"Prices plateau as incomes catch back up"

Here’s some real hard-hitting reporting from the P-I. It turns out that mortgages are rising a lot faster than paychecks. Who knew?

The percentage of Seattle residents who … own their homes increased over the past five years — even though home values and mortgage payments rose much faster than incomes, data the U.S. Census Bureau released today shows.

According to Census numbers, the trend in Seattle also was true in the county, state and nation, although the chasm between income and home values widened more in the city.

Local economists said low interest rates were the biggest reason more people were able to buy their own homes between 2000 and 2005. They also worried about what the trend might mean for coming years.

During that period, “we got home ownership levels nationwide really at record highs, to a point where I’m not sure it’s sustainable,” said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University.

Crellin expects nationwide homeownership rates to stagnate or even drift downward in the next several years.

“Obviously, we can’t sustain the disparity between incomes and housing prices that we have at the present time,” he said. “What I am expecting is prices are going to remain pretty much on a plateau for a period of time as incomes catch back up.”

Ah yes, don’t anybody worry about the historically unprecedented run-up that home prices have experienced in the last 3-5 years. The much-lauded soft landing will save the day. Depending on what Mr. Crellin means by “pretty much on a plateau,” and how quickly incomes actually increase, his scenario would mean stagnant home prices for anywhere between six (totally flat home prices, incomes increase by 5% per year) and twenty-five years (1.5% per year home price increases, incomes increase by 3% per year).

It would seem to me that if home prices stay stagnant for even three or four years, there will be repercussions that will put downward pressure on prices. People can’t refinance out of suicidal financing when they don’t have any magical equity. And who wants to buy an asset that isn’t appreciating at all? The soft landing just doesn’t seem to add up.

(Aubrey Cohen, Seattle P-I, 10.03.2006)

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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.

12 comments:

  1. 1
    Comrade Chairman Greenspan says:

    “What I am expecting is prices are going to remain pretty much on a plateau for a period of time as incomes catch back up.”

    Well, there’s a first time for everything, I guess.

  2. 2
    Peter Taylor says:

    People can’t refinance out of suicidal financing when they don’t have any magical equity. And who wants to buy an asset that isn’t appreciating at all? The soft landing just doesn’t seem to add up.

    That’s pretty much my conclusion too. Their evaluation is based on “all things remaining equal”. That is, if all economic factors remain exactly the same for the next decade, we MAY see prices plateau as incomes catch up.

    I have a question. Who’s going to buy houses while we all sit around waiting for our big pay raises to pay for our McMansions?

  3. 3
    MisterBubble says:

    I’m continually amazed by the number of “economists” who don’t think through their arguments. Tim, your analysis is straightforward and logical, and doesn’t make use of any bizarre assumptions or strangely estimated rates of growth. Why can’t “local economists” do the same thing?

    You would think that a university-affiliated “center” would have more intellectual integrity….

  4. 4
    Lake Hills Renter says:

    I wonder if it’s the case that there’s plenty of economists that don’t use such off-the-wall assumptions, but they don’t get quoted by a newspaper that has much of its advertising revenue from real estate.

  5. 5
    Eleua says:

    Does anyone remember how lofty NAZ stock prices just plateaued until earnings materialized and caught up?

    Anyone?

    Anyone at all?

    Don’t all raise your hands at once.

  6. 6
    plymster says:

    You would think that a university-affiliated “center” would have more intellectual integrity….
    —misterbubble

    Why would you think that? I’m sure most of their funding comes from the RE industry, and academics are more desperate for funding than “industry” economists. As an old professor friend of mine used to say, “We fight harder for money because there is so little.”

    It makes you wonder, though: Who can you trust to correctly report data on RE? You can’t trust banks, title companies, Realtors, appraisers, government, etc, as they all have a vested interest in either more transactions, or higher RE prices. What about mortgage insurance companies?

  7. 7
    SourMash says:

    Since the reporter didn’t provide the source for this information, here’s the U.S. Census news release that prompted this story.

    It’s from the 2005 American Community Survey, which is actually a pretty good data set.

    The American FactFinder site is slowed to a crawl today, but there’s a map from it that may be of interest around here:

    Percent of Mortgaged Owners Spending 30 Percent or More of Household Income on Selected Monthly Owner Costs: 2005.

    This map can be displayed by State/County/Metropolitan Statistical Area. Should be pretty interesting if I can ever get things to load.

  8. 8
    WaitinginMarysville says:

    In order for household incomes to go up by 5% a year doesn’t the rate of increase need to be more than double from what it has been the last few years?

  9. 9
    Crashcadia says:

    Once the layoffs from the REIC, along with the layoffs generated by the debt effect, kick in, then we will see that large jump in earnings.

    I just didn’t realize that you could earn so much on unemployment.

  10. 10
    Nolaguy says:

    For some stories, the PI has a “Sound off” section that allows people to comment on the story.

    The “Soundoff” for this story posed the question:

    “What could or should be done about the increased gap between incomes and housing prices?”

    Interesting responses.

    http://tinyurl.com/jet5c

    Like this one:

    “I personally would love to see an out of state tax applied to ANYONE that has not lived here longer than 5 years…”

    sigh…

  11. 11
    S Crow says:

    Plymster says:

    “Who can you trust to correctly report data on RE?”

    Companies that are NOT owned by mortgage or real estate brokers, or title companies. For example, like us. There ain’t too many of us left.

  12. 12

    […] train,” she said. “No one thought the train was going to crash.”Well… not exactly no one.Posted in Local, News | Tagged foreclosures, Seattle_Times, Tableau Posted by: The Tim Tim […]

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