the market is irrational unless you think there should be a 100% homeownership rate.

Real said...

Max:
"1. What percentage of Sac residents are house owners?"

Answer: 60%

"What is the percentage of house owners that earn less than $87K and bought within the last three years?"

Answer between 0-19.36% in terms of total sales. However, this is misleading as we do not know how many people sold and then re-purchased within the sale market. I would think less than 1/3 (7%) of the total transactions had the people leave the market and/or sold and are now renting.

What you said is housing is affordable to those who already own a house. It's not the same thing.

Housing is affordable if you have an 'average' income. Do you think you deserve to be able to afford a home straight out of high school with your job at Starbucks? If you do, this will be the first of many hard lessons you will learn.

The US is at an all time high for home ownership, if you think you can not afford to buy a house, you should first look at your skill set and how you rank in terms of income vs. others in the society. In the US, we allocate goods and services to those that can afford them - if you want a house but don't want to get a job that pays more, then move to Montana - there are plenty of houses there.

What my posts proves is that housing is affordable for those that have bought one already (these people are not under water) and that by income to median price metric, Sacramento is still very affordable compared to other larger cities.

patient renter said...

"What my posts proves is that housing is affordable for those that have bought one already (these people are not under water) and that by income to median price metric, Sacramento is still very affordable compared to other larger cities."

Assuming both of these statements are true, you're still leaving out a large group: the first time home buyers.

Sac is still not affordable for first time buyers, even those who make more than the median income. These are people like gwyn and myself, with college degrees, good paying jobs, etc. According to every standard/traditional housing affordability metric, it's just not affordable. I'm not sure why you seem so intent on proving otherwise.

norcal ray said...

Real,

you need to use median income and who is going to buy the starter homes if the median renter is priced out? If the starter homes cannot be sold, how do people move up? The only answer is price drops.

patient renter said...

How about I pose an "affordability" scenario. Traditionally 25% of gross income was the safe affordability threshold. More towards 30% could be considered aggressive. So let's assume the middle, 28% gross income for a home. Let's also assume we already own a home, which according to your data would mean our household income averages $87,919. A few more variables need to be assumed: interest rate of 6.5%, annual property tax of 3500, homeowners insurance of 481. With 0 down and 0 monthly debt (credit cards, student loans, etc) the amount of home the average existing homeowner can afford in this scenario is $272,074.

The average non-home-owner with an income of $59,548 could afford a $167,340 house.

Quick calculations done via:

http://cgi.money.cnn.com/tools/houseafford/houseafford.html

Max said...

What my posts proves is that housing is affordable for those that have bought one already (these people are not under water)

How do you know if they're under water or not? If they bought at the peak (~$380K), then they're down for sure. Also, your 3.9 metric jumps to 4.4 when you use peak prices.

and that by income to median price metric, Sacramento is still very affordable compared to other larger cities.

True. Relatively speaking, Sacramento is more affordable. However, we weren't speaking on relative terms. The fact remains that the median household income in Sacramento can only buy two-thirds of the median house (using your 3.9 metric). I wouldn't call that "affordable" by any stretch of the imagination.

Also, I'm a little confused about your $59,548 number. I've checked several sources for median HH income, including the ones you cited, and they list between $43,000 and $51,000.

Wikipedia
Homefair
Comcast
US Census

Sippn said...

Real, you've hit the nail on the head and you produced the data to prove it.

I've been telling these folks that its not the middle 60% of income that owns a home, its the top 60%....so Shiller hasn't taken this into account.

Max said...

I've been telling these folks that its not the middle 60% of income that owns a home, its the top 60%....so Shiller hasn't taken this into account.

It doesn't matter what scale you use, as long as you're consistent. If houses historically cost 3 times median household income, then shoot up to 6 times in a short period of time, you have to ask why.

You can use dollars, pesos, annual income, or bottles of Coke as your unit of measure for all I care. The fact remains: what used to cost a little, now costs a lot. The question is, "why did it happen?", or, "will it stay that way?" Not, "did it happen at all?"

Embdddsgnr said...

Real's data is compelling, and if you look from far enough, Sacramento does seem rather affordable in comparison.

I must agree with Max however, in that the ratio of home prices to wages in this area has increased significantly. It has almost everywhere really. When my own income stagnated while housing prices almost doubled, I eventually realized I wasn't going to get in. It's amazing how much better you feel once you've given up hope. . . . I think we all know the "why" at this point, but the "will" is the big question.

In the end I don't care what data anyone uses to justify buying or not buying. My view is that you buy when you can afford what you want, using traditional means. If you can't, then too bad. I wish there was a good tech job market in Montana. But the housing market will adjust itself as it always has. If we continue to have an influx of people from the bay area, etc. that drive prices up, then they may stay up. If nobody is buying because they can't afford too, then prices must adjust. Even in my beloved 95814/16/19 area codes, the prices are coming down, albiet slowly. I'm very interested in seeing what happens this year.

Cmyst said...

I'm with you, embdddsgnr

These formulas are all very logical, and I'm sure they're the types of things that bankers and financial agents should be using to determine whether a person can qualify for the amount of money they are asking for.

As for me, I figure I can afford a home around 300K on my income of 100K. I looked a year ago, and what 300K could buy was not worth buying. (Since the MLS has those nifty mortgage calculators, it's pretty easy to calculate your basic PI amount.)

Moving to another area of the country is surely a possibility for me, as my career is in high demand in every state. I'm willing to pay more to live here, and as long as I can at least rent a comfortable and safe middle-class home I'll likely stay. And frankly, I don't see myself being priced out of the real estate market for more than another 3 or 4 years, tops. California needs me, as much as I love her, and if people like me start moving away, that would be a very bad thing.

paranoid renter said...

>>>>>>>>>
It doesn't matter what scale you use, as long as you're consistent. If houses historically cost 3 times median household income, then shoot up to 6 times in a short period of time, you have to ask why.
>>>>>>>>>>>

Historically, wealth was never as concentrated as it is now in the hands of a few. This disparity is only growing over time. This means that things like real-estate will be priced out of reach for more and more people. I don't think we will ever return to the historical price to income for real-estate.

Diggin Deeper said...

One has to be very careful when throwing numbers and statistics around like Real does. Especially when they seem to nearly always come from a realtor organization or other agenda minded source. As compelling as it sounds, if the "starter home" market has no buyers because those buyers have been priced out, the weight of this segment will likely drag down the market of those that actually own homes. When the big builders have to give away amenities to the tune of $100,000+, what's to stop them from arbitrarily dropping the sales price on paper and burying those who've bought in the neighborhood over the last couple of years. Let's not forget that sentiment, value, and the price attached to that value are centerpoint to any argument for buying while prices are falling. There's no compelling reason to buy when sentiment and value perceptions remain negative. SAR, CAR, and NAR continue to scramble to find ways to prop up an industry that's in decline. Those looking to buy should complete their due diligence with balanced information from all sides. Dig a little deeper and the truth will be revealed.

Real said...

When the big builders have to give away amenities to the tune of $100,000+, what's to stop them from arbitrarily dropping the sales price on paper and burying those who've bought in the neighborhood over the last couple of years.

You hit the nail on the head but don't even know it. How long do builders continue to roll out new developments when prices are falling and they make no money on the sales? The speed with which builders stopped new construction (see new housing starts and abondoning land options) will hold up the market. Starter and low cost homes are only introduced to a market like Sacramento when a neighboorhood deteriorates to the point no one wants to live there or builder build $200K "affordable" homes.

The reason why you don't see $200K affordable new home construction - and even I would argue you could sell these like hotcakes - is that the LAND is worth more than $200K so the builders would rather pull back and not build until the market shows signs of life rather than use up these expensive land by building starter homes. For those thinking 'land is available all around Sacramento', you ignore the realities of special interests controlling zoning, freeway commutes lengthening, and flood zones. Believe it or not, but Sacramento has the same land scarcity issues as San Francisco, etc when it comes to land within a reasonable commute of downtown. To think the market will come down in price so the 40% of people that are renting can afford to buy is a pretty silly premise of any argument. The will remain priced out of the market just like they are now. My advice to them, either save for a down payment or find a nice house to rent and sign a long long term lease while you still have some leverage.

Diggin Deeper said...

"You hit the nail on the head but don't even know it"

Where have you been? The builders continue to build throughout the county even when the market continues to ratchet down. The catch is they will build to attract those who's perceived value is in line with current market prices. If a market's in decline, they will build lower pricing into their proformas and close their projects, make their fair profit, and move on. I don't need arrogance to tell me that I should buy when the market is giving signals to the contrary. There are probably more compelling reasons not to buy then there are to pull the trigger. Do all the math you want, it does not and will not change the perception to value equation. It doesn't change the rationale that if prices are falling, why buy until there's equillibrium between fair sellers and buyers. And what if the bottom is still years away and prices continue to fall unabated? Would the homeowner that's two years into his mortgage still have enough equity where it didn't matter if prices keep falling for the next few years? Contrarian thinking and investing is good, as long as we have our facts straight, and risks are commensurate with reward. There are many other macro factors to consider when worm has turned in the real estate market. All that realtor banter means nothing to the discerning buyer.

Bitter renter....Not!!! said...

I have very secure employment that pays well above the median. I have very little debt.

As much as I preferring owning a home, there is nothing compelling me to purchase a home at these artificially inflated prices.

I have crunched the numbers many times and repeatedly come to the conclusion that I would rather live rent "rich" than house "poor."

Until the market realigns, if it does, I'll continue to bank/invest the difference.

Max said...

Until the market realigns, if it does, I'll continue to bank/invest the difference.

There's the key right there. As a renter looking to buy in the future, you have to act as though you already own: If your rent is $800 and you could afford a $1200/month house payment, bank that $400. Not only will you have a nice down payment when the time is right, you'll also have the discipline to live within your means and your standard of living won't drop.

How often do you hear the term "house poor?":

Pic

Diggin Deeper said...

"As much as I preferring owning a home, there is nothing compelling me to purchase a home at these artificially inflated prices"

IMHO, when a market runs hot and straight up for 4 or 5 years, a healthy correction is normal. What's healthy? 20%, 30%, 40%? Who know? The market will indicate the time to buy. The artificially inflated prices you speak of are based on perception to value, and not some equation that gets run at the mortgage or real estate brokers office. You along with many, many prospective homeowners, who can afford to make the commitment today, are waiting because prices have outstripped perceived value by a bunch. Prices have spiraled, the market has fallen, and until it shakes out, what's the compelling reason to act? If the price of eggs rises to $10 a dozen, the buying public will either agree that its a fair price, or stop buying eggs until the price drops to a level of value that warrants purchase. The grocer might give you compelling reasons to buy, especially if he's overburdened with inventory, but the truly market driven individual will assess the value and refrain until the value appears once again. All these calculations are nothing but mindbending ways to put lipstick on a pig.

Bitter renter....Not!!! said...

Saturday, after returning from a wonderful long bike ride along the American River, I decided to treat myself to Starbucks.

While enjoying my Double Chocolate Chip Frapachino, I couldn't help but overhear a lady discussing her housing plight with a friend.

Although I truly wasn't trying to eavesdrop; it was my understanding that she and her husband are $100k negative on their interest only loan.

She went on to say that her husband is worried sick. She, on the otherhand, isn't too concerned because...the market will turn around by March....

She appeared to believe this as strongly as I was hoping that the beverage I had just enjoyed was calorie free :)

Real said...

She went on to say that her husband is worried sick. She, on the otherhand, isn't too concerned

If they do not plan to sell within the next year or two, should they be worried? I could be worried sick that I did not buy Google at $80/share, but I didn't so I move on and I don't concern myself with it. Until they sell, they have not lost anything. From a pure finance perspective, you could think about their home purchase like a bond, if interest rates go up or down, bond prices move in the opposite direction. However, if you hold the bond to maturity, you are not effected by the change in price that happen along the way. As long as they believe that house prices will rebound and they intend to hold for another year or two, they have not lost anything and likely will not lose anything long term except hypothetical profits if they had bought 1 year later.

Bitter renter....Not!!! said...

Real,

I believe (it remains to be seen whose crystal ball will ultimately be correct) that it will take much longer than "another year or two" to recoup a $100k "adjustment."

As long as they can cover their upwardly mobile monthly mortgage, who cares, what does it matter? It's not real money anyway; at least until you sell.

When I was in college I worked for a short while as a car salesman. One of the first things I was taught: People don't buy cars, they buy car payments.

I think the same could be said for many of the home buyers these last few years.

lexi said...

Bitter Renter Not!!!
"I believe (it remains to be seen whose crystal ball will ultimately be correct) that it will take much longer than "another year or two" to recoup a $100k "adjustment."


This is the first time in history
housing prices have gone up so fast and so much. Personally, I don't believe it will happen again.
At least not in our lifetimes. But
if everyone really saw the handwriting on the wall... it would
be panic selling.