Tuesday, January 29, 2008

Central Valley Real Estate's Elephant in the Room: Affordability

From the Modesto Bee:

Northern San Joaquin Valley home prices have plummeted, but they haven't fallen enough to become affordable for most wage earners, a new study shows. Home buyers must earn about $98,000 a year to comfortably afford a median-priced house in Stanislaus County, the Center for Housing Policy reports. But workers in only one of the 64 occupations studied -- construction managers -- earned that much last year. Even two-income couples with good jobs -- such as accountants, police officers, school teachers and firefighters -- barely can cover ownership costs, the report showed.
In calculating what's affordable, the study assumed not more than 28 percent of household income should pay the mortgage, property taxes and insurance. It also assumed buyers had a 10 percent down payment with a conventional loan.
Houses weren't always hard to afford. Anita Hellam, executive director of Habitat for Humanity for Stanislaus County, remembers during the mid-90s "when the majority of the working families living in Modesto were able to find affordable housing."
Click here to read the study. The amount of income needed to purchase the median-priced home per their methodology:
  • Sacramento: $110,090
  • Stockton: $113,683
  • Modesto: $98,003
  • Yuba City: $86,569
  • Merced: $90,816
From the HomeGuide123.com (hat tip Bay Area Housing Bubble)
Historically, median home prices and median incomes have always shared a close relationship. From the mid-1970s to 2001, the historical ratio of median housing value vs. median household income was consistently between 2.6 and 3.0. What this essentially means is that median home prices were (on average) 2.8x the median household income for the last 30 years. Using this 2.8 formula, it is very easy to estimate what median home prices would be if the most recent bubble never happened.
There is no doubt about it. California was hit hardest by the housing bubble. Although prices have always been slightly elevated in the state, they grew by leaps and bounds during the housing boom. The result is that home prices are 61 percent higher than they should be given California's median household income of $56,645.
From the Auburn Journal:
Placer County Association of Realtors statistics for December show a $357,000 median value for the 226 homes sold in December -- down from $366,000 in November, and $439,700 in December 2006. The median value is well off the peak of a red-hot August 2005 real estate market in the county, when it soared to $517,500 and 486 sales were closed.
Lyon's report by Trendgraphix showed the average price per square foot in Placer County decreased by three percent during the month of December to $194. El Dorado County's was $204 per square foot and Sacramento County's was $177. The Trendgraphix report's overall totals for the tri-county region of Sacramento, Placer and El Dorado counties mirrored the Placer County numbers. Sales were 22 percent lower than December 2006 sales and the December inventory of 13,181 homes for sale was 28 percent higher than the December 2006 inventory.
Joe Newton, Association of Realtors president, said Monday that while the market has been awash with negative industry statistics, the downturn has meant clients buying and selling homes "rely on us even more as trusted advisors."...Placer County will continue to be a destination for people as the market sorts itself out, he said, noting amenities like nearby wildland areas for hunters, rafters and fishermen.
From the car.org:
Home sales decreased 33.4 percent in December in California compared with the same period a year ago, while the median price of an existing home fell 16.5 percent, the California Association of Realtors reported today.
Sacramento Median Price Change: -21.5%
Sacramento Sales Change: -19.0%

CBS13: Squatters Take Advantage Of Foreclosed Homes
News10: Recovery from Foreclosure Takes Time

From the Stockton Record:
New-home sales last year in the United States were in lock step with those in San Joaquin County - both saw annual sales drop by about a fourth from the previous year...[T]he average selling price of a new home in San Joaquin County dropped 12 percent over a year, from $519,350 in the fourth quarter of 2006 to $456,956 in the fourth quarter of last year.


Diggin Deeper said...

It might not take too long to drive prices down within the affordability of the median income family.

The credit crisis might just put banks in a no win situation.

Mortgage holders (banks) are now responsible for the escalating price reductions we're seeing and will witness in the near future. Most are tied up in the credit meltdown where cashflow and liquid assets are the only things keeping the doors open (that and finding some overseas sheik that will take the bait). The overhanging inventory in REO's, along with the onslaught of an greater foreclosure scenario on the horizon, will force banks to fire sale REO assets before we're done.

Inventory seems immovable, as weak sales are met with a equal or greater amount of new REO's placed in inventory each month. Something's gotta give as the banks are being short-squeezed into a position of liquidation rather than a temperate and orderly sale of these homes. They've tried for months and the plan hasn't worked! If they don't clear the decks soon, banks will have to accept an even greater inventory added to the non-selling inventory presently on hand. They're fighting problems on too many fronts and unwanted inventory is the least of their concerns.

Bernanke understands the pressures the banks face and is doing everything in his playbook to avoid a Japanese style meltdown that took 16-17 years to unwind. He doesn't look too successful up to this point.

You can be assured that banks will control the price drops from here on out. The more desperate the bank, the better the deal, and the easier for the median income earner to afford.

Let the unloading continue...

Jacob said...

What happens when they have their fire sale and still cant sell it all. Then the banks turn on each other and sell at any price and will still have inventory.

Affordability is only one problem. The other big problem is inventory. There are so many areas that were overbuilt that no price is low enough to put a person in each home. And investors will only obsorb so many once they realize that they cant get renters cause there aren't enough people to go around.

I have no pitty for the banks. They gave people $500k with nothing more than a signature. If they wanted to find out what happens when you loan money to people that can't pay it back there were cheaper ways to go about it.

They probably could have enrolled everyone in the USA in econ 101 at the local community colleges for about $1 billion. A lot less to enroll just the people in charge of lending out money. lol

Husmanen said...

DD, I am too seeing some of the banks lead the way. First, I thought it would be the builders but that hasn't panned out like I thought it would yet. At least not in EDH or Folsom, especially Elliot in Folsom.

But the banks seem start to see the immovablility of the sales and it is based on PRICE. Some banks are now becoming more aggressive. Case in point, 117 JOHN HENRY CIR, Folsom, CA 95630, Sqft 1754. MLS #: 80009331.

Asking price $359k.
Sales History
06/29/2005: $484,000
07/26/2004: $410,000
01/31/1994: $176,500

Rents are between $1,550 and $1,750 for similar homes in the immediate area. The PITI (5.78%, 30yr, 10% down, no PMI (BofA)) is about $2,250. After tax (28%) this puts it in the ballpark of $1,650.

Of course, there are other things to consider besides the rent to PITI but it is a good rule of thumb. Depending on how complicated you want to get, also consider that rents have a lot of downward pressure right now.

PeonInChief said...

A couple of notes on the housing affordability study: it's much cheaper to rent than to buy here. And rents aren't increasing very much here either. (In fact, I've noticed that several for-rent duplexes in my neighborhood have been waiting for tenants since before Christmas.)

Second, buying and renting are both cheaper in Portland than they are here. Now much of Oregon is politically appalling, but Portland and Eugene are fine places to live. (DH and I are thinking of retiring to Portland.)

One of the problem with affordability studies is that they assume that everyone should spend the same percentage of income for housing. This isn't true. People with incomes of, say, $250,000 a year can spend half of their income on housing, should they be so inclined. They'll still have $125,000 for other expenses. But people who make $50,000 a year can't afford to spend $25,000 on housing and still meet their other expenses. (And, of course, people who make $15,000 can't afford to spend any money on housing, but that's a different issue.) What this means is that San Franciscans can afford to spend a greater percentage of their incomes on housing than can Valley residents. So our affordability is even worse than it appears.

aggiealum said...

I'm looking in Woodland and have been crunching numbers for awhile. Median household income $56K (according to Money Magaine's 2007 list). Using the homeguide123's factor of median housing within the city being 2.8x median income, the median home price in Woodland should be $158K. According to the same Money Magazine article, the median home price was $443K or ~7.9x median income. Now, not knowing with the median house size is in Woodland, I'm having trouble deciding whether the asking prices of new homes there are reasonable. Resale homes are asking about $175/sqft. There is a new development in Woodland and the asking price is approx $145-155/sqft (add another 10% off, which ends tomorrow, and it's about $130-140/sqft). One builder is able to release a handful of homes each month (3 or 4). Now I just missed out on one floorplan for this month's release (which happens to be the most popular floor plan), and they're saying they won't have one for Feb or Mar, and don't know what's in store for Apr. I feel bad b/c of all this analyzing of the market I've been doing that I didn't just want to jump in w/o doing more number crunching. For example: median income vs median home, school district, asking/sale prices of comparable resale homes, etc. The wife was ready to put the deposit down that day, but she knows that she just wants "a" house, but she didn't let her emotions be her case for buying now. Anyway, what do you all think (especially Gwynster who is knowledgeable in this particular locale)? Did I "miss out" on the builder's scheme to lure people in with what seems like a deep discount only to create a false lack of supply by telling these people they have none left? Then raise the prices as more people feed into the demand? Or will the price be at or below in 3 months? Oh, the mello roos in this area has been the deal breaker many times ($229/mo with the largest bond capping at 1% increases each year for the life of the bond: 30yr, but no HOA).

Jacob said...

The builder is likely not trying to create false demand and is more likely being cautious and building what they can sell and no more.

Wait until next year after all the resets due in 08 occur. That's my only advice. We will hit a bottom at some point, but it wont be 08 for sure.

The problem with the 7x income homes or 10x or 70x (seriously I read an article about a college student that got 700k in loans on 11k salary) and also the high mello roos is that nobody want buying for the long term. So who cares how affordable it is or how insane the taxes are when you will just sell in 6 months and make 100k.

now that the party is over prices will return to the mean. If the mean dictates a price of 150k then that is where we will get to (adjusted for inflation). Sellers, lenders, and builders will kick and scream on the way down, but they can't defy gravity forever.

Buying Time said...

Speaking of affordability the WSJ had an article a bit back about how wealthy folk are coming into small towns and buying up all the nice real estate to put in their portfolio of playgrounds. Then the people who actually live there (and have for generations) can no longer afford it.

I am becoming even more disillusioned with the consequences of free market capitalism lately.

Cmyst said...

The problem with the free market is that it isn't, really. There is always cronyism, entrenched interests, graft, bribes, etc.

There are homes that I like that I could easily afford now -- well, if I could still get a loan with a limited down payment. And diggin is right: those homes are REO, and they've been priced very aggressively. These homes are easy to compare, too, because they tend to be in the same neighborhoods and the same style/builder. There just isn't any big difference, but the REO will be over a 100K lower in price. For me, the impetus to buy will probably come a ways before the bottom is reached because I want to live in the house for at least the next 15 years and the style of house I want is very specific. I have actually come very close to trying to qualify for 2 of these houses in the last month. At some point, the price will balance out with the limited availability of this specific type of house.

Diggin Deeper said...
This comment has been removed by the author.
Diggin Deeper said...

Time will come when pricing just won't budge any further, when replacement costs are such, that prices offered equal an instant equity position vs. building a comparable home. Where's the level in today's dollars...$75, $80, $85 per sq ft?. I am a buyer when replacement costs offer me instant equity and a generous insulation against future price drops...if there are any.

The same for interest rates that the Fed gods are playing with. Bernanke's basically firing rubber bullets at a problem that would take a cannon to do the job. Any reasonably intelligent person will conclude that lower interest rates got us into this jam in the first place. Deja vu as we standby and watch the same game unfold.

Pricing structure has to be reconfigured, incentives granted, permitting costs within reason, land costs within easy reach, to meet a consumers ability and willingness to buy. Obscene profit (if there is such a thing) becomes fair profit again. All the extra fluff is stripped off to meet actual consumer demand. The material costs to build a home should be the same here as they are in Memphis, Tn. Labor should be too, as we have an abundant population of those willing to work at fairly low wages building our homes today. What's the ratio of Labor to Material...40/60?. SMF could probably shed some light here. The point is all the ups and extra's over material/labor/profit cost have to be recast in order to meet consumer affordability. Even then, those numbers can only be watered down so far. No one is going to give the land away, city services come with a cost, etc. So there is some pricing level where reasonable meets a willing consumer. I'd like to know where that level is because I'm an immediate buyer.

I've commented before, there'll come a time when a good deal and a great deal on real estate is narrowly measured by a few percentage points. Imho, there will be a frenzied/panic stricken bottom followed by a structural replacement cost bottom. I'm counting on human nature to be true to form. I don't think its years away.

Sippn said...

agg... forget the median price vs median income thing... because your looking at new.

If you're willing to look at everything, resale homes, etc. you'll find stuff closer to the numbers. Don't forget that many buyers in Woodland come from areas with higher incomes, making the median vs median measurement immaterial.

When you get specific about what you want and you are competing with others of the same mind set, that creates more demand than supply.

Gwynster said...

Just a couple of things on the Woodland question.

1) the developer with the lots of customs has started putting them on the MLS with some nice reductions. If they keep this up, they will discount smack into Centex's market which Centex will not be thrilled about.

2) I'm already seeing some defaults in KB portion of the community. Once the competition gets cooking between the REOs and the exsiting stock there, it will get competitive fast.

3) the mello roos is beyond stupid. If I were to even consider anything in Springlake, the seller would have to agree to pay off my portion of the MR fees completely. But then I have other questions/concerns about MR so I just avoid it all together.

4) The community is only half built. I've heard that remaining developed but unbuilt lots are being offered for sale now. Once the squeeze really hits the city, you have no idea who they sell them to and what those projects will look like.

5) resales in Woodland are really declining nicely. I see house after house listed for 180 to 240 days, dissappear, then come back as a REO. What was a good neighborhood may not be that great in 6 to 12 mos.

6) Davis - Woodland is Davis's redheaded stepchild. If prices keep going down, it forces Woodland down then the trend reverses. We get pressure from West Sac too but that's almost all on rentals rates. It's a nasty positive feedback loop. I've heard no end of griping about it here in Davis (which as you can all suspect brings a secret smile to my face).

These are my opinions and what I've been seeing. Does that help a little?

Gwynster said...

damn blogger ate my second post.

Sippin, those people only exist in your fantasy world. The people that have been buying in the Springlake area are scrapping by on 50+% DTI if they are lucky. Go back to talk up an area you actually know something about.

smf said...

"SMF could probably shed some light here"

Only some, as I get more involved in the design part rather than the construction side.

The false demand created plenty of opportunity to allow prices to rise.

High material costs could add 20% to a project. Some materials went up 300% during the boom.

High land prices (now dropping dramatically) added another good percentage.

The demand also skewed the labor curve, as even before the bubble construction hands were short.

With a more normal market, we have already seen the prices start to come down, including raw land.

Remember, builders HAVE to build in order to stay in business, so construction will continue till a balance is reached.


Woodland is still Woodland, regardless of current circumstances. Davis was always more expensive (by a good chunk) than Sacramento.


Demand means crap right now when supply exceeds it by significant factors.

When I originally purchased our home in 2003, MLS would typically show 40 houses for sale. Now it tops 120. Demand did not increase by 200%, and housing excesses are not shaken off in a few years.

Diggin Deeper said...

Economy nearly stalled in 4th quarter


At a .6% 4th Qtr '07 growth rate, GDP is actually negative when we adjust for the 2.7% inflation for the same period. While the govt makes a case for muted inflation, minus food and energy costs, overall costs are outstripping the economy's ability to show real growth. We probably entered recession sometime late 2nd or early 3rd qtr of '07. Has the Fed already accounted for this in the emergency cut last week? You gotta believe they had these numbers by then.

This confirms to me that we are now in a recession, and the Fed is once again, behind the curve. This will definitely change buyer activity in this area.

Gwynster said...


I have no illusions about Woodland. It is the Walmart nation.

It is overbuilt on new and they had lots of speculators in 02-05 and some in 06. The REOs are driving the market now.

Those new units were built to challenge Davis. But as prices drop in Woodland, it becomes more desireable for the budget folks then Davis reduces and Woodland sales decline and another round of price slashing occurs. This effect happened on the way up and is happening on the way down.

The number of REOs in Woodland is staggering and there is a flood coming. Davis just started to get theirs last summer and fall and now the pressure is on.

That's what I mean by a positive feedback loop.

Patient Renter said...
This comment has been removed by the author.
Patient Renter said...

" am becoming even more disillusioned with the consequences of free market capitalism lately."

How's that? We don't have free market capitalism - we have ridiculous market intervention, bailouts, subsidizations, etc. Just the existence of the Federal Reserve prohibits us from having a free market.

With a truly free market, sans a central bank that is owned by private banks - the wealthy people you're afraid of coming in and buying up everything might not be so wealthy - or at least they wouldn't be wealthy for the wrong reasons.

mbc said...

I don't like seeing the value of my 401k drop any more than the next guy, but it seems more and more the Fed's main focus is to bail out Wall Street with these rate cuts. We are right in the middle of paying the consequences for keeping rates too low for too long and here we go again. Plus, if the rate cuts stimulate the stock market and stoke inflation then long-term mortgage rates will have to rise. How will that help the housing market?

Another thing. If the return to affordability means we have to build smaller homes instead of 3000 SF McMansions them I'm all for it. Most families don't "need" more than 1500 SF anyway.

smf said...

"That's what I mean by a positive feedback loop."

I understand that. The problem is trying to forecast how far it 'could' drop due to the inventory problem. Just a cursory look at the MLS shows a lot of spec. homes lately, and I know some have disappeared for a while.

"Most families don't "need" more than 1500 SF anyway."

We would love to have a larger home, since we have the kids (three) and should be able to afford it.

As I stated before, prior to the bubble the largest track home available was about 2500 sq.ft. Customs rarely exceeded 4000 sq.ft. That typical became atypical. Even some who could afford the mortgage payment on a larger home may NOT be able to afford the upkeep (water, electricity, time, landscape, etc.) of their homes for the long term.

Diggin Deeper said...

"Plus, if the rate cuts stimulate the stock market and stoke inflation then long-term mortgage rates will have to rise."

And rise they will with or without the Fed's help. We've yet to be weaned off of "excessively cheap" credit. We're are walking a fine line on which is better...low interest rates or higher cost of living? You don't get both as they are directly opposed to one another as it relates to the buying power of the dollar.

Fed funds rate just cut an additional .5%, discount rate cut .5% as well. That takes another arrow out of the quiver with not too many arrows left to fire.

Might initially help the 401K, but in real dollars we lose.

mbc said...

I was raised with two siblings in a 1500 SF 3/2 ranch house built in the early 60s and it seemed fine to me. If you "want" a larger home and can afford it, it's a free country and I say go for it. To me, however, the house size inflation that has occurred since the 50s, and especially in the last 10-15 years, is very unfortunate. Americans in general already gobble up a disproportionate share of the world's resources and this only adds to it.

Gwynster said...

"The problem is trying to forecast how far it 'could' drop due to the inventory problem."

Maybe I'm missing something. I called a bottom? It's the Heisenberg Principle of Asset Deflation in action out there.

I can see it's falling but couldn't place a value on jack these days, not even for myself. I'm waiting for that long wide bottom.

smf said...

If you "want" a larger home and can afford it

The key word is 'afford' in the equation. We can certainly afford it, but many who bought could not upkeep the home for the long-term.

But our requirements are a little different than others. We have three kids, plus the need for an office, since we do quite a bit of work at home.

I called a bottom?

No, you didn't. But at this point, with the little research I have done, I think the inventory problem is a little more severe than imagined. 'IF' at one point you cannot find a tenant for your house, you either will have to demolish the thing, or drop the price waaay below what normal market value would have been under a normal market.

What should happen when you build 20 homes when only 10 were required to keep up with the population? Housing inventory does not go away quickly.

Diggin Deeper said...
This comment has been removed by the author.
Diggin Deeper said...

you either will have to demolish the thing, or drop the price waaay below what normal market value would have been under a normal market."

Won't be long before real estate here will look so cheap to the world that we'll get our fair share of export investments. The only problem is international investors will have to export renters to live in them...

Gold lovin the Fed action...pushing towards $950 an ounce. Great indicator of what's on the horizon with respect to inflation...Is a $1000 an oz out of the question? Let's see what happens with more rate cuts looming.

Gwynster said...

"What should happen when you build 20 homes when only 10 were required to keep up with the population?"

You're preachin' to this choir now. I suppose I should run some numbers and charting with the 07 data finally comes out. I think by the time we get numbers, we will offically be in a recession (as opposed to unoffically now) and no one will be surprised.

smf said...

we'll get our fair share of export investments.

You think we are the only ones suffering from this problem? We have family in TWO different LatAm countries that basically tell us that what happened here is happening there!

When my mother tells me about condos that are not selling, I get a certain sense of dejavu.

I suppose I should run some numbers and charting with the 07 data finally comes out.

I still wonder how many high end people/homes will start to get in trouble soon.

Diggin Deeper said...


But I'll bet their currencies aren't falling as fast as ours unless they're pegged to the USD. The dollar hit the second lowest point in 40 years today. It's no wonder people can't afford the monthly upkeep on the McMansions out there as you stated earlier. And it will be no surprise when they have to choose between the home and being held hostage by their daily living expenses.

The problem we have today is all about purchasing power. When it erodes so does affordability. It classic deflation in one asset in order to combat classic inflation in many others.

smf said...

DD -

I agree...


What I am still not clear about is how dependant the rise in other world's economies has been tied to the growth of the US housing bubble.

At the same time, regional bubbles have popped out everywhere, to the point that a relative was doing spec. housing in Mexico City. Now he is having financial trouble. He can't sell the homes. But he refuses to see that what is happening there may be a bubble as well.

This to me is the great unknown so far. The unwinding has begun here, but there are still many other places and countries to follow.

Diggin Deeper said...


As much as I'd like to believe that our real estate market is responsible for our stateside problems, and maybe those of other countries, I don't believe it rates compared to what we've allowed to happen to our purchasing power.

I think there's a correlation but one that is beginning to distance itself. Afterall, while it's our dollar, it's the world's problem, as long as the world accepts it as their problem... countries have choices as we're beginning to see.

We've basically taken the dollar down to a level where dollar holders are losing value and purchasing power by holding those dollars. If you had $1 Million in in 2000, and went to sleep for 7 years, you'd barely have $600,000 left. Can you imagine holders of a $Trillion watching the value erode month after month, and in meantime, you're food costs are rising over 1% per month?

China's food inflation is rising in double digits. Why? Because they tied the Yuan directly to the dollar and dollar buys less and less each year. More and more Chinese dollars are chasing food products in China and prices are rising to compensate for the loss of our dollar's purchasing power. Another example, is the dollar as the world's reserve currency. Most oil in the world is bought in dollars. Since oil is a finite supply and demand commodity, if dollars get cheaper, oil must rise to compensate. Of course it's more complicated than a simple analogy but true when separated on its own merit.

So I'm not inclined to agree that our real estate problems have caused problems for other countries. A symptom, maybe, but the disease is in the dollar's purchasing power or lack thereof.

smf said...

"So I'm not inclined to agree that our real estate problems have caused problems for other countries."

The asset bubble got manifested big time thru housing, but the problem is also as you described. The situation is very complex, hence I give no conclusion to those conclusions I know nothing about.

But for example, regardless of dollar value, if our use of oil was partly tied up to housing (transportation of material), and now that demand is way down, so will go the price of oil.

And frankly, attempting to not sound a little kooky, the rise of oil can have an effect on certain regimes if it were to go down again.

Those countries that depend on oil export and saw the price rise have made financial commitments according to their expected future revenue. If the revenue goes way down, their current financial troubles become even more acute.