Big Picture Week: Examining Home Affordability

In one of the first responses to yesterday’s look at Seattle’s long-term Case-Shiller Home Price Index Ross Peterson brought up a good point:

So equivalent annual income increase did not keep up with the housing prices increase but did the buying power keep up with the increase? I think the interests rates have fallen in the same time frame giving the a household more buying power.

That leads us nicely into today’s topic: Affordability.

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:

Affordability Formula

Here’s a look at King County’s affordability index over the last 17 years (as far back as the median price data from the NWMLS is available):

King County Affordability Index

The average level of the affordability index from 1993 through 2004 was 108.3. The latest reading was 98.0. 98.0 isn’t bad, of course the only reason the index is that high is the fact that interest rates are so abnormally low. Last month’s average rate for a 30-year mortgage came in at 4.43%. At an interest rate of 6.5% (0.7 points below the ’93-’04 average), the affordability index would currently sit at a pitiful 77.9.

Here’s another way to look at affordability that I introduced back in May:

King County Affordable Home Prices

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.

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 62.8% in July 2007, and has since fallen to just 9.3%. From 1993 through 2004, median prices came in an average of 0.4% lower than what the median household income could afford.

Even when you add incomes and interest rates into the home price picture, Seattle home prices look about the same as they did in our analysis yesterday: better than the peak years, but not quite back to where the local economic fundamentals suggest they should be.

Big Picture Week on Seattle Bubble

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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. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

66 comments:

  1. 1
    HappyRenter says:

    The rule of thumb seems to be that your monthly payments should not exceed 30% of your household income – assuming you have a stable household income. What if your household income is not stable? Then, you rent?

  2. 2
    ray pepper says:

    RE: HappyRenter @ 1

    “Then, you rent?”

    ABSOLUTELY….YES!

  3. 3

    I think it’s also worth keeping in mind that just because a lender preapproves you for a certain dollar amount doesn’t mean that you should borrow that amount. If you’ve been renting a house for 1500 dollars per month and get preapproved for a home loan where the payments are going to be 2500 per month, are you really going to be able to do that? Have you been comfortably saving that extra thousand per month?
    Lending standards are certainly tighter than they were a few years ago, but for a lot of people, the difference between rent and a mortgage payment means a major lifestyle change, and often means giving up things that you like.
    For some people, it’s worth it. The house and the yard and the garden will give them more pleasure and satisfaction than going out to restaurants, the theatre, concerts, and clubs did.
    For others, they may begin to resent the house in no time at all.
    It’s a personal decision, and not everyone is going to have the same answer, but it’s something to consider.

  4. 4
    The Kid says:

    Here’s the problem. Rents are equally unaffordable. Everyone likes to burble happily about how “If buying is too expensive, just rent and save up a whole bunch of money!”. As if renting was sooooooooo much cheaper that you’re just going to save gobs and gobs of money doing it.

    Typical 1 bedroom runs around a $1000/mo right now
    Typical 2 bedroom around $1250/mo

    That’s $200k, and $250k of mortgage at today’s rates. And don’t give me any nonsense about how much expense water sewer and garbage add. Most apartments have started charging you for those things separately anyway.

    The problem with affordability is that currently, and for the last 10 years or so, putting a roof over your head at all has been too goddamn expensive period. Look at the prices. Look at the incomes. Pay attention. Someone. Please. Anyone? Anyone else see the problem?

    DO NOT FORGET THAT THE MEDIAN INCOME MEANS THAT HALF OF THE POPULATION MAKES LESS THAN THAT.

  5. 5

    RE: The Kid @ 4
    Yes, rents are way too high in the Seattle area. But I wouldn’t say that they’re equally unaffordable. A 250,000 dollar mortgage at 4.5% , 30 year term, including taxes, homeowner insurance, and PMI would run about 1625 per month, and a 1250 dollar rent for the typical two bedroom would in most cases be quite a bit nicer than the house you’d acquire with a low down payment 250,000 dollar mortgage.
    Not a great choice either way, but it’s more like one is bad and one is horrible.

  6. 6
    Updog says:

    Can anyone a little older and wiser comment on life with high interest? I don’t think I’ve seen rates above 8% since leaving college. The feeling I’m getting is that lower doesn’t necessarily alter what I’m able to buy – any extra purchase power just creates a vacuum filled by higher house prices. Of course, this is a plus to the seller, who can get more for the same house even though median income hasn’t budged. As a buyer with good cash reserves and a solid rate of saving, why shouldn’t I be rooting for interest rates to rise?

  7. 7
    The Tim says:

    RE: The Kid @ 4 – You’re getting ahead of me. Price to rent ratio is scheduled for later this week. :^)

  8. 8
    Brad999 says:

    The Kid: Don’t forget that owning anything equivalent to an apartment will also come with condo/HOA dues that are usually much more than utilities. I am in a very good place to compare rent vs. own as the mirror image unit exactly next to mine in the building where I live is for sale. If I bought at their (already reduced) asking price with 20% down at today’s historically low rates, I would be paying $2600/mo to own vs. the $1600/mo I pay to rent. That’s a pretty substantial savings, and a big chunk of that is HOA dues.

  9. 9
    Kary L. Krismer says:

    RE: Updog @ 6 – If interest rates go up significantly, that would be likely the result of inflation kicking in, which would harm your cash reserves.

  10. 10
    The Kid says:

    RE: The Tim @ 7 – Not so much the price to rent ratio here as the income to rent ratio. I’m wondering how this economy is supposed to last with what seems to be a fundamental disconnect between how much people make and how much people are expected to pay for things, in both housing and in goods and services.

    Using most of the 20th century as a baseline of normal, comparing incomes and house prices, housing costs across the US should be about a third of what they currently are. And as rents are informed by house prices, and house prices are informed by rents, the only thing rent really has to be is marginally less expensive than buying, yet both have become completely disconnected with what people are actually capable of paying.

  11. 11
    S. Marty Pantz says:

    By Ira Sacharoff @ 3:

    [F]or a lot of people, the difference between rent and a mortgage payment means a major lifestyle change, and often means giving up things that you like. For some people, it’s worth it. The house and the yard and the garden will give them more pleasure and satisfaction than going out to restaurants, the theatre, concerts, and clubs did. For others, they may begin to resent the house in no time at all.

    But I constantly heard that all renters are putting their lives “on hold” until they buy a home.

  12. 12
    Urban Artist says:

    Thank you The Kid. Rents are not cheap. Oh and would someone please point me to all those great houses for rent in Seattle that are cheaper than a mortgage and somehow nicer than you could buy. Most of the houses for rent in Seattle for 1500.00 to 2.000.00 are pits and I am not all that picky. I’m just waiting to find a house that has a mortgage payment that equals what I pay for rent. I will gladly pay rent to the bank and be done with Landlords. Oh and stable jobs, what is that! You may think your job is stable but that can go away in a flash. How many people now collecting unemployment thought they had a stable job 3 years ago.

  13. 13

    Affordability? LOL

    We can graph how things haven’t changed too badly in a several years spectrum, but so what?

    Seattle home buyers haven’t had affordable homes since 1978, when it first started taking one income to pay for the house and another professional type income to feed the household. I imagine today it’s about no better than 1978. Seattle homes are not affordable.

    Even at the bottom of the 1990 Seattle home price bubble, a new/small $60K rambler in Snohomish county still cost a lot at 10% mortgage interest rates and most of the lower priced homes were still about 50% of one professional income’s net pay…..assuming it had no other debt.

    Since the average household income is about 1.2 incomes [per Census Bureau] in the Seattlle area, not 2 incomes, using approx single incomes, is a much better mathematical method of showing theroretical 1st time home buying affordability than duel incomes, especially for 1st home buyers [ya know, the ones likely to also have kids and horrifying daycare expenses too].

    The DINKs [double income, no kids] are clearly a Seattle minority, but some have the false perception, they rule in Seattle when it comes to real estate….LOL

  14. 14
    pfft says:

    By The Kid @ 4:

    DO NOT FORGET THAT THE MEDIAN INCOME MEANS THAT HALF OF THE POPULATION MAKES LESS THAN THAT.

    and median home price means half the homes are less than that.

  15. 15
    pfft says:

    let’s remember two things.

    1. these metrics are rough guides.

    2. these metrics are subject to change.

    to put this in perspective nationally homes were overvalued in the 2002 compared to their highs in 1990. one could argue in 1999 or 2001 it didn’t make sense to buy a house because they were almost overvalued. prices soared anyway.

    http://www.ritholtz.com/blog/wp-content/uploads/2008/12/case-shiller-chart-updated.png

  16. 16
    The Kid says:

    RE: pfft @ 14

    Very good. Which means that if we have housing available for purchase for 65% of the population, the supposed homeownership rate, that means the 40th percentile on up should be able to afford to purchase a home. So… Can a household income of 38k afford to buy in King County? You answer that one. Compare that to rents. 100% of people need shelter. How many of them can afford it.

  17. 17
    Urban Artist says:

    If a family in Seattle that makes even slightly over the median income would have a hard time paying a 2,000.00 a month mortgage it would be equally hard to pay that in rent. If they are paying a lot for rent they are not able to save a whole lot to buy a house.

  18. 18
    ARDELL says:

    RE: HappyRenter @ 1RE: pfft @ 15

    In addition to income debt ratios, there is a reserve requirement. If the income is stable, that requirement is low at one to two months mortgage payment (including RE taxes and Home insurance cost) in reserve AT time of closing. If the income is not stable…then that reserve requirement would increase to as much as one full year of mortgage payment in reserve at time of closing, depending on the condition of the property and the nature of the income instability.

    The “reserve” can be in 401k or other non-liquid assets.

  19. 19
    Drshort says:

    RE: The Kid @ 16

    There are a lot of retired people with limited income, but paid off homes. There are a lot of students. There are a lot of young people with limited income who have no desire to buy in the next decade. The home buyer market differs from the general population.

  20. 20
    LA Relo says:

    It’s a good thing there’s a windfall of high paying stable jobs coming to organically support the still inflated home prices, and foster a true recovery, not one funded by the debt of our grandchildren.

    There is, right?

  21. 21
    The Kid says:

    RE: Drshort @ 19
    We have two large charts provided by Tim, saying just what I said, that homes are not affordable to the majority of the local population. Tomorrow with rental information I think we will discover with hard numbers that rent is not affordable to the majority of the local population.

    Very well, if the buyer market differs from the general population then why do we use income statistics from the general population to determine house prices? Why not strip out all the irrelevant demographics and find out what the market actually looks like?

  22. 22
    pfft says:

    By The Kid @ 16:

    RE: pfft @ 14

    Very good. Which means that if we have housing available for purchase for 65% of the population, the supposed homeownership rate, that means the 40th percentile on up should be able to afford to purchase a home. So… Can a household income of 38k afford to buy in King County? You answer that one. Compare that to rents. 100% of people need shelter. How many of them can afford it.

    there is an easy answer. many people have found it worth it(and some not) to devote more of their income to housing. 30% is only a guide. you can devote as much or as little of your income to housing as you want. my guess is many people will devote more than 30% of their income towards housing in major metro areas.

  23. 23
    NESeattleSeller says:

    Prices are not set by some evil dictator somewhere. They are set by the market. The fact that rents are high and that houses continue to sell (even at very slow rates) for prices some think are way too high is the reality. You can tell landlords that the rents are too high, but if they get tenants, that is the market saying those rents are fair to someone.

    I tried to sell a rental house in the spring for personal cash flow reasons. It didn’t sell so I rented it out. I had people clamoring to apply and should have asked a higher rent, but still rented it for more than a buyer would have paid with 20% down and just a bit less than a buyer with only 5% down would have paid in monthly mortgage costs. And the rent will go up next year, whereas a mortgage would stay the same.

    Seattle has limits on houseing. Although there are lots of empty condos downtown, the pool of single family houses (preferred by young families) hasn’t grown much in the last few years. Supply and demand rule. Let’s look at a graph of population, households, and number of housing units over time to get a good feel for how supply and demand have changed.

  24. 24
    pfft says:

    By LA Relo @ 20:

    It’s a good thing there’s a windfall of high paying stable jobs coming to organically support the still inflated home prices, and foster a true recovery, not one funded by the debt of our grandchildren.

    There is, right?

    our grandchildren want mommy and daddy to have jobs so they don’t have to move in with grandma and grandpa. they’ll also be happy if mommy and daddy can drive on nice roads and have cops and firefighters to make the . our grandchildren would also probably like nice schools.

    “reset” would lead to more debt anyway so your point is wrong.

  25. 25
    The Kid says:

    RE: pfft @ 22

    Let’s try that again, only with a little added reality. 30% is not an unenforced guideline, or a piece of folk wisdom. In order to go above that you either have to have a very lenient bank/landlord, or lie. It has nothing to do with your willingness or tolerance for risk, and everything to do with the amount of risk someone else is willing to take on someone who has to devote half their income to their shelter.

  26. 26
    2kt says:

    RE: The Kid @ 4

    There are many homes on the market under $1,500. The problem with majority of this web site’s audience is that they all want that 3-bed, 2-ba home in a good school district, on a quiet cul-de-sac and good view, but only want to pay $1,100 for it.

    Who knows, given time and a fair amount of Sniglet’s prayer, the day will (surely) come.

  27. 27
    dscott says:

    What does 2k in rent buy you (King Co)? If our findings are any indication, you’ll likely find a semi-crappy 3 bedroom house in a fairly nice area for your troubles. When tax implications are taken into account, I think we’ll be close to rent/purchase parity if RE drops another 10-15%

  28. 28
    The Kid says:

    RE: 2kt @ 26
    If they can have that does that mean I can get my two bedroom crackerbox with a little garden in a mediocre area for $300 a month pretty please?

  29. 29
    The Tim says:

    By NESeattleSeller @ 23:

    Supply and demand rule. Let’s look at a graph of population, households, and number of housing units over time to get a good feel for how supply and demand have changed.

    Hey lucky you. We did exactly that just a few months ago. Spoiler alert: Supply is increasing faster than demand.

  30. 30
    2kt says:

    RE: The Kid @ 28

    Ask and you shall receive. Amen.

  31. 31
    Yaj says:

    Seattle will always be expensive relative to median household incomes. Most likely – far too expensive for anyone person or household making due with the median income to have a decent quality of life here, ever. You’ll spend so much of your income on housing in one form or another, even while renting a modest apartment in a less than stellar part of town, that you’ll not only never be able to afford a home, your retirement savings will be completely inadequate, you’ll never have enough money to travel, etc, etc, etc.

    If you want a decent house with a yard, at a price that you can afford, the best strategy is to move somewhere else like, say, Omaha. I’m not being sarcastic, and I’m not putting down the midwest – which is full of very nice cities that are vastly more affordable than Seattle or any other major West-Coast city. Life isn’t fair. You have choices. If you truly value owning a decent home at a price that a middle class income can buy – you should consider moving elsewhere.

    If you value whatever intangibles that Seattle has to offer above all else – then stay and suffer.

  32. 32
    pfft says:

    By The Kid @ 25:

    RE: pfft @ 22

    Let’s try that again, only with a little added reality. 30% is not an unenforced guideline, or a piece of folk wisdom. In order to go above that you either have to have a very lenient bank/landlord, or lie.

    or just lax lending standards and someone who wants to devote more of their income to housing instead of something else. it’s not set in stone.

  33. 33
    Drshort says:

    Is the median price only for single family homes? Does it include condos? Mobile homes? Trailers? Section 8 housing? The point is that the median income is for all incomes, but the median home price is for a subset of housing that is tradititionally more expensive.

  34. 34
    m-s says:

    By Yaj @ 31:

    Seattle will always be expensive relative to median household incomes. Most likely – far too expensive for anyone person or household making due with the median income to have a decent quality of life here, ever. You’ll spend so much of your income on housing in one form or another, even while renting a modest apartment in a less than stellar part of town, that you’ll not only never be able to afford a home, your retirement savings will be completely inadequate, you’ll never have enough money to travel, etc, etc, etc.

    If you want a decent house with a yard, at a price that you can afford, the best strategy is to move somewhere else like, say, Omaha. I’m not being sarcastic, and I’m not putting down the midwest – which is full of very nice cities that are vastly more affordable than Seattle or any other major West-Coast city. Life isn’t fair. You have choices. If you truly value owning a decent home at a price that a middle class income can buy – you should consider moving elsewhere.

    If you value whatever intangibles that Seattle has to offer above all else – then stay and suffer.

    Seattle WAS not expensive, as the graphs show. What made it so desirable that it became unaffordable starting in 2005? Was it the demise of grunge? Couldn’t be; the same trend is probably to be found in other Case-Schiller cities around that time. Naw, its an abberation, that will deabberate, in time…

  35. 35
    David Losh says:

    I’m going to put this in here because I think you have the affordability equation wrong, or at least the 30% of your income saying wrong.

    I think it is you should buy a house three times your income. A $100K income should buy a $300K house.

    In 1984 I was making $27K and bought a house for $34K. 1986 my income was $54K and paid $92K for our house in Maple leaf. In 1996 I was making $36K and bought a house for $100K in Greenwood. I was making $100K in 2004 when I bought the 3400 sq ft house in Meadowbrook for $300K.

    The ratio seems to be going down all the time.

    price is everything, the payment is an annoyance.

  36. 36
    wreckingbull says:

    By Yaj @ 31:

    If you want a decent house with a yard, at a price that you can afford, the best strategy is to move somewhere else like, say, Omaha. I’m not being sarcastic, and I’m not putting down the midwest – which is full of very nice cities that are vastly more affordable than Seattle or any other major West-Coast city. Life isn’t fair. You have choices. If you truly value owning a decent home at a price that a middle class income can buy – you should consider moving elsewhere.

    If you value whatever intangibles that Seattle has to offer above all else – then stay and suffer.

    Is that really what you think? Seattle or Omaha? On second thought, keep thinking that. It will help preserve my qualify of life in one of the smaller cities of the PNW.

  37. 37
    HappyRenter says:

    By Brad999 @ 8:

    The Kid: Don’t forget that owning anything equivalent to an apartment will also come with condo/HOA dues that are usually much more than utilities. I am in a very good place to compare rent vs. own as the mirror image unit exactly next to mine in the building where I live is for sale. If I bought at their (already reduced) asking price with 20% down at today’s historically low rates, I would be paying $2600/mo to own vs. the $1600/mo I pay to rent. That’s a pretty substantial savings, and a big chunk of that is HOA dues.

    Now, take that 1000$ difference which is 12000$ per year and put 5000$ of it into a ROTH IRA (I think that’s the maximum allowed?) and the remaining 7000$ into some “safe” mutual fund or some foreign mutual fund/treasury or whatever. After 30 years, aren’t you going to retire with a very nice chunk of money? And once you retire, you can still buy a house and live wherever you want since you don’t have to commute to work every day? Why is it that you are supposed to buy a house when you are young and then sell it when you retire? My uncle and aunt did the opposite: they rented and saved their entire life, and bought after retirement and they are very happy.

  38. 38
    HappyRenter says:

    By Urban Artist @ 12:

    Thank you The Kid. Rents are not cheap. Oh and would someone please point me to all those great houses for rent in Seattle that are cheaper than a mortgage and somehow nicer than you could buy. Most of the houses for rent in Seattle for 1500.00 to 2.000.00 are pits and I am not all that picky. I’m just waiting to find a house that has a mortgage payment that equals what I pay for rent. I will gladly pay rent to the bank and be done with Landlords. Oh and stable jobs, what is that! You may think your job is stable but that can go away in a flash. How many people now collecting unemployment thought they had a stable job 3 years ago.

    That’s the problem. Rents are not cheap, but I have not moved the money in my bank account into a down payment. I have enough money on the side that I could afford being unemployed for a period of time without being kicked out from my apartment. That also means that I am not under pressure to accept any job just so that I can pay my bills. Also, I am free to move with a two weeks notice without panicking that I have to sell a house, being foreclosed on, losing my down payment, etc. Renting allows a lot of flexibility.

    And, there are currently a LOT of condos for rent for under 1500$, like a 2-bedroom condo in Greenwood for 1450$ (price reduced). Just look in Craigslist. A lot of desperate condo owners who bought in 2007 and do not want to sell at a lower price.

  39. 39
    HappyRenter says:

    RE: David Losh @ 35
    So, it’s better to buy at a lower price rather than at a lower interest rate. I guess that is because you can always refinance later if rates drop, but you cannot really change anything about the loaned amount.

    I guess the affordability index does not tell you whether it’s time for you to buy but whether most people around you, who want to buy, will jump into a mortgage.

  40. 40
    Tim Boyle says:

    Those who rely on interest income to live are now also struggling.
    $1M used to kick off $50k per year risk free
    now it will pay $10K
    I wonder how much of a negative effect on older home owners this has?

  41. 41
    Ron Nelson says:

    I Personally Have Given-Up-Any Thoughts.. ON EVER PURCHASING A HOUSE IN SEATTLE…. Im Sticking with my 850 feet $700. Dollar a Month with everything Included Bottom Halve of the HOUSE, For the Unseeable Future… I will happily bank 2,000.+ every month for Investments…

    I Recently Puchased A House in Boise IDAHO with 55,000.00 Downpayment… $760.00 DOLLAR PAYMENT.. Plan in Paying Off In Several Years…~!!

    $170,000.
    Meridian Boise Idaho—4 Year Old UPSCALE NEIGHBORHOOD- RIGHT OFF THE Golf Course… 2,500 Feet 4 Bedrooms, 2.5 Bathrooms 1/4 Acre Off the Golf-Course….. 3 Car Garage with Water Softener, Concrete fully Landscaped.. RV Parking— 175.00 Dollar Home Association Fees, THIS SUCKS.. $175.00 Dollars PER YEAR Down the TUBES.. Laughingly—– Seattle Sucks…

    170,000. Owe NOW 115,000.– Payment 760.00 DOLLARS…. …… RENT IT OUT FOR BELOW MARKET RENTS~! 975.00 Dollars…Rent to a Good Friend~ Peace of Mind~!!

    @Renting it Fair Market Rental Value is $1,100.– All Day Long… Can get as much as $1,300.-1,400. if I wanted to..~!! However I believe its a Win/Win with my Friend Renting it..

    Awesome Home Location in a Great Area ~!! Equivalent To Living In Bellevue.. 10 More at Boeing… IM OUT OF HERE~!!

    SERIOUSLY GUYS CHECK OUT BOISE… Its Just as Nice as Seattle with much Less Traffic and Much Less Rain…. …. Cost of Living/Taxes are so Much Better.. Granted there is Only Roughly 500,000 People in the Greater Boise Area.. Its growing a Much Higher Rates Currently For A Reason~!!

    BELIEVE ME THE EQUIVALENT WOULD COST ME.. EASILY $600,000++++ IN SEATTLE…
    That Would Be Equivalent to a Prison Sentence for me~!!!

  42. 42
    Ron Nelson says:

    MY Payment of $760.00 Per Month…
    includes TAXES/INSURANCE…. Wooooow…

    Try Doing this In Seattle…

    This Isn’t Cracker-Box House… ..
    You can Buy houses there Brand New— for $115,000. — 2000 Feet..

    Check it Out if you don’t Believe..

    Napa Boise—- 10 years ago, 10,000 PEOPLE…. NOW 80,000 Live in Napa… Talk about Growth~!!

  43. 43
    Ron Nelson says:

    Plan On Leaving Boeing In About 10 Years~!!
    I’m Shooting for the Future..

    I Don’t Care What Seattle House Prices Go… …

    I Advice many of you Here In Looking at OTHER OPTIONS…. There is A-Lot-More-To-Life-Than-SEATTLE~!!

    Besides who wants to be here in Say 15 YEARS??

    Tollroads/Traffic—Taxes—-Gregoire!! OOOOoooh Where does it End..~!!

    Amazing we have to Have Seattle Bubble where it Should Be Titled: (( SEATTLE BITCHING))

  44. 44
    Ron Nelson says:

    Everybody Here is Trying To Figure Out how to Afford to LIVE HERE~!!!

    The Truth is… Many/Most really Can’t..
    Why We make Number 1# Rating Recently for Holding the MOST CREDIT CARD DEPT Individually~!!
    REST MY CASE….

  45. 45
    David Losh says:

    RE: HappyRenter @ 39

    30% of income, for a mortgage payment makes no sense. I know mortgage reps would love for you to buy into that, but it’s a false premise. As rates went down people bought a higher debt load? That makes no sense.

    The idea is to pay the house off. No one should be thinking of making payment for 30 years. A higher price takes more resources to pay off the principal.

    It only makes sense if you plan on paying interest for fifteen years, before you start seriously amortizing.

  46. 46
    Macro Investor says:

    This affordability is a total sham. These low, low rates are a trap set by our government. They’re trying to sucker renters into bidding the prices up again. And they’re trying to sucker underwater owners from doing short sales or turning in their keys. They don’t care if they ruin us financially and we can never retire. They just want to protect banks from ever taking a loss no matter how foolishly they behaved.

    Most people need to sell a house or downsize to retire. What are you going to do when you find out your house is a loss after putting a lifetime of savings into it? It will be cold comfort that someone said it was “affordable” back when you bought it.

  47. 47
    Jonness says:

    By pfft @ 15:

    prices soared anyway.

    http://www.ritholtz.com/blog/wp-content/uploads/2008/12/case-shiller-chart-updated.png

    You forgot to mention what happened to lending standards, which kicked off the bubble. Contrast that to increasingly tightened lending standards in the current environment, and you end up in Japan.

    Imagine that, their prices went up when they shouldn’t have too. The problem is, when the charade ended, prices corrected for a very long time.

    http://www.marketoracle.co.uk/images/2008/japan-house-prices–nov08.gif

  48. 48
    Jonness says:

    By m-s @ 34:

    Seattle WAS not expensive, as the graphs show. What made it so desirable that it became unaffordable starting in 2005? Was it the demise of grunge? Couldn’t be; the same trend is probably to be found in other Case-Schiller cities around that time. Naw, its an abberation, that will deabberate, in time…

    And interestingly, prices are not just high in Seattle. They are similarly high across the entire PacNW when compared to historical norms.

    The correction is ongoing. It’s still too early to buy.

  49. 49
    wreckingbull says:

    RE: Macro Investor @ 46 – No doubt. I bid the baby boomers ‘good luck’ in trying to unload their homes on Gen-Y. Oops.

  50. 50
    HappyRenter says:

    I’m confused. I grew up in Southern Italy until the mid 80’s. At that time in Southern Italy it was possible to buy a house with 50 million Lire (the equivalent of, I would say, 30’000 $) and it was common to pay cash (it’s not that way anymore). Then I moved to Switzerland where in order to afford a house you must work for a bank your entire life. Now, I have moved to the PNW of the US and everybody complains that housing is not affordable but it used to be.

    Is it really for granted that buying a house should be affordable for anyone? Or, is it maybe something that, in the near future, only a small percentage of the population can afford and the rest has to rent, unless you want to move far away from urban areas and job opportunities?

  51. 51
    zipzippygc says:

    This speaks to the affordability strain: Seattle in Top 25 in 90-day delinquencies and defaults
    http://www.marketwatch.com/story/housing-isnt-even-close-to-stabilizing-2010-09-22?pagenumber=2

  52. 52
    ray pepper says:

    RE: zipzippygc @ 51

    excellent link..thanks!

    (btw……………………………they r all coming back!)

  53. 53
    ray pepper says:

    RE: zipzippygc @ 51

    excellent link..thanks!

    (btw……………………………they r all coming back!- people will only remain stupid for so long!)

  54. 54
    Macro Investor says:

    RE: pfft @ 15

    “prices soared anyway.”

    Pft, your problem is you think markets are magic all-knowing all-seeing genies. Tell us, please… was the market right when ebay and amazon were $400 stocks? How about a little while later when they were $15? Markets are simply crowds of people who rarely have their emotions under control. There is no difference between dot coms and housing bubbles.

  55. 55
    pfft says:

    By Jonness @ 47:

    By pfft @ 15:

    prices soared anyway.

    http://www.ritholtz.com/blog/wp-content/uploads/2008/12/case-shiller-chart-updated.png

    You forgot to mention what happened to lending standards, which kicked off the bubble. Contrast that to increasingly tightened lending standards in the current environment, and you end up in Japan.

    Imagine that, their prices went up when they shouldn’t have too. The problem is, when the charade ended, prices corrected for a very long time.

    http://www.marketoracle.co.uk/images/2008/japan-house-prices–nov08.gif

    lending standards are always tighter after the bust and loosen during the boom. this will happen again, bank on it.

    we aren’t japan, we’re repeating the 70s.

    No, We’re Not Turning Into Japan
    http://www.slate.com/id/2264391/

    Timing of government intervention. Everyone—including those of us who reject the Japan analogy—can agree that the Japanese government and central bank prolonged its malaise by unfathomable delays in policy response. The famous move to a zero-interest rate did not, for example, kick in until about nine years into the crisis; the Federal Reserve and U.S. government acted much more swiftly. When Barack Obama makes his uphill pitch about how things could have been worse without the bank bailout or stimulus, it’s precisely a Japan scenario he’s talking about.

    great slate article.

  56. 56
    Macro Investor says:

    By zipzippygc @ 51:

    This speaks to the affordability strain: Seattle in Top 25 in 90-day delinquencies and defaults
    http://www.marketwatch.com/story/housing-isnt-even-close-to-stabilizing-2010-09-22?pagenumber=2

    Wow. This says we have a shadow inventory of 56,000 houses. What’s that, about a 20 month supply? Sounds like we need to buy or be forever priced out. Where’s Steve Titler anyway?

  57. 57
    pfft says:

    By Macro Investor @ 54:

    RE: pfft @ 15

    “prices soared anyway.”

    Pft, your problem is you think markets are magic all-knowing all-seeing genies. Tell us, please… was the market right when ebay and amazon were $400 stocks?

    no. but what the illustrates is that you can get in trouble if you treat metrics as set in stone. alan greenspan called a bubble in 1996 and he was wrong for years(even 98 didn’t stop the party). markets are an art not a science. gold has been a bubble since $500. I remember articles asking if it’s wise to buy the new silver etf as that could be the sign of a bubble. that hasn’t worked out so well.

    people cry bubbles when 2 things happen

    1. they’ve been wrong

    2. they have no idea what the heck is going on

    if you thought gold was a bubble at $500 what do you think and what should you do $800 dollars later? most people will dig in their heels, pout and cry bubble even louder. they finally give in near the top and fuel the parabolic rise. it’s much easier(on your wallet if not on your mental capital) to admit you were wrong and $800 and ride the wave.

  58. 58
    The Kid says:

    RE: Macro Investor @ 54 – I agree, I would like to add that supply and demand, and “the market” no longer apply when you’re talking about necessities, like shelter. Everyone needs them, when they get too expensive for a chunk of the population, they don’t just “choose” not to buy, they are forced to do without. That was the tragedy of the housing bubble, not lost home values, or foreclosures, or bad investments, but the loss of something far more precious.

    Homes. Not real estate, not investments, not rentals, not ‘average dwelling units per capita’. A home. For a person to live in. To raise a family in. Nearly an entire generation denied the quality of life that their parents and grandparents had. Lack of ability to afford shelter, whether one obtains it through rental, mortgage, or ownership, delays education, delays prosperity, delays children, delays life goals. For millions.

    “The Almighty Market” can go fark itself. In the ear. Sideways.

  59. 59
    Basho says:

    While the index presented provides a good picture of affordability trends, the absolute values are not realistic for most of my peers (people in their 20’s). I know a young couple that recently bought a $350K house, and it required a household income more in the range of $80K to $100K. For starters, new households typically are not going to have a 20% down payment. FHA financing is more in the range of 5%. In addition, it is not uncommon for young people to be constrained by the total debt payment limit on FHA financing. Auto loans and educational loans are very common, and the monthly payments can be substantial.

    I also wanted to point out a misconception that may be embedded in this comment: “I think we’ll be close to rent/purchase parity if RE drops another 10-15%”

    This comment may ignore the fact that home prices affect rents. A fall in home prices would mean a fall in household expenditures. Reduced household expenditures would mean less personal income. Less personal income would mean fewer households or lower household incomes. Fewer households would mean less demand for housing and lower household incomes would mean a reduction in the price households could afford to pay.

    As home prices fell, some people would purchase housing units and leave rentals. More vacant rentals would mean lower rents.

    The ultimate point I am trying to make is that you can’t just assume one variable is static. The housing price level where mortgage payments and the rent will be identical cannot be determined with any certainty.

  60. 60
    Cheap South says:

    There is something very wrong when that green line showing “affordable home” is sitting at $350,000.

    And, again, everyone seems to be counting on dual incomes OR job security.

    New reality makes that formula obsolete.

  61. 61
    Cheap South says:

    By The Kid @ 58:

    RE: Macro Investor @ 54 – I agree, I would like to add that supply and demand, and “the market” no longer apply when you’re talking about necessities, like shelter. Everyone needs them, when they get too expensive for a chunk of the population, they don’t just “choose” not to buy, they are forced to do without. That was the tragedy of the housing bubble, not lost home values, or foreclosures, or bad investments, but the loss of something far more precious.

    Homes. Not real estate, not investments, not rentals, not ‘average dwelling units per capita’. A home. For a person to live in. To raise a family in. Nearly an entire generation denied the quality of life that their parents and grandparents had. Lack of ability to afford shelter, whether one obtains it through rental, mortgage, or ownership, delays education, delays prosperity, delays children, delays life goals. For millions.

    “The Almighty Market” can go fark itself. In the ear. Sideways.

    Correct. That’s why the market gives you the finger when it comes to health care or lawyers. You don’t want to use them, you need them; so you get raped.

  62. 62
    David Losh says:

    RE: HappyRenter @ 50

    I like your comments, I guess, because your points about Italy, and Switzerland are completely to the point. In many other parts of the world people rent forever. In many places the land lord is a lord of an estate that is passed from one generation to the next. Some families have massive Real Estate holdings that they can never sell because no one can afford to buy. Rents are low, and properties maintained on a minimal level.

    We are having the debate right now about cash property purchases in Peru. That was the norm ten years ago, and today everything has gotten too expensive, and you have to buy with a mortgage.

    The world is changing. Money is changing, and what you can afford is changing. I think what is more in line with affordability is what you can buy, or what you want to own. A buyer of property should have a plan of what they want, and what they can afford to own. It doesn’t seem to me that pricing will retreat as far as we think, so you will need to have a strategy of ownership.

    What really concerns me is the people who are stuck with say a town house in Ballard at $400K, or even $350K. There is no chance of building an estate out of that. Or the people who own property that can not be maintained, or has no ability to be usable space for them, or needs extensive remodeling to be attractive to some one else.

    What I’m really trying to say is that we are at a point where owning property is a long term investment because you can’t get rid of it so easily.

  63. 63

    […] quite.” What about you?Big Picture Week on Seattle BubbleCase-Shiller HPI Rate of IncreaseExamining Home AffordabilityPosted in Features, Statistics | Tagged big-picture, Case-Shiller, fundamentals Posted by: The Tim […]

  64. 64
    Kary L. Krismer says:

    By NESeattleSeller @ 23:

    Prices are not set by some evil dictator somewhere. They are set by the market. The fact that rents are high and that houses continue to sell (even at very slow rates) for prices some think are way too high is the reality. You can tell landlords that the rents are too high, but if they get tenants, that is the market saying those rents are fair to someone.

    I would tend to agree. By saying it’s not affordable, to some extent that simply means others are willing and able to pay more. I don’t go around saying that a Lexus automobile is unaffordable just because others are willing to pay the manufacturer’s prices.

  65. 65

    […] What’s your take?Big Picture Week on Seattle BubbleCase-Shiller HPI Rate of IncreaseExamining Home AffordabilityPrice to Rent RatioPosted in Features, Statistics | Tagged big-picture, fundamentals, price-to-rent, […]

  66. 66

    […] by the price to rent ratio.Big Picture Week on Seattle BubbleCase-Shiller HPI Rate of IncreaseExamining Home AffordabilityPrice to Rent RatioPrice to Income RatioPosted in Features, Statistics | Tagged big-picture, […]

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