No Family? No Equity? You’re Screwed.

Slowly but surely the downside of exploding house prices is being highlighted in our local media. Maybe not so much in Seattle proper, but at least down in Tacoma (where houses are quite a bit cheaper than in King County) the issue is being given some attention.

The price of a home may be relatively modest in Pierce County when compared with our neighbor to the north, but that doesn’t mean it’s any easier for a first-time buyer to get into a house here.

"Affordability has been at the lowest level I’ve seen in 12 years," said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University.

For example, the affordability index for all buyers in Pierce County at the end of 2005 was 104, meaning that all the families pulling in the county’s median income, $62,437, could afford the median-priced home, $255,000. The median is the midpoint, with half above and half below.

However, a look at first-time homebuyers, who don’t have equity to put toward a home, shows a drastically different picture, Crellin said.

The affordability index drops to 61 percent in Pierce County. That means first-time buyers here can afford a home priced at 61 percent of the median, or $155,550.

The picture is worse in King County, where the affordability index on a median-priced home, $390,000, is 80 percent. For first-time home buyers, the index falls to 45 percent. That figures out to a home price of $175,500.

Keep in mind that the figures they are quoting are for "families," meaning that single people are completely excluded from those statistics. Here’s a good explanation of the difference between "median family income" and "median household income." Despite the shrill insistence by local real estate cheerleaders, the numbers clearly show two things: 1 – Many would-be first-time home buyers are totally priced out. 2 – If you aren’t part of a "family" that has two incomes, you are priced out.

"Their choices are limited," he said. "Either they have to choose a less expensive home or take out an alternate mortgage instrument."

But as mortgage rates rise – up to 6.61 percent on a 30-year-fixed-rate mortgage in Washington last week – homeowners are finding adjustable-rate mortgages or interest-only products less and less attractive, he said.

Also, the cooling of the superheated housing market is a concern to homebuyers looking at these products. A yearly equity jump of 20 percent is no longer a sure bet, he said.

"I thinking we’re not looking at a housing bubble, but a balloon," he said. "We’re on the verge of deflating, but we’re not looking at any severe reduction of values in this area."

Wow, so many great quotes in there. "Alternate mortgage instrument," "20 percent is no longer a sure bet," and "not a bubble, but a balloon." I especially like the bit about deflating, but not "in this area." Sounds a lot like the polls that came out a few weeks ago where some large percentage of Americans now predict housing reductions, but very few predict such reductions in their own backyard.

(Barbara Clements, Tacoma News Tribune, 05.02.2006)

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

11 comments:

  1. 1
    Mikhail says:

    I can’t help but laugh at how the pundits spin a declining market as being “bad” for prospective first time buyers. Buyers can’t count on the annual 20% price increases…

    But wouldn’t it be better to just buy the house for 20% off in the first place, rather than gambling it will keep rising in value into infinity?

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  2. 2
    Anonymous says:

    Fed is raising the rate on may 10th. It’s going to be interesting to see what happens then.

    Rate this comment: Thumb up 0

  3. 3
    emcityjill says:

    Not totally screwed! Here’s why:

    Who doesn’t love Robert Shiller? You know, that Irrational Exuberance guy who nailed the dot-com bust and has been wagging his Yale-employed finger while insisting the housing bubble really does exist and it’s preparing to pop? His latest endeavor has made it possible to begin trading futures contracts based on real estate indexes in ten metropolitan areas around the country (the list does not currently include Seattle, which fails to surprise, since we always seem to be late to the party). Those of us who might invest in the stock market rather than real estate can now choose to SHORT the RE market at will! I think this is great, even though I don’t really invest apart from my retirement accounts. It’s just nice to see more options available to those of us who’d rather dip a foot in the pool for a while before deciding if the water’s fine. It also gives me time to find a husband and get knocked up so I can finally afford that 350K 2 bedroom townhouse in Des Moines, Tukwila, or Burien.

    Read more about how to hedge your RE bets at the New Yorker or the Boston Globe.

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  4. 4
    Anonymous says:

    But as mortgage rates rise – up to 6.61 percent on a 30-year-fixed-rate mortgage in Washington last week – homeowners are finding adjustable-rate mortgages or interest-only products less and less attractive, he said.

    this is a howler, completely upside down from the way it should be. ARM’s are meant to be used in times of inlfated interest rates, because when those rates eventually go down, your monthly’s go down, not in REVERSE!!! They’re meant to be attractive in high-interest time’s because of they’re tied to the prime…

    Bizarro world

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  5. 5
    S Crow says:

    Hmmmm eating a sandwich for lunch and hitting the Blogs…..

    Stumbled over this doozy.

    National Mortgage News reports from Freddie Mac:

    Freddie: Cash-Out Refi % Hits 16-Year High In the first quarter, 88% of the homeowners who refinanced their homes got a mortgage at least 5% larger than the original loan, the highest such percentage since the third quarter of 1990, according to Freddie Mac.

    ———–

    Folks, this statement runs parallel with my posts for months. People are not reducing their debt loads, they are increasing it, and using the house as an ATM. 88%? That’s a number that makes me pale, and I’ve seen a lot of stuff.

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  6. 6
    seattle price drop says:

    S Crow:

    Thankyou SO much for your contributions to this blog.

    Please keep it up- often!

    Rate this comment: Thumb up 0

  7. 7
    meshugy says:

    I bought a house in April of last year. The mortgage brokers I dealt with didn’t try to sell us on anything exotic. We actually were turned away at first because I run my own business. They won’t even look at business owners until you’ve been open for at least two years. So we had to wait, and even then they were pretty conservative about our options. We ended up with a fixed rate, 30 year at 6.125%.

    I guess that’s unusual, because apparently everyone is signing up for negative amortization suicide ARMs. Really scary…

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  8. 8
    Dukes says:

    Here’s today’s 24 Hour Market Cycle from NWest MLS:

    New Listings 773
    Back on Market 128
    Price Increases 87
    Price Reductions 322
    Contingents 34
    Pendings 564
    Solds 735
    Expireds 135
    Inactives 180

    New listings matched with Solds, but again 322 Price Reductions while 135 Expireds and 180 Inactives. So we can see that the lemmings are still biting albeit at prices that are reducing.

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  9. 9
    Anonymous says:

    Thanks for the update Dukes!

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  10. 10
    meshugy says:

    thanks for the #’s dukes….

    I’ll be curious to see what the median price for April is. The MLS #’s come out on Friday.

    Do you think the median is going down?

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  11. 11
    meshugy says:

    Uh oh:

    California Foreclosure Activity Up

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