Affordable Home Price Inched Up in May

Affordable Home Price Inched Up in May

As promised in this morning’s affordability post, here’s 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 a family earning 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.

King Co. Actual & "Affordable" Home Prices

The “affordable” home price actually rose in May thanks to a dip in rates to their lowest points since October. The “affordable” home in King County now sits at $437,067, with a monthly payment of $1,708.

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.

King Co. Home Price, Income Req. to Afford

As of May, a household would need to earn $69,123 a year to be able to afford the median-priced $442,250 home in King County. This is up from the low of $46,450 in February 2012, but up month-over-month to the highest point since last August. Meanwhile, the actual median household income is around $68,000.

If interest rates were 6% (around the pre-bust level), the “affordable” home price would drop down to $356,064—19 percent below the current median price of $442,250, and the income necessary to buy a median-priced home would be $84,848—24 percent above the current median income.

Dipping rates helped keep affordability from dropping with the spring boost in home prices. If rates stay low, home prices will probably continue to increase in the near term as the local economy continues to boom, but if rates start to go up, expect that to quickly put the brakes on home price gains.

  

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.

10 comments:

  1. 1
    Deerhawke says:

    These are really useful charts Tim. I certainly would not have guessed that the median and the affordable home chart lines are so close to one another.

    Longer term I tend to be pessimistic and doubt we will see greater affordability. My view is that prices are going to continue to inch up. It is hard to believe interest rates will stay this low. While labor markets are starting to limber up and people can job-shift and seek higher wages, I am guessing this will not keep pace with the increases in prices and interest rates.

    Rate this comment: Thumb up 0

  2. 2
    Yaj says:

    I think that using the median income is a useful way to look at affordability, but is there anyone out there who can actually afford a $440K home with an income of $70K?

    That’s about what we paid for our house, we typically have an annual gross something like 3X that, and ~$450K with a 10% DP was always near the maximum that we could afford after factoring the cost of health insurance, retirement savings, college savings, upkeep costs, replacing cars every 10 years, actually buying a few pieces of furniture for the place, eating out once a month, taking modest vacations, etc, etc, etc, etc.

    Kudos to folks that can make it work, but for us an annual income of $70K would have us looking at places in the ~$210K range, max.

    Rate this comment: Thumb up 2

  3. 3
    whatsmyname says:

    Given that 30% of our population can’t afford the bottom price house; it is a wonder that going up 20 percentage points on the income distribution should be matched with going up 50% on the house price distribution. That really makes no sense at all.

    Rate this comment: Thumb up 0

  4. 4

    RE: whatsmyname @ 3 – Not everyone buys houses, or even wants to buy houses, or even lives in houses (some live in condos and apartments). Also, not everyone uses income to buy houses–there’s also savings.

    Rate this comment: Thumb up 0

  5. 5
    JWS says:

    RE: Yaj @ 2

    This is just my opinion, but if you are making $200k a year a $2,000 monthly mortgage payment ($400k 30 year loan at 4.25%) should be no problem. I think any financial adviser would agree assuming that you don’t have massive amounts of student loan debt.

    Your gross income is over $16k a month. It’s time to make a budget and get your discretionary spending under control.

    Rate this comment: Thumb up 0

  6. 6
    Yaj says:

    @JWS

    Totally agree that it looks like no problem if you just look at gross income. “Spending” on retirement savings takes $45-50K per year (not including social security/medicare/medicaid deductions), taxes normally take another ~$45K, and health, disability, life, auto, and umbrella insurance equal $21K per year, student loan repayment (15% above required payment) comes to $7200, college savings are ~$4K/year so the reliable monthly net left over after covering the essentials comes to around $7500, of which around $2500 goes to paying mortgage + property taxes. Spending on utilities, gas, groceries, child-care, etc usually amounts to another $3000. Big non-recurring items like car repair, home repair/maintenance/improvement, medical bills, clothing, furniture, vet-bills, vacations/recreation/hobbies, charitable giving, etc vary dramatically but the average spend on those comes to roughly $1500 per month.

    No complaints, and the monthly spend on retirement, insurance, and student loans (and to be fair, non-essential spending in other categories) are all higher than average and that certainly factors in, but I’m still left wondering how any household could afford a $440K house and still manage to put money aside for retirement, emergencies, etc + home repairs/maintenance, let alone doing a bit of spending to enjoy life every now and then.

    Rate this comment: Thumb up 1

  7. 7
    Blurtman says:

    RE: Yaj @ 6 – The kids can take out student loans, the home equity will be retirement savings, emergencies – that’s what credit cards are for. And don’t forget the luxury car leases.

    Rate this comment: Thumb up 1

  8. 8
    Yaj says:

    Edit: “but I’m still left wondering how any household making $70K could afford a $440K house and still manage to put money aside…”

    @Blurtman: You forgot taking out the maximum HELOC to buy expensive, rapidly depreciating assets. YOLO man!

    Rate this comment: Thumb up 0

  9. 9
    JWS says:

    RE: Yaj @ 6

    The good news is you’ll be able to buy a mansion at retirement with the amount you are saving.

    An example:
    $50k annual savings for 30 years at 8% annual return = $5.6 million

    Rate this comment: Thumb up 0

  10. 10
    Mike Stanger says:

    Hey, Tim: I’ve been meaning for some time to comment on the affordability index. First, what source, geography, and household size are you using for median household income? It seems much lower than the Seattle-Bellevue-Everett Area Median Income.

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