Since we looked at the affordability index yesterday, Let’s have an updated look at the “affordable home” price chart.
In this graph I flip the variables in the affordability index calculation around to other sides of the equation to calculate what price home the median household income could afford to buy at today’s mortgage rates if they put 20% down and spent 30% of their monthly income.
The median price has risen since our last update April, but continued declines in interest rates have offset most of that increase. The median household income can currently “afford” to purchase a home 21% more expensive than the current median price of homes that are selling.
Here’s the last view on this data, where I flip the numbers around one more time to calculate the household income required to make the median-priced home affordable at today’s mortgage rates, and compare that to actual median household incomes.
As of August, a household would need to earn $54,994 a year to be able to afford the median-priced $378,000 home in King County. Meanwhile, the actual median household income is around $66,000.
You can really see the effect of artificially low interest rates in this last chart. Prior to 2009, the median home price and the income needed to afford the median home moved pretty closely together. However, as rates have been pushed through the floor over the last few years, a large gap has opened up between the two lines.
If interest rates were at levels more like they were pre-bust, the necessary income to buy a median-priced home would be slightly higher than the current median household income (which is just another way of saying that the affordability index would be below 100, as detailed in yesterday’s post).
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Wait a minute! Is the first chart indicating that current home prices _should_ be close to the bubble peak?
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By this logic will the NASDAQ hit 5000?
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Tim. You are assuming twenty percent down for someone making $54,994 a year to be able to afford the median-priced $378,000 home in King County.
First: Do you think many can actually qualify to get financing especially when you add in closing costs and commissions, their car payments and other normal debts?
Second: For someone to save about $75,000 for the down payment on an income of $54,994 a year with a median household size of 2.4 will probably take the next twenty years to save that money unless they are already homeowners not paying their mortgage and living rent free.
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RE: Pegasus @ 3 – RE: Pegasus @ 3 – I love it when a Democrat come to the startling realization that it’s going to take sacrifice to get what they want…..
Here’s what a Republican would do…
1st… don’t have a car payment to begin with or ‘normal debt’ as you call it…. there’s nothing normal about debt.. you should work to become debt free before you even think about a house..
2nd… It isn’t unrealistic for a person earning 55K to save 15K per year and have that down payment in 5 years.. If you don’t have that kind of discipline… well, then that’s a problem for you
3rd… don’t add the .4 to your 2.4 size family until you’ve saved the down payment…
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RE: corndogs @ 4 – Thank you for the political help on your imaginary world of make believe. I deal in reality and in that world most people do not live debt free, they have children, they buy cars on credit and they don’t save 50 percent of their take home pay. Welcome to the real world. I am pretty sure the majority of Republicans never lived in your imaginary world. I am not saying that few did not or would not do what you propose but that would be a very very small minority. My point in questioning Tim’s numbers are that they are based on unrealistic assumptions almost as much as your fantasy Republican world that does not exist in reality but only in your tainted itty-bitty mind.
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The Affordability is a trap, a debt trap. That loan is for fifteen to thirty years.
I’ve been saying I don’t see any economic reason why the price of housing, or property should go up. It makes no sense to sign up for more debt, today, when there are so many economic reasons to start building cash reserves, the way corporations have.
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RE: corndogs @ 4 – Care to provide us with a spreadsheet of that $55K budget? Please include 15% to tax deferred retirement savings, family medical expenses (yes most employers do not cover even close to 100%), emergency reserve, and all other living expenses in said spreadsheet. We can then compare your claims to reality and have a good chuckle.
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By David Losh @ 6:
The population of Seattle is increasing. Even if every other factor were stagnant, that puts upward pressure on prices.
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By Nick @ 8:
Correct, but stagnant means flat. You could have other factors go negative, which would push prices down, as occurred back in 2008-2009.
Dave’s fear of debt is short sighted, and totally ignores the benefits of ownership of real property (e.g. being able to live in it or rent it out). He also ignores the fact that done properly the debt will eventually be paid off. If this were a car forum, he’d be promoting a form ownership which required car lease after car lease, and never ending car payments. Or maybe he’d be advocating staying clear of cars for any reason, because they are depreciating assets. Whichever, his analysis cannot withstand any scrutiny.
Not that there are not times when it might be appropriate to not buy (or to lease a car). That’s another of Dave’s problems. He’s one of those here who I mentioned earlier, who thinks everyone else’s situation is exactly the same as his. There are many reasons to buy or not buy a house that may or may not apply to different people.
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RE: Nick @ 8 –
I’m sorry, but it doesn’t. That is the role of density.
You might as well say we are surrounded by water, and they aren’t making any more Real Estate.
http://www.bizjournals.com/seattle/news/2012/09/18/holland-partner-group-starting-work-on.html
Holland Partner Group is building another set of apartments downtown. That doesn’t take into account all of the other developers who are interested in Seattle.
I look at the Real Estate investor like a lumber jack, or commercial fisherman. Large development companies come in and have managed growth to maximize profits. In the transition a lot of small investors will be swallowed.
The small investor, including the home owners, will be driven out of competition by lower prices.
You’d have to make a much stronger case for the scarcity of housing.
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By David Losh @ 10:
So you’re going to have a situation where say someone wants to build a 15 story building on a piece of real property, but the lot that building is built on is no more valuable than back when the highest and best use of that low was to build a 2,500 square foot house on it?
And your not understanding the comments people make about water in Seattle apparently means you don’t understand why people would want shorter commute times, and how water has an adverse impact on the ability to get shorter commute times.
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QE infinity will inflate nominal home prices along with everything else. High inflation is a guarantee only this time the affects will be acute. Smart money will leverage cheap debt as means to accumulate wealth in hard assets.
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RE: Poofman @ 12 – We have been hearing that tale for 5 years now and we have had plenty of QE along the way and don’t forget all of those tax credits given away. The FED now owns 25 percent of the 10 year treasury market. The only inflation you are seeing is brought on by the players taking the QE monies and loading with commodities. As soon as the players make their money, since there is no increasing demand, the prices drop. The only impact other than that is what was brought on by the drought and hopefully that is different next year. If you see wages going up 6 percent a year and unemployment below 5.5 percent than your myth might become a fact. Unfortunately since most wages are global now and with those Chinese workers willingly putting the iPhone 5′s together for $2.00 an hour and ready to build other things that is pretty hard to envision happening.
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RE: Pegasus @ 13 – Smokin’, Pegasus. Smokin’.
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RE: Pegasus @ 13 – You must not ever darken the aisles of a grocery store to make that comment. Or buy clothes. Or fill up your car.
Even the coupons in the mailers and in the Sunday ads are getting worse – buy two or three of something just to get a measly 50 cents off the total? That’s not even worth walking to the store for.
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RE: wreckingbull @ 7 – RE: Pegasus @ 5 – Interesting that on this liberal-slanted cry-fest web-site the Cordog got a huge amount of thumbs up and you 2 bozos got the ‘shellacking’ of thumbs down…. I love it…. what you might think of as some unusual pipe dream type of scenario….. is EXACTLY… how the American Dream is obtained…. I’ve lived it, I lived in a 950 sq ft house for 14 years… I paid cash for that POS… and saved my money… never had a new car…. never had debt….. so… AGAIN…. quit your whining, buck up and live out the amazing privilege opportunity you’ve been presented with as an American citizen….. If you can’t make a go of it here, it’s your own danm fault….
Hey, check out the JHammy house, it’s up another $60,000 this month….. zestimate is 60% above the purchase price now…. loving it!!!
http://www.zillow.com/homedetails/8223-Goodman-Dr-NW-Gig-Harbor-WA-98332/49162176_zpid/
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Someone earning 55k shouldn’t buy a $350000 house in most cases. I was in that situation once– opted for a $200k condo instead. Worked out well over the years as the mortgage payment became more and more affordable every year, and was able to use the extra money to pay down debt… as corndogs says, debt isn’t something you “have” to live with. Drive an older car, save your money, don’t saddle yourself down, don’t buy what you can’t afford. It takes discipline and planning but works very well in the long run.
I don’t happen to think people should buy “as much house as they can get approved for”, the secret is to live a little below your means, or a lot – as much as one can, anyway.
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RE: dchap @ 17 – Communist!
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RE: corndogs @ 4 – Looks you got shellacked with quite a few thumbs down but hey no one here thinks you don’t have blinders on. You need to tell us how much money you made last year again. I never get tired of seeing you brag and fabricate stories about how Republicans would do it.
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RE: Pegasus @ 19 – did you just say ‘I know you are but what am I?’ haha… you’re a child! I am opening up a paypal acct so you can start paying me for the free lessons on how to be a grown-up….
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RE: corndogs @ 16 – There you go Corny. Thanks for your house update. It has been about a month and I was worried that you had stopped bragging. You need to save the nation now by writing an autobiography. Might I suggest you title it..” I am the greatest Bozo in the World and I can prove it”. Clowns that have to tell us how much money they are supposedly making and using a Zillow price to value their house monthly reminds me of what the great American real estate bubble was all about…. fools.
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RE: Pegasus @ 21 – I didn’t buy anything during the bubble dummy. I bought many years before and after….. Zillow doesn’t mean jack squat to me… except that ‘the Tim’ brought it up that his Zillow value was about what he paid for his house a year later… That’s why i like to point out that my Zillow value is 300K!! more than I paid only 6 months later…. and he thinks he should write a book… yes, I will be keeping you posted….
I’m not bragging, I’m making fun of numbskulls on here like yourself that have been laughing at other peoples bad fortunes on this site for the last 3 or 4 years…. you’ve been biting your nails watching prices go down on Tim’s BS charts and thinking you were gonna snag a crumb… and it DIDN’T happen….. now you’re whining…. yes, I’m enjoying it.
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RE: corndogs @ 22 – Sorry Doggy but I am not whining about anything nor am I the one laughing on this site over someone else’s bad luck. You are the one bragging and gloating over making some money over someone else’s misfortune. You bought a house that was a distressed property. Ya think maybe the prior owner loves seeing you gloat over his losing his house? So what if you made some money, you are not the only one in world to do so. Making some money doesn’t necessarily make you smart and bragging about it shows it must be a rarity. Posting Zillow estimates on your home and then trying to fabricate about your doing it , like you tried to do on your Republican fairy tale is so you. Caught posting about someone else’s down thumbs when your own post had more….proof that you truly are the world’s greatest Bozo.
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RE: corndogs @ 22 – All arguments aside, is your tax burden really $9,490 for that thing?!?! I just about shat when I saw that.
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RE: David Losh @ 6 – Well said David! Prices shouldn’t be going up now – it will take us down that bad road again. BUT, that said, I am absolutely certain that housing prices will continue to rise, eventually beyond the previous levels that got the economy so screwed up. We never learn.
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By Erick Gonzales @ 25:
It wasn’t the prices that were the problem, it was the loans supporting them.
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RE: mike @ 26 –
The debt that people have to pay is the problem.
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