Let’s have another look at home affordability in King County. First up, the affordability index.
The affordability index is based on three factors: median single-family home price as reported by the NWMLS, 30-year monthly mortgage rates as reported by the Federal Reserve, and estimated median household income as reported by the Washington State Office of Financial Management.
The historic standard for affordable housing is that monthly costs do not exceed 30% of one’s income. Therefore, the formula for the affordability index is as follows:
Here’s a look at King County’s affordability index over the last 19 years (as far back as the median price data from the NWMLS is available):
Again, a ton of improvement since Big Picture Week 2010, when the index was at 98.0. The average level of the affordability index from 1993 through 2002 was 107.6. The latest reading was 134.9—25% higher than the pre-bubble average.
It’s still important to note that the main reason the index is this high is the fact that interest rates are even more abnormally low than they were a year ago. Last month’s average rate for a 30-year mortgage came in at 3.99%. At an interest rate of 6.5% (0.7 points below the ’93-’04 average), the affordability index would currently sit at 101.8—a respectable, but not fantastic level.
Here’s another way to look at affordability that I introduced back in May 2010:
This chart shows how much a family can afford to purchase if they earn the median household income and put 20% down, given the interest rate of the time. Note that in past versions of this chart I had been using 28% of income instead of 30%. This version has been updated to maintain consistency with the 30% level used in the affordability index chart.
The blue dot above represents the month this blog was started, August 2005. At that time, the median home price was 18% more expensive than what the median household income could afford. The difference between the two topped out at 53% in July 2007, and has since fallen to -26%. That’s right, thanks to today’s super-low rates, the median home is now actually 21% cheaper than the “affordable” home price. At 6.5% interest, the “affordable” home price would be $327,387, just barely above the most recent median sale price.
Finally, for those the are curious, here’s a busy chart with the three components of affordability each plotted as a separate line. Note that in this chart I’ve multiplied the median household income by five in order to visually align the home price and household income lines.
When you add incomes and interest rates into the home price picture, Seattle home prices look even better than they did in our analysis yesterday, thanks to ridiculously low (and completely unsustainable) interest rates. However, even at a more reasonable mortgage rate, affordability would be back to a decent level. Does this mean we’re at the bottom? Probably not, but we’re certainly closer to the bottom than we are to the top.
Big Picture Week on Seattle Bubble
- Case-Shiller HPI Rate of Increase
- Examining Home Affordability
- Price to Rent Ratio
- Price to Income Ratio
- Unemployment and Foreclosures
Tim- Love the data you provide. I saw that you used 20% down as a way to figure out the Affordable Home Price. What do you propose the Affordable Home Price to be using an FHA loan at 3.5% down?
Also, I agree that interest rates are at an unsustainable level, however isn’t Japan at 1% interest?
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Since 1978 Seattle Homes Have Been Completely Unaffordable
Requiring two incomes instead of one income per household to afford. We have an average of 1.2 incomes per household today in Seattle. The chart above uses “gross pay”, not “net pay”….
Another conundrum that makes the above affordability data not an improvement at all are current jobs scarcity in Seattle. We can’t all be working two incomes per household or we put one household in a homeless camp because we hogged an extra job to be a two income family, let’s be pragmatic and honest.
Wake me up when we depopulate and raise wages and lower unemployment [honest count too, not Pink Pony lies].
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Softy @ 2
Back off
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RE: softwarengineer @ 2 –
Great observation softwareengineer! Tim – Is the $67,027 median household income Gross or Net?
Do you think we could return to a one income per household level? My wife would be happy :)
Also, I noticed you use Median Household Income x 5 on the chart. So ($67,027 x5) = $335,135. I believe I’ve read that in a normal market a homeowner should only go to Household Income x 3.5. So I guess an Affordable Household Price would be ($67,027 x 3.5) = $234,595.
What are your thoughts on a 3.5x multiple vs. a 5x multiple?
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RE: FirstTimeHomeBuyer @ 4 –
I Bet You’re a Young Forgotten “Y” Generation Like My Daughter
God bless you :-)
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RE: softwarengineer @ 5 –
Yeah I am. Its tough out there for us “Y’s”
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By FirstTimeHomeBuyer @ 4:
Gross, straight from OFM.
I doubt we’re ever going back there for the homebuying public as a whole (too many people have fallen into the two income trap, but for my family we definitely limited the income we considered for buying a home to just one income (and we kept our total PITI home payment at 15% of the gross of that one-income).
Sorry if I wasn’t clear, but I wasn’t multiplying the income to indicate some sort of relationship between income and how much a home buyer should spend on a home, but just to visually align the home price and household income lines to approximately the same scale on the chart. It’s a cosmetic adjustment, nothing more.
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RE: The Tim @ 7 –
Tim you’re awesome! Thanks for the replies. Here’s some additional info if people want to know what they can afford using a 3.5% FHA if I’m understanding the charts Tim laid out above correctly. Not necessary if someone should, better to live within your means. Below is some math on it.
So if I’m reading your charts correctly, a household making a Gross income of $67,027 can afford a home at $433,964 with a 20% downpayment. I just ran a quick calc using Zillow, they have a 3.79% 30 year mortgage rate. They say the total monthly payment is $1,944 ($1,616 Principal & Interest + $278 Taxes +$50 Homeowners Insurance).
So if anyone wants to know (like me), if you are going FHA and doing 3.5% down. Someone can afford a House Price of $321,400. Monthly payments being the same at $1,944 ($1,436 Principal & Interest + $206 Taxes + $50 Homeowners Insurance + $252 Mortgage Insurance).
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TT, there might be a couple of things we need to look at in order to understand this report, and its use of the MLS “median price”.
While much more extreme than Seattle, these cautions apply to Phoenix:
First, is that there has been a very large drop in REO listings, but there also is a very large number of unlisted REOs – about a years supply, it looks like. The supply of REO can, and will, be, replenished for quite a while yet.
So, the number of REO sales must, and did, decline. But, there is evidence that the listing prices were about US$ 20K under market for all cash sales. The Lenders were buying “cash”. For example, BKofA was recently told that they had to build up their “capital position” – that takes cash.
Second, when the REO sales dropped, that removed the bottom 10 to 20% of the lowest priced homes. What then happens statistically is that the “average” of the remaining homes sold must, and did, go up.
But, that does NOT mean that home prices are now going up. What it means is the cheapest homes are not being sold anymore. That is very different.
Third, “short sales” have gone up about as much as foreclosures have gone down. Might sound good, but what that really means is that the home owner/seller took a little less of a hit than if they walked away; and the bank/lender took a little less of a hit than they would if they foreclosed.
So, while the prices for “short sales” might LOOK like they are going up, they also might not be, in fact.
Again, while Seattle has not seen the full foreclosure bite of Seattle (pun?)[Sorry], what you DO have is a very skewed RE market – with very low priced home selling much more than high priced homes. Not as extreme as Phoenix, but not at all “normal”.
The question have you adjusted for those changes? Should we not?
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RE: The Tim @ 7 –
Tim – I like your 15% idea. Smart, economical, conservative. Good stuff. Let me plug some numbers in for the median household income.
So lets use $67,027 Household Median Income. So 15% of that is $10,054. So per month PITI should not exceed $838.
Okay for a PITI of $838, the Household Median can afford a Home Price of $180,700 with a 20% downpayment at a 30 year mortgage of 3.79%. ($673 Principal & Interest, $116 Taxes, $50 Homeowners Insurance)
If going FHA, 3.5% down @ 3.79% interest, the Household Median can afford a Home Price of $133,900. ($598 Principal & Interest, $86 Taxes, $50 Homeowners Insurance, $105 Mortgage Insurance)
Well now I know where to begin my offering price.
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Man this is depressing using the 15% rule.
A house price of $280,000 would need an income of $102,000 at 20% down or an income of $136,000 at 3.5% down.
Man I need to ask for a promotion!
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RE: The Tim @ 7 – I second the recommendation for the Two Income Trap. A fascinating read – both on the housing bubble front, as well as the health care problem. Warren was really ahead of her time!
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By FirstTimeHomeBuyer @ 11:
I would hope that someone making over $100k a year would be able to save up $56,000 in a few year’s time.
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Gee, maybe this will help :
NAR Realtors: We Overcounted Home Sales for Five Years
http://www.cnbc.com/id/45659547
Trust a Realtor.
Welcome to the New Depression, v2.0.
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RE: FirstTimeHomeBuyer @ 8 – That works out to 35% of gross income and 44% of net (assuming 20% tax rate for those who can’t afford accountants and tax expenditures). And don’t forget that is a rule of thumb MAX. I’ve been quoted by BECU that 42% of gross income in debt is MAX.
I prefer using 20-30% of net single income (makes more sense as I can afford less if/when taxes increase). Breaking the two income trap requires this initial assumption I believe.
TT @ 7
I also find using a multiple of 3.5x rather than 5x to be a more accurate representation of affordability, but then I’m a guy who doesn’t think spending 30% of gross, or 37% of net, income on housing is affordable. Unless you assume housing is more important than vacation savings, a car payment, student loans, hell any real savings.
Finally what are realistic property tax and insurance rates. I’m using 1% and 0.5% respectively, a little conservative but not much IMO.
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RE: The Tim @ 7 –
The conclusions you are drawing are bizarre.
Number one you are using interest rates that are based on the mortgage amount, which has no bearing at all on the over all debt. Whether you put saved money into a Real Estate transaction is a misnomer. Those are after tax, savings rate real dollars. That’s expensive money that could be better used elsewhere than on a family home debt structure.
The second thing is that in five years, or so, when a person sells the property they will run into a completely different affordability. Interest rates may well go to zero, or up to 6%, my bet is always 6%, but I have been wrong.
Then the price of the mortgage goes up. The price of the property may go down, but I doubt it will go up using either the lower, or raised interest rate.
So you are just paying to service the debt. You could pay the property down further with after tax present dollars, but then again there may well be better uses for the money.
So I don’t see today’s affordability as an indication of us being closer to the bottom. You are showing why prices haven’t really dropped, and people are paying 2006 prices.
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RE: The Tim @ 13 –
OK, I interjected a term “after tax, savings rate dollars.”
Those are real, present day dollars that could do a lot of other things for a much greater return than a home mortgage. I know you’re looking at it as money you don’t need to spend 4% interest rate payments on for 30 years, but ultimately it is a dead loss of cash.
What’s better is to take 0% down then apply the up to 20% to the principal balance, you could even do that over time.
That way you jump start the amortization schedule, and have a greater probability of getting to free, and clear sooner.
The fact still remains you are in a non appreciating asset, but your equity would be growing.
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RE: The Tim @ 13 – I second that.
This is a very instructive post – not least for the reactions it elicited. Affordability is always in the eye of the beholder. I have had tenants who chose to stop renting from me (I cap eligibility at rent=1/3 gross income) to buy a house where they will be paying closer to 40% or more of gross in PITI. And I have had prospective tenants beg to rent a house at 50% of their gross. They often do, and without getting evicted for non-payment, just not from me. People feel strongly about having a nice place to live. Some are really tired of apartments/condos/townhouses. So affordable to them is a much higher percentage of their take-home, even if it means eliminating saving, doctor visits, and eating out from the budget. Under current conditions, with rents rising, home prices falling, and payments pretty close, I gotta think that those who can put together a down payment will stop renting and start buying before these trends make the difference really lopsided – but it may get more crazy before that happens. Looking forward to tomorrow’s post!
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Drive by comment: A lot of people have been tossing around affordability commentary and ratios. If people believe that front end (household debt) and rear end (household plus house payment) debt to income ratios are lower they are mistaken. I deal with banks everyday and see rear end debt loads at 50-55% which is the limit for banks such as Wells, B of A, PNC and so on. And that’s based upon Gross income. So the real net income/DTI caps mean that there is not a lot of wiggle room for living.
And it still astonishes me to see incomes well over $50,000 a month for some Cats and their DTI’s are atrocious. It’s the look rich but I’m broke syndrome still lives on.
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By The Tim @ 13:
It can be tough to save like that. Factor in a couple of kids and the whole thing blows up real easy. $100K seems like a lot until you have school supply fees, athletic fees, band fees, day care fees, extra gas, clothes, dental, shoes, shoes, shoes, food and a funnel, etc.
Not to complain, wouldn’t have missed it for the world, but it do be costin’ serious money.
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Looked at some models down in Auburn at a place called Monterrey Park. Beautiful 3 bedroom places…smallest, fully detached was only $217,000!
http://newhomes.move.com/communitydetail/builder-10806/community-54134
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I don’t care what anyone says. $400,000 is not affordable. If you think so it’s because you’ve been brain washed all your life by the media, government provided schools and corporations marketing “American culture”.
Learn to live without debt and you and your family will be a lot happier and better off. To most of you, I realize I might as well have written “live without air”.
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By ricklind @ 20:
It would be easy to save that if you are a single guy writing a blog. Otherwise, lets say you make $120k/year. You have no house to write off but make a lot of money compared to Jim and Sue Midwest, so your taxes are going to be quite high (assume about 25% with SS/medicare/etc). So you have maybe $7500 take home. Just for easy multiples you have rent ($1800 for a modest house), bills (cable, phones, internet, heat, water, etc $600), student loan(s) ($400), car payment(s) ($400), health/life/car insurance ($400), 401k ($400), misc. amortized random expense (broken car, etc $200), gas ($200), food ($800). This is just the basics for a family, leaving you with $2200 of which you expect them to save about $1600 to get to the $56k goal in a few years. Good luck…
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Thanks for the link to last year’s article. It was great to see Macro Investor, myself, and others proclaiming that “It’s still too early to buy” while pffft argued the other side claiming interest rates were on the verge of going off in a 1970′s style trip to the moon. My favorite part was when I argued we were going the way of Japan, and pffft flatly said, “no we’re not.”
Can you believe there are still people out there arguing that the housing market will not go the way of Japan? What are these people smoking? It’s not that it won’t happen. It’s that it has already been occurring for the last 4 years in Seattle and even longer in other parts of the U.S. The only question remaining is how many more years it will take until we break out of the cycle and begin to experience yearly appreciation gains?
This correction is not only about affordability. It’s also about debt deleveraging, and there’s plenty more of that that must occur before we reach the bottom of house prices. So be prepared to see lower prices in the near future and beyond. When we see real job growth (as opposed to record numbers of people giving up), then we can begin to talk about a different picture. Until then…
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By FirstTimeHomeBuyer @ 4:
The obvious problem with buying in at 5x is, that you’ll lose your shorts if you end up having to move in the next 7 years or so. In truth, the reason things seem affordable is because we are caught in a liquidity trap (ala Japan), and this forces mortgage rates down close to zero with no clear way to turn them around. Case in point, today the Fed announced it will continue to keep the rates low for another year and a half. But this is not because the Fed is comprised of nice guys. It’s because the economy is shattered,and they are nearly out of bullets to fight it.
We’ve most likely got a few more years of this nightmare to endure, and then homes will truly be affordable. I’m not talking 5x. I’m talking bargain basement. :)
Cash talks; BS walks.
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RE: Jonness @ 25 – RE: Jonness @ 24 –
We won’t go the way of Japan because, number one we have a military industrial complex, and number two we have bankruptcy.
On the Big Picture 2011: Case-Shiller HPI Rate of Increase thread Hugh Dominic threw up a Forbes article about how Americans are deleveraging. Yeah, because the are going into foreclosure, and declaring bankruptcy. It’s the American way.
In a couple of years, when every one is settled into a financial strategy that they have made bets on, the interest rates will be able to climb.
When interest rates go up the debt structure you have in place will be that much greater. You home price will go down, but your mortgage debt will remain the same.
It’s the American Way.
Banks are going to make more money. I suppose they will claim it’s to recoup from the foreclosure, bankruptcy losses.
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By FirstTimeHomeBuyer @ 8:
That is just plain scary. I can’t believe people do this on a gross HHI of $67K (especially when prices are still actively falling). I’m thinking a loan of $200K is about max for this income. But borrowing $150K is probably what my limit would be if I were in those shoes. Since that doesn’t buy anything, I’d take advantage of this flat to declining market and save a real downpayment in order to circumvent the mortgage insurance.
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RE: corncob @ 23 – Yeah, budgeting is hard. People should be able to have whatever they want, including home ownership, without ever having to make any sacrifices.
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By Macro Investor @ 22:
Yeah well that’s why I put “affordable” in quotes. No way would I spend that much on a house if I made $67k.
That said, the point of this exercise isn’t about what a family should or shouldn’t be buying, but rather to see what the standard “affordability” metrics look like, applied in a consistent fashion across the last few decades.
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By David Losh @ 26:
I think what you are saying is we have already gone the way of Japan, but we could eventually take a hard right turn and go somewhere far worse. I agree that could happen.
But for now, we are stuck amidst a debt deleveraging cycle. Interest rates are not at record lows by accident.
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By The Tim @ 7:
Actually, that’s pretty amazing!
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RE: Jonness @ 30 – We say “gone the way of Japan,” but I don’t think Japan has gotten to its destination yet. After years of excruciating policy, they now have I think the second highest debt to GDP ratio in the developed world. Greece is going to default, then Japan will blow a year later while the world is still distracted by Europe.
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RE: Macro Investor @ 22 –
Great Post! Absolutely correct. Affordability means not having to become a debt slave.
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RE: Macro Investor @ 22 –
Good post. Along the same lines, is there any legitimate reason the NAR would use anything other than county sales records to tally sales? Core Logic noticed the problems with NAR stats months ago if I recall correctly and The Tim has found lots of holes in their data over the years. Is NAR just abandoning growing sales propaganda because they will soon have to say how bad things are to help prop up the GSEs when FHA heads over a cliff (shift in talking points)?
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Are you guys still on here trying to figure out or rationalize the housing bubble in Seattle and why it hasn’t burst? I was on here years ago everyday but I decided to do something about it instead of trying to figure it out and sitting around in my Magnolia apartment complaining about it all. I left! I moved my business to Minneapolis/Saint Paul where I grew up and bought not one house but four! All foreclosures, all less than 40k each! I love it here, the cycling is the best in the country, the people are far friendlier than Seattle, more hipsters in MPLS than anywhere in Seattle (good and bad) I ski all winter and sail on the lakes and Lake Superior all summer! It’s great. I just could never rationalize a 450k crap box condo in Seattle when I can have several homes here for 1/2 the cost of one 500 sq ft poorly built condo. The nightlife here puts Seattle to shame these days as well. Uptown and Hennepin are electric like Capitol Hill was 15 years ago. The arts are unparalleled here as well as regular people can afford spaces and afford to live here not just corporations and their pawns. Those that can move here I would suggest doing so!
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By Macro Investor @ 22:
Are you trying to say no one makes enough money, or has enough net worth, that they can afford a $400,000 home? A significant percentage of buyers pay cash at the over $1,000,000 price level. There’s a lot of wealth in this country.
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RE: Jonness @ 24 – Pfft probably wasn’t factoring in the negative effects on the economy of Obamacare. ;-)
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By Chris @ 34:
I addressed that in the Monday open thread, but since that thread is dead now I’ll repeat it here. The problem is trying to accumulate data from hundreds of MLS systems which each do things differently and sometimes overlap.
By Kary L. Krismer @ 38:
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RE: Kary L. Krismer @ 38 –
Thanks for the info. With the NAR saying real estate transactions account for $2 trillion of the yearly GNP (I think that’s the number they used) I wonder why they don’t track sales from the county and have a more reliable number. It seems we track pork belly sales better than we do real estate sales.
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I don’t understand how you can call an interest rate “unsustainable”. What’s going to cause the rate to go up? Obviously it’s not going to be that way forever, but I don’t see that it’s going up anytime in even the near future. With all the economic s*** going on in the world, 10-year U.S. Treasury Notes are excellent, safe buys, and will continue to have very low rates and as such, mortgage rates will be low.
The first poster even mentions Japan’s rates are at 1%. That’s an apt comparison as we are in for our own “lost decade” where housing prices do not go up at all. I honestly don’t think that is such a bad thing either. It will readjust everyone’s thoughts on buying houses. They are for living in, not for investing in (unless of course you are a landlord, in which case this time period is great for snapping up property).
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RE: Chris @ 39 – If what they were after was the gross $$$ amount, using the county figures would probably give them a much larger number. It would include foreclosures, bank owned, etc. But the problem is they’d have a hard time backing out skyscrapers, malls, etc.
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RE: NSBill @ 40 – If you had a world where inflation was not a serious concern, I’m not so sure 4% wouldn’t be a normal rate.
Stated differently, the biggest impact on interest rates is from inflation.
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RE: NSBill @ 40 –
Because we have the ability to get rid of debt by foreclosure, and bankruptcy, or negotiation.
The interest rates will rise when there is a reasonable expectation of a return on investment.
What Kary is saying is that inflation will be controled by a rise in the interest rate. Some people, myself included, think that the economy can over heat, and the brakes need to be applied by raising interest rates to get some of the capital out on the system and into paper investments.
I’m called pessimistic all the time, but I honestly believe we are in a time when the little guy can make big dollars, and grow the economy. We just have to stop playing games with corporations that are what? To Big To Fail. Tax them to death, that’s what I say. I want my money back in the tax system after all the gifts the real tax payers have given them.
Taxes paid as a cost of doing business are of far less value than those that are paid by the American worker.
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By David Losh @ 43:
I wasn’t saying that. What I was saying is that if you have an economy where the best interest rate is about 12%, then inflation would probably be running at about 8%. If the best rates are 16%, then inflation would be at about 12%. Thus the biggest factor affecting interest rates is inflation, because I don’t think there’s anything else that would get the best rate up to 16%, other than perhaps a collapse of the banking system.
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By Jim @ 35:
Yes, there are a lot of places that are more affordable than Seattle, but rent set by the free market suggest that many like myself are willing to pay a premium to live here. There are even people who move to New York and San Francisco, and the cost of living there is much higher even before account for state income tax.
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RE: Lisa @ 45 – Absolutely. I’ve lived in Northern and Southern CA, Michigan, and grew up in NJ. Whenever I tell people I am from Seattle, they smile, and either say they need to go back and visit again, or say they want to visit Seattle. No stranger I met ever put down Seattle. Unlike New Jersey.
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By Blurtman @ 46:
If you come to many communities in central Washington and announce your from “Seattle”, your bound to be told to “Go home!” , (but only after you have emptied your wallet, of course.) :)
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By Blurtman @ 46:
You’re from New Jersey? That explains a lot. What exit?
I’m an exile from the Garden State myself.
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RE: Kary L. Krismer @ 44 –
Inflation would come first, followed by the rise in interest rates. How would it be otherwise?
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RE: David Losh @ 49 – That’s different than what you said before. What you said before was that inflation could be controlled by a rise in the interest rates. They tried that before and it didn’t work. They ended up with stagflation.
What I’m saying is that the rate of inflation is a competent of interest.
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[...] decades to get an idea of where we’re at today. Probably the biggest surprise this year was affordability, which thanks to ridiculously low interest rates, soared to a 30+year high in [...]
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