Since we looked at the affordability index last week, 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.
Median prices have been basically flat since our last update in August, but thanks to yet another dip in interest rates from 3.60% to 3.35%, the price of an “affordable” home in King County rose from $455,669 in August to $470,074 in December. We’re rapidly approaching the point where the “affordable” home price will be on par with what the median home price was at the peak. Ridiculous.
Here’s the alternate view on this data, where I flip the numbers around 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 December, a household would need to earn $53,597 a year to be able to afford the median-priced $380,046 home in King County (down from $54,994 in August). Meanwhile, the actual median household income is around $66,000.
If interest rates were at levels at 6% (comparable to where they were pre-bust), the necessary income to buy a median-priced home would be $72,914, and the “affordable” home price would be $345,539—$35k below the current median.
+50
i had an epiphany this morning!
1) i realized house-price to income ratios are less meaningful than i had initial thought.
2) the more important metrics are monthly mortgage payments and debt-to-income ratios.
the answer for why this matters is fairly clear.
houses are mostly financed. financing translates the house price to monthly payments. and it’s these monthly payments that determine whether a buyer can afford the house.
as a semi-perma-bear, this is disheartening because i can no longer point to the high price/income ratios as a reason for house prices to head lower.
instead i look at the the monthly payments which are quite low by historical standards and can only conclude unless interest rates head higher (unlikely in the next 2 or 3 years), prices will increase or remain at these levels. in other words, i’m not sure what i can look at that would indicate lower prices since payments are quite affordable.
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“As of December, a household would need to earn $53,597 a year to be able to afford the median-priced $380,046 home in King County (down from $54,994 in August). Meanwhile, the actual median household income is around $66,000.”
The Tim, I KNOW you’re just doing this for illustrative purposes, however the dear reader should be aware that this calculation only shows the trend, NOT what is actually “affordable” to a person who is prudent with their finances (e.g. considers not only today, but is actively planning to provide for their future selves out of their own resources, instead of relying on sucking off the teat of some one else).
IMO, only an insane person making just under 53.6k / year GROSS would buy a 380k house at the stated conditions (20% down = 76k down payment, for a mortgage of 304k). Your debt would be ~6x your GROSS annual income. Talk about being a debt serf.
Actual numbers from Excel “pmt” function: Monthly principal and interest only on the 304k at 3.35% annual rate 30 year term is $1,339.77. $53,597 divided by 12 is a monthly gross of $4,466. 30% of that is $1,340, so yes, that payment is “affordable”, IF that’s as far as you go (which I know is how you do it since the rest of the costs are difficult to quantify with rigor).
For those looking for a more realistic SWAG:
Of course, on this hypothetical 380k home, you’re looking on the order of 3 grand a year in property taxes. There’s 250 / month. Homeowners insurance – call it 500 / year, or another 42 bucks a month. Over that 30 year life of the mortgage, you need to keep the place up, so figure on, say, 1/2% a year (and I’m being very generous / low ball on that). 380k * 0.005 = 1,900 / year = 158 a month maintenance.
So the real monthly cost of that “affordable” place is much closer to:
$1,340 principal and interest
$250 property taxes
$42 fire / home owners insurance
$158 low ball maintenance estimate.
$1,790 – a more realistic estimate of what the median house will actually cost.
For our hypothetical person making 53.4k a year, that’s actually 40% of their GROSS earnings. After income and socialist security taxes it’ll be over 50% of their take home monthly pay, and that’s not even putting away a dime to a 401k or retirement savings (which our poor sap 53.6k a year person / family had better be doing since the Government provided safety net will be going away within 10 to 20 years, right about the time these poor saps will be looking forward to it.)
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RE: No Name Guy @ 2 – The studies prove that homeowners and especially their children, lead a higher quality life versus lazy dirty renters. You can’t put a price on that especially when the rent payment about equals the house payment.
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RE: Pegasus @ 3 – LOL. How long have you been working for NAR? ;-)
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RE: No Name Guy @ 2 –
It actually gets worse in Seattle because you can’t buy much for $380K.
I’ve had this discussion a lot lately, and another thing I would point out is if Real Estate prices remain flat, or track whatever inflation rate we end up with, then you are paying compound interest on a debt that may never realize a return.
You can say this is the same as rent, but it is in all reality a 30 year debt, that you owe, and need to pay off.
The second part of the affordability discussion is over all debt. How about student loans, or that car payment at incredibly low interest rates? You have a couple of kids, and maybe those credit cards start racking up interest.
It’s not just the mortgage debt trap, it’s a way of life for Americans.
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RE: * @ 1 – “…and it’s these monthly payments that determine whether a buyer can afford the house.”
Sort of. That is, if the buyer could project with certainty that the income stream he is currently receiving will continue into the future.
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I cannot imagine affording a $380,000 house on $54,000/year or even $66,000/year for that matter. I don’t know how people do it. They must not spend any money other than on their house.
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RE: Erik @ 7 – More than one person that I know did it with interest-only loans.
The house next door to me did in fact sell for almost exactly $380K last summer, but the new owner is a senior-level M$ programmer so he’s making in the 6 figures I’m sure. Just got all-new vinyl windows installed too (1977 house, aluminum windows, sweatin’ with the oldies).
I was mentally struggling with paying $160K for my house at around a $50K gross annual salary back in 1998, as the same house in much better condition would have cost half of that in my home town.
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By David Losh @ 5:
FWIW, mortgage interest isn’t compound interest. It isn’t even simple interest on many loans now.
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RE: redmondjp @ 8 –
I owned a $160k house in 2004 when I made $16/hr. I even refinanced it to remodel. I make more now and now I own a $92k condo. Lesson learned about “the american dream.” My new “american dream” is to have a good time until its my time to go.
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By David Losh @ 5:
Yeah, agree.
IF a person were one of these hypothetical 54k / year gross pay people with 76k as a down payment in the bank, and they thought buying was best for them, in their particular circumstances, etc. they’d be fools to buy such an expensive place (380k).
There are lots of pretty decent places in my neck of the woods (South Sno County) to be had for 1/2 to 2/3 of 380k. If you get something close to the Lynnwood P&R lot, the commute into Seattle is quite reasonable on a plush bus. Or, making a run against traffic to the factory in Everett and riveting together planes is a snap.
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Our annual income is ~$200K plus and our top-end price range is $500K, with a 20% downpayment.
I have no idea how the average household can afford anything like the median home (I don’t think they can, or are buying homes) and still set aside money for retirement, the emergency fund, etc not to mention own and operate cars, save for their kids education, own pets, take a vacation once in a while, eat out once in a while, etc.
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“We’re rapidly approaching the point where the “affordable” home price will be on par with what the median home price was at the peak. Ridiculous.”
I don’t see why that’s inherently ridiculous. A $470k home today costs several hundred dollars less in monthly payments with a 30-year loan than the $470k home did in the bubble years, and MUCH less than an ARM did.
Yeah, Seattle property is still inflated, but that comparison itself doesn’t say much.
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RE: No Name Guy @ 11 – The median income number is a pointless number because many people at the low end of earning have no ability (or possibly desire) to own a house, and almost all of those at the upper end do. What you really need is a median income of homeowners, preferably broken down in many ways, such as separately by condo/house and Seattle/Bellevue/suburbs.
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Affordability Rules in Seattle Got Bizzarrre After the 2000s
Let’s look at affordability in the 60s and 70s, with basically all single income buyer families too, raising the Baby Boomers as kids with about 6-8% interest…..about 15% of net [not gross] pay.
Now let’s move up to when the X gens were kids, 80s to late 80s Recession. After the Savings and Loan Crisis you could not qualify for a loan unless after car payments, and other loan payments [credit cards] were added to your qualified max mortgage payment; this all had to be less than 30% of your NET pay [not gross]. Interest rates were about 10% then. Before the 80s banking crisis they were cutting loans in the late 70s to early 80s on 15% interest and one professional paid the house payment and one worked for the other bills [it destroyed the economy]….if you were single income you rented forever.
We’ve just left a FAR WORSE banking 2008 crisis than the 80s Recession, that still haunts us with no end. And we talk affordability in Seattle at 30% of Gross Pay. Am I missing something or is this a complete joke compared to the history of mortgage affordability in the Seattle area?
I hear the average American household only has about $30K saved for retirement [buying a $190K avg house]. I bet its far lower in Seattle’s high priced real estate market. IMO, you need a couple million saved to retire safely at about $60K/yr. Hardly no one’s gonna retire safely in Seattle using the 30% of Gross Rule for mortgage affordability.
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“Low Rates Keep the “Affordable” Home Price Inflated”
Does it mean that we are in a “affordability” bubble?
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Just because the statistics and a lender tell you that you can “afford” to buy a particular house doesn’t mean you should. These stats indicate that someone making the median county household income of 66,000 per year can “afford” a home in the neighborhood of 400,000 dollars. But wouldn’t you be kind of nuts to be taking on that much risk? Wouldn’t you be a lot safer buying a 200,000 dollar home or renting? Living on the edge and gambling that your income will increase to pay higher property taxes and homeowner insurance just doesn’t seem so wise to me. Not being able to go out to eat, go to the movies, go out for a beer because all your money is going to pay the mortgage is not worth it, and is a big risk. What if property values fall? It’s happened before, big time, and is likely to happen again.
Obviously, I’m not against homeownership. I just feel that if you’re going to buy a house, you shouldn’t be slave to it. I’m not against homeownership. I’m against stupidity.
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RE: yaj @ 12 –
I have a hard time understanding where the money is spent. $200k a year is $16,666/month gross. 30% to taxes leaves $11,662/month net.
A $400k mortgage ($500k house, 20% down) at 3.35% is $1,763/month. Let’s add on another ~$1k for taxes, insurance, maintenance for a monthly total of ~$2,800 for your house.
Where is the other ~$9k/month going?
Maybe a big chunk for student loan debt? Or maybe you have kids in expensive private schools or colleges?
I’m just wondering b/c I consider our monthly family budget pretty large and we are nowhere near ~$11.6k/month
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RE: JWS @ 18 –
Maybe he has a 15 year mortgage, so another $1000 for housing.
Max the 401k: another $1500. Wife’s too: $1500
Emergency fund: $500+
Daycare/private school: (guessing) $1500
Car payment (or, better yet, savings for car to pay cash): $650
There’s another $6600.
Then the regular stuff: life/disability insurance payments, utilities, food/dining, clothing, vacation savings, charity/tithing, additional savings…
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RE: JWS @ 18 –
Even with $200K/YR
That family is not gonna save the $2M needed for a $60K/YR retirement either….but if they butcher axed their mortgage payment [or paid it off in like 10 years]….they might have a blue moon chance.
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RE: Blurtman @ 6 –
I’d also add that if/when rates go up the correlation between home price to gross income (or net if your more conservative) will be more relavent again. Its just we we’re living in the land of lala rates right now which is pretty significantly distorting the market.
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it’s a strange world that $470k is considered “affordable” when most buyers have never accumulated this amount of money in their entire life.
that’s like saying a bugatti veyron (priced over $1M) is affordable because the lender is willing to finance it over 60 years at a low rate. you can’t really afford it, but the financing has been stretch so much you can devote the rest of your life paying the debt down. today’s housing market is similar although a bit less extreme.
the longer the mortgage loan term and the shorter the holding period, the closer the financing resembles rent. a 30 year fixed @3.35% with an average length of ownership of 7 years (which, btw, is less than 25% of the 30 year loan term), roughly 1/3 of the cost pays interest, 1/3 pays taxes and only 1/3 pays principal. so about two thirds of cost of owning in the first 7 years (which is how long the typical person lives in a home) is gone forever just like rent.
what makes more sense is having a mortgage with a 7 year term which matches up better with the ownership period. even a 15 year term is better than 30 years. a 30 year loan makes no sense, if you buy a house after 35 years of age, you’ll be paying off the mortgage into retirement (assuming retirement is at 65).
i’m conservative with my money and paying half a million for a house seems too high, but i will probably end up paying that if not more because of the social pressure (it’s easier to pay up, than break up).
i hate this real estate market.
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News from our neigbhors to the south:
Sale prices of Bay Area homes surged in 2012 at a pace that accelerated throughout the year, according to DataQuick, a San Diego research firm. In December the nine-county median rose to $442,750, an astounding 32 percent increase compared with the prior year – the highest jump in 25 years of record keeping, DataQuick said Wednesday.
That benchmark is heavily influenced by a changing mixture of homes sold. About half of the increase represents higher values, while the other half stems from fewer bargain-priced distress sales and more high-end homes changing hands.
Read more: http://www.sfgate.com/realestate/article/Bay-Area-home-sales-prices-surging-4200912.php#ixzz2IG4lzZVw
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Great post ; this really opened me up to the housing market in Seattle. I was looking into moving here thanks to a new job offer, and was wondering if you had any leads as to which neighborhoods are considered affordable at the moment. I am looking to spend about $400,000 on my house mortgage, and want something that a couple of minutes away from the CBD…let me know.
Alana
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No matter how you slice it, it is the time to buy homes now. The financing rates are the lowest that they have been in the longest time and it would be a shame to let that opportunity go. However, I would stir away from foreclosures and lease hold. Fee simple is the way to go. There is no need for the rent money to go to waste, if you have enough money for a down payment, put that rent money into your future home. What do you think?
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RE: Damian D. @ 25 – You want to talk to the poster called “Pegasus”. He is so hot to buy that he will probably throw up some fake resistance. Persistence will be the key.
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