California Realtors: Affordability At Record Low
Submitted by
CalculatedRisk on Thu, 10/06/2005 - 4:24pm (19 comments)
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Its interesting that the last time affordability in CA was so low was at the peak of the last RE cycle in 1989.
What is amazing is that one needs an income of $134K to buy a median priced home in CA. That must be the top 5% or less of incomes. How can these prices be justified if so few people can afford, even when you consider lax lending standards? Cash flow must matter at some point.
CR, I think you are right on the money with your housing call. Do we have another bounce next spring which is supposedly the best season for housing transactions?
malabar, I think the housing boom is past its peak (but still strong), so I expect next spring to be a disappointment for the housing industry. I'd still like to see a few more months of data.
It will take some time for the down cycle to play out.
Best Wishes.
Gee I wonder if the HAI can go negative? You know, TWO families living together can't afford one house...
malabar: Seriously, when considering household income, I would think the top 5% are making much more than 134K. And on top of that, given that you have more than 5% senior management in many companies ...
That is, 5% of CA.
But I suppose even nationwide the top 5% household income is more than 134K. Income disparity may be much greater than you think. A household income of 134K will buy you at most a moderately decent lifestyle in the Bay Area, considering that you have to put back some money for 401(k), rainy day, etc. I'm not joking. Of course, if you spend everything right away, you can live like a duke (not a king).
In my opinion the California Realtors Housing Affordability Index makes homes appear more affordable than in 1989. In that year 20% down payment was a smaller proportion of income than it is today.
In addition incomes were growing faster as inflation was higher in the late 1980s. Even if families were spending a large portion of their income on mortgages, after a few years as their incomes increased a home owner with a fixed mortgage would find the payments much more affordable. It is not so today.
See my web site for a more detailed explanation.
Sorry. Page not found.
cm, i suppose if you get to cash in your options at Google or you are an agent of a good stable in Hollywood, $134K would be chump change
I realize that $134K is not a big income in LA, SF Bay area or San Diego. But CA has cities like Fresno and Bakersfield too and the whole ag belt in central CA. In any case I am sure some one has the income distribution data.
It just struck me that $134K income is required to get a median priced home.
Great note Gavin. Very informative.
Didn't you guys read the portion of the article CR quoted above?
14% of California households have incomes above $133.8K.
Erik, we're going to make you the next Federal Reserve chairman. Talk about taking away the punchbowl just when the party started to rock.
Here, folks, play with this. It's the lovely little tool we banker tools use to "geocode" loans so we can report properly to the regulators. Ignore the code part and just enjoy the numbers.
Go to
webgeocode redirect.htm
Enter your address, or any address you want. Since this will give you data at the census tract level--the smallest unit you can get--you have to have an address, not just city. If you know the zip code you can skip city and state.
Click "search," and then click on "Get Census Demographic."
Enjoy.
If I recall, in '89, a 30 yr fixed was at about 10%. Obviously, that was a huge contributor to the low affordability ratings (coupled with high prices). Here we sit with less than 6% on a fixed and lower affordability. In the last bust interest rates were falling rapidly, down to about 7% in 4 or 5 years. Affordability rates moved substantially higher with smaller price declines than would otherwise have been required.
I used the link Tanta provdided to check on the data for a home we just sold.
Price in 2000: $399k
Median income in 2000: $126k
Price in 2004: $910k
Median income in 2004: $147k
Interesting....
Even if families were spending a large portion of their income on mortgages, after a few years as their incomes increased a home owner with a fixed mortgage would find the payments much more affordable. It is not so today.
And besides the ratio of income to price has increased from about 5:1 around 1975-1980 to almost 12:1 now... you can clearly see that from the graph he posted.
Note also that the graph makes the increases look like income & pricing was increasing together in proportion as if it was reasonable & rational... but note that the scale on Y axis is LOGRITHMIC... meaning that the gap or difference between income & price is growing geometrically and not linearly... kudos to Gavin on the find.
More proof of a bubble.
Tanta,
I tried the same as deb. Again, the income levels were "out of whack" with the prices.
Since I know my area well, I see two things happening:
(1) People with money are moving in, driving prices higher, skewing the median income up.
(2) Those already in the area are being squeezed with higher tax rates. They have the option of cashing in...and moving...or trying to weather the storm. Medium income people do not have a chance...and they are the local work force--teachers, plumbers, etc.
This last Tuesday was repo day, a great day in America. Wednesday night and Thursday, we got eight new listings for repossessed homes from Fannie Mae (4), Freddie Mac (2), and Centex (2).
As I was looking up the various streets in the map book, I suddenly realized that one of the new Fannie Maes is in the new subdivision right across the street from our office. In fact, I can see the home through the window behind my desk. Freak out.
This is a 2-story, 2200+ sf, 4-bed, 3-bath, 2-car garage, brick home built in 2004. The county appraisal records value it at slightly over $176,000. I have no idea how much the buyer paid for it, but starting prices for a 1600sf, 3-bed, 2-bath home in this subdivision are in the high $180,000s.
When they started building this subdivision, I said to myself, all of these people are going to go broke. Small lots, large houses, so there's very little yard, and all the houses are really close to each other. It looks like the developer got his building ideas from San Francisco.
This new repo has a balcony overlooking the street. I always thought that strange. Why would anyone want a balcony overlooking Freddy Gonzalez? There's nothing there except our office (which is in an old ranch house on 7 acres that we bought and moved into in 1995) and a veterinarian clinic.
Well, now it's starting. It hasn't even been a year and already at least one buyer has lost his home. I wonder if he lost his wife too. This is what happens when people overpay for houses or buy houses they can't really afford.
To me, this signals the beginning of a long period of foreclosures and price declines, which is great for my business. The housing boom comes and goes, but there will always be repos.
I dont know where the CAR gets their median RE $$, but in the Peninsula area of SF (San Mateo and vicinity), there are NO houses at the median price. Occasionally, there is a 1br, 1ba condo in the $400k range, but most SFH start at $700k-750k+. And that will buy you a 2br 1ba, 1100 sqft house. A typical 3/2 or 4/2 1800-2200 sq ft is at least $1mm to $1.25mm. So at 20% down, 30yr fixed mortgage, thats a $1,000,000 nut plus about $1000/month in taxes plus about $1000/month in maintenance, upkeep, etc. Rough calculation puts monthly cost at $7500/month, or $90,000 per year. After-tax.
Affordability? Cash Flow?
tanta - I can't get into the site... I get this message:
The page cannot be displayed
The page you are looking for is currently unavailable. The Web site might be experiencing technical difficulties, or you may need to adjust your browser settings
Standard internet boiler plate for something is fubar... any ideas? I am not on a large super secure network but am on a home LAN and do have a basic firewall.
I have a few adresses that might show the 'other side'... how cheap some areas still are but can't get in. If these are 'unaffordable'... America is in deep shit.
Ideas anyone? I'll look for answers laer this weekend - I'm out for awhile.
dryfly, that message means you are considered an undesirable person by the FFIEC and you should expect Federal Marshals with sidearms to show up any minute now.
Actually, the FFIEC geocoding site can interact badly with some firewalls. Try
FFIEC Home Page
Then click on the Geocoding/Mapping System link.
If you still can't get there, it's your firewall.
Whoah, another three listings for repossessed homes just this morning. That's eleven new listings since in the last three days.
When you consider that, according to NAR, the average realtor lists and sells six homes a year,it's easy to see why I work with repossessed homes.
The boom is over. The bust has begun.
Anyone interested in buying a moderatley priced repossessed home in the near future should check out this website: Locate and Bid on Bank-Owned REO and Pre Foreclosure Properties for FREE at Buy Bank Homes.