Big Picture 2011: Price to Income Ratio

Okay, let’s have a look at how local home prices compare to local incomes. This is basically the same thing we’re looking at when we talk about affordability, but with interest rates taken completely out of the picture.

First, let’s check out the ratio between home prices and King County median household income data from the OFM:

Seattle Home Price to Income Ratio

Last year this measure was 31% above its 1990-2001 average. As of September, the difference is down to 19%, roughly on par with where it was in early 2002.

As we did last year, let’s have a look at another take on the price to rent ratio, using per capita income from the BEA instead:

Seattle Home Price to Income Ratio

As I mentioned last year, I think the per capita income better reflects the “wealth effect” of the dot-com boom here in Seattle than the median household income. Another way of looking at it is that per capita income is perhaps a better measure of the income of the segment of the population that actually buys homes than the strict median income, and better accounts for the investors that own the 41% of King County homes that are renter-occupied.

Here’s a plot of home prices, per capita incomes, and median household incomes each indexed to January 1990 = 100. Note that the income data is only released yearly, so the data between releases is a simple linear interpolation, and I’m assuming flat per capita income data since the last data release in 2010.

Seattle Home Prices and Incomes

Last year I stated that the comparison to per capita incomes put home prices “about ten percent higher than where incomes suggest they ‘should’ be.” Today prices have fallen enough to put the two right in line. If you’re comparing to median income, prices are still about 20% higher than where they were relative to incomes through the ’90s. Given that the current difference between median income and home prices is so much more dramatic than the per capita income ratio and the price to rent ratio we looked at yesterday, I’m inclined to think that the median income comparison overstates the home price imbalance, but if you’re looking for a data point to “prove” that homes are still 20% overpriced, here it is.

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.

60 comments:

  1. 1
    HappyRenter says:

    Tim, I don’t remember why you prefer the per capita instead of the median household income. In my view, you are more inclined to buy a home if you have a family rather than if you are single or a young couple. If the median household income has not increased on par with home prices, I don’t see how families can afford a home.

    I think that a more detailed analysis should break down the increase of per capita income into age groups. It might turn out that the younger generations (i.e., those who are potential buyers) have not seen the same increase in income as older generations (who already own homes). Also, unemployment is much higher in younger age groups (25 and under) than middle aged people (30-50).

  2. 2
    John Bailo says:

    If the Government wanted to really encourage home ownership, instead of the mortgage deduction, they should put a higher tax rate on 2nd, 3rd, 4th… properties. Escalating with each one added.

  3. 3
    HappyRenter says:

    By John Bailo @ 2:

    If the Government wanted to really encourage home ownership, instead of the mortgage deduction, they should put a higher tax rate on 2nd, 3rd, 4th… properties. Escalating with each one added.

    Wait! Then you would be taxing the rich. We don’t want that either ;)

  4. 4
    The Tim says:

    By HappyRenter @ 1:

    Tim, I don’t remember why you prefer the per capita instead of the median household income. In my view, you are more inclined to buy a home if you have a family rather than if you are single or a young couple. If the median household income has not increased on par with home prices, I don’t see how families can afford a home.

    I tried to explain my reasoning right in this post:

    I think the per capita income better reflects the “wealth effect” of the dot-com boom here in Seattle than the median household income. Another way of looking at it is that per capita income is perhaps a better measure of the income of the segment of the population that actually buys homes than the strict median income, and better accounts for the investors that own the 41% of King County homes that are renter-occupied.

    One of the most frequent complaints I hear whenever I post stats about the median household income is that it doesn’t account for the fact that the bottom 41% of households in the Seattle area are not home buyers. Ideally we’d be able to look at the median income of only those households that make up the potential home buyer pool, but that data isn’t available. I’m arguing that per capita income might be a decent proxy for that.

  5. 5
    m-s says:

    I’ve read a lot recently about how the “other” debt load on people, i.e. college loans, car loans, general credit card debt, etc. has increased over the decades. Seems that the more of that there is, the less can be devoted to house payments. Alternatively, this median “other debt” load should be subtracted from median income (whether per capita or family) before you calculate the ratios.

  6. 6
    Scotsman says:

    RE: m-s @ 5

    You make great points, especially about student loan debt We have to figure if someone is graduating with say $80K in loans then that same amount should be deducted from their home purchasing power since the financing impact is about the same.

    Here’s a family we all know- they make about $23,000 a year, but spend $36,000 putting the difference ($13,000/yr) on the credit cards. Since the card balances already total $151,000 they’re about to run out of credit. Now they’ve tried to cut back and reduce spending, but so far all they’ve come up with is $385. And that was a major political battle, if ya know what I mean. How much house will they be able to afford?

    Yup, you guessed it- that “family” is the USA.
    http://video.cnbc.com/gallery/?video=3000062374

  7. 7
    An Onyx Mousse says:

    Hi Tim,
    The point of using the median income is not that the median income household is representative of the homebuying population, but rather that movements in the median are a succinct way to capture changes to the incomes of marginal buyers, who tend to have incomes at least correlated with the median. This probably affects prices mostly at the low end of homes, To the extent home prices are correlated with changes in the high end of incomes, your measure would reflect that better.

  8. 8
    ARDELL says:

    RE: m-s @ 5

    It used to work this way.

    Housing allowance 28% of gross (front end)
    Housing + Debt Allowance 36% of gross (back end)

    If your total debt was 10% of gross (2% over the allowance of 8%) then your mortgage approval reduced from 28% of gross to 26% of gross. The front end being reduced by the excess at the back end.

    If the car and credit cards and student loans didn’t equal more than 8% of gross, there was no “penalty” for the debt against how much house you could buy. You were only “penalized” if your back end was over 36% (“your back end is out”) and the excess debt was subtracted from the “front end” or amount of monthly mortgage payment they would approve.

    It still works that way…to some extent…but the numbers have shifted upward as to the front end and back end %s and differ somewhat from one lender to the next or one loan program to the next.

    This is how banks were getting more money via higher interest rates, without the buying consumer realizing what was happening, during the “bubble” years. They would give a buyer a pre-approval for $225,000, knowing that would push their back end out and cause the loan to be a sub-prime loan. The buyer went out with this pre-approval letter without realizing the Purchase Price shown of $225,000 was one that forced their back end out, and resulted in a risk based high rate loan.

    Add that to the fact that this area did not…and does not…have a rate cap in the finance contingency, and the buyer had no recourse when they discovered the problem and high monthly payment, except to close anyway or lose their Earnest Money.

    Sad.

    The back end being out used to = a lower pre-approval Purchase Price. Now it is more likely to create a higher interest rate, but an approval nonetheless. Some limitations, of course. That backfired when the lender did not get years and years of higher interest rate…but instead…got the house back.

  9. 9
    David Losh says:

    RE: Scotsman @ 6

    We elected Obama to end the war in Iraq. Mission Accomplished.

    Congress just passed a whopping $662 Billion dollars for a defense budget.

    Composition of the FY 2012 Budget $892 Billion in Outlays for medicare, medicaid http://www.hhs.gov/about/FY2012budget/fy2012bib.pdf

    Then we can throw in another 21% for pensions.

    That’s most of your budget right there. Public Welfare is another 13%.

    Let me throw in a little reality in the charts and graphs department http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200

    OK there’s a big problem there in about 2008 with the money the government takes in, could that be tax cuts?

    The problem with scum like the Santelli guy is they don’t do anything. They are the bottom feeders who are trying to create hysteria where none. aboslutely none exists.

    These thieves convince people that they should trust the Santelli thieves with thier money, and then they watch market conditions unfold, and let you systematically lose.

    He doesn’t care about research, or reality. He wants you to trust him so he can sell another book, or get invited to speak for a hefty fee. He’s the private sector of the Newt Gingrich.

  10. 10
    Jonness says:

    “I’m inclined to think that the median income comparison overstates the home price imbalance, but if you’re looking for a data point to “prove” that homes are still 20% overpriced, here it is.”

    Last year I argued that per capita income was not useful due to well-known and growing disparity between the super rich and the middle class. Since the super-rich spend a much smaller percentage of their incomes on housing than the 99% of house buyers, PCI data is not useful when making comparisons to median house prices.

    http://housingcorrection.com/images/incomedisparity.jpg

    http://housingcorrection.com/images/incomegap.jpg

    I went on to argue that median household income was a better indicator, because it better tracked the incomes of actual home buyers through time.

    One point argued against me was that median household income weights too heavily toward renters and low incomes, and therefore it is not as good as PCI. My point was that the shift in quantiles in median household income was far, far less that that of PCI. In addition, renters incomes are tied to home prices, because they purchase homes for the landlord, who must make a profit in order to rent the homes. Thus, median household income is a far more accurate comparator than PCI.

    However, I could not convince certain people that MHI of everybody was better than MHI of owner-occupied homeowners only. Curious of this claim, I used the American Housing Survey to compare the ratio between years 1991 and 2009. I was not surprised to find that this data supports my argument and disputes PCI as being meaningful when used in a house price to income ratio.

    ACH data:
    Median ratio of value to current income owner occupied 2009:
    Seattle City 4.8

    Median ratio of value to current income owner occupied 1991:
    Seattle City 3.7

    CS vs OFM Median price to median household income KK 2009:
    4.8

    CS vs OFM Median price to median household income KK 1991:
    3.5

    Due to gross decoupling over time with the large majority of house buyers’ incomes, per capita income is not a useful comparator to house prices. However, Median household incomes of all residents have stayed tightly coupled through time with Median household incomes of owner occupied homeowners only.

    Seattle area houses remain grossly overpriced compared to historical relationships to meaningful income comparators.

    http://www.mybudget360.com/wp-content/uploads/2011/12/distribution-of-household-income-united-states.png

    http://www.mybudget360.com/wp-content/uploads/2011/12/average-income-americans.png

    http://www.mybudget360.com/wp-content/uploads/2011/12/wealth-in-america.gif

  11. 11
    Scotsman says:

    RE: David Losh @ 9

    “He’s the private sector of the Newt Gingrich.”

    What? I try to keep up David, but it’s hard. Are you saying Santelli is the complete package? That he has cajones, or that he is cajones? Maybe he’s the junk . . . in Newt’s trunk? I just thought he was the “protection” we needed from a government that “loves us long time” while doing “back door” deals. I only know we need to stop before we go blind. Where’s OneEye- he’d know how to handle this. . . ;-)

  12. 12
    MichaelB says:

    Tim,

    You raise an interesting point regarding the valuation of properties. Is it really true that 41% of homes are rental investments and the rent versus buy ratio is 29? This means that a $400K home would rent for $400k/29 = $13,793 per year. That is a whopping 3.5% return on investment before expenses. As wages are actually dropping, and home prices are not expected to have capital gains for a very long time. In addition to the fact that rentals are a pain in the ass and require about 5% per year to maintain (you must count any sweat equity as an expense). How is this a good investment? Unless you can purchase a home at around 15X annual rent, you are not making a good investment. Since 41% of properties are so-called “investments” how long do you expect investors to keep their money tied up in a losing proposition? Would you buy a house for a 3.5% return with prices expected to drop in this current global environment? Assuming inflation of x% No? Then expect prices to drop until rental properties are a good investment.

    Possibly you believe that household income is not a good measure because it does not provide the results you would like. In fact, it is a measure that has been used for a very long time and thus is quite a good indicator of a houshold’s ability to buy a house. It should be 3, but in this economy 2.5 is very possible. Using 20 years of data is not sufficient and proves nothing since the last thirty years have seen increasing levels of debt like no other period in history. Each successive recession has been solved by increasing debt until we find ourselves here – at the end of the line. Therefore, your analysis and assumptions are not valid

  13. 13
    MichaelB says:

    By Scotsman @ 6:

    RE: m-s @ 5

    You make great points, especially about student loan debt We have to figure if someone is graduating with say $80K in loans then that same amount should be deducted from their home purchasing power since the financing impact is about the same.

    Here’s a family we all know- they make about $23,000 a year, but spend $36,000 putting the difference ($13,000/yr) on the credit cards. Since the card balances already total $151,000 they’re about to run out of credit. Now they’ve tried to cut back and reduce spending, but so far all they’ve come up with is $385. And that was a major political battle, if ya know what I mean. How much house will they be able to afford?

    Yup, you guessed it- that “family” is the USA.
    http://video.cnbc.com/gallery/?video=3000062374

    Fortunately, that family also can legally print their own money, so it is no problem and they can buy as big a house as they want! :)

  14. 14
    JimN says:

    RE: ARDELL @ 8

    “Add that to the fact that this area did not…and does not…have a rate cap in the finance contingency, and the buyer had no recourse when they discovered the problem and high monthly payment, except to close anyway or lose their Earnest Money.”

    Does something prevent a prudent buyer (or buyer’s agent) to add a rate cap finance contingency?

  15. 15
    ARDELL says:

    RE: JimN @ 13

    No. But that doesn’t really solve the problem as “prudent” buyers and buyer’s agents aren’t the ones who get in trouble by not having a rate cap. Added protections in the boilerplate documents, and rate caps do exist and have existed in most of the Country for many years, protect consumers generally. Those who would be wise enough to “add” it in, would also not likely have the problem in the first place. So it doesn’t really solve the problem that someone can add it.

    Also, if it were part of the contract as the norm, sellers would not perceive it as “odd” and the offer with the rate cap would more likely be accepted. As a stand alone “add in” that Listing Agents have not seen before, it is not as likely that sellers would accept offers with rate caps in them.

    I was once told, by a reputable source, that the Finance Contingency in this area did have a rate cape at one time, sometime prior to 2004, but it was removed.

  16. 16
    Jonness says:

    My comment has been awaiting moderation for the last few hours. So while we wait, we might as well view this short little movie I made:

    http://housingcorrection.com/misc/letsdoit.htm

    :)

  17. 17
    David Losh says:

    RE: MichaelB @ 12RE: MichaelB @ 11

    Good comments that are very true.

    Investors were willing to take a lower return on investmnet, or cash flow, or even feed a negative because properties were appreciating in value.

  18. 18

    RE: Scotsman @ 6

    Its Actually Worse Than Just Reducing Principle Debt Ability

    Since college loans aren’t the 30 year variety, more like the 10 year variety….this makes the $80K college loan more like a $160K loss in your principle debt home buying ability.

    But not to worry Scotsman, the paranoid banksters are well aware of this and do exercises on the Seattle transit every morning….practicing shaking their head sideways “no” to loan applicants….

  19. 19

    RE: MichaelB @ 11

    Well Said

    I agree….a caveat, its even worse than your good mathematical logic…talk to landlords [I do], some are just shutting their units down entirely in today’s economic ship-wreck, it costs more to rent it out in legal fees and damage, than to leave it empty….

  20. 20
  21. 21
    David Losh says:

    RE: Scotsman @ 10

    What I’m saying is that the conservative movement is corrupt.

    I don’t think you can dispute that. Santelli, like Gingrich, are personalities. I think Rush Limbaugh brought us people like Glenn Beck, Shaun Hannity, and Bill O’Reilly.

    The message got lost in the translation.

    If you want to talk deficit look at the last link: http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200

    The United States runs a deficit. Right now on the chart you can see that the deficit swelled by tax cut, over spending, and then the stimulus package. Obama did the right thing, at the right time.

    Now the deficit is military, and health care. Those are the cuts that need to be made.

    Obama promised to get us out of Iraq, which he did. He also brought in a Health Care Reform legislation. Military, and Health Care, that is fifty per cent of the budget.

    Any conservative has to look at military, and health care cuts in order to get to a balanced budget. It’s the elephant in the room.

    After that it is tax revenue. There are a million, literally, a million places to close loop holes, and tax fairly, industries that are counter productive.

    All of these things are possible for a family making $23K per year? It’s a mockery of our entire system to make the comparison. Santelli knows who pays him.

  22. 22

    RE: David Losh @ 20

    Reduce Benefits on Everything Except the Mortgage Interest Deduction Going Mostly to the Top 10% Rich in America?????

    Article:

    “…The U.S. federal income tax code is full of complicated deductions, credits, and loopholes, the largest of which is the mortgage interest deduction (MID).

    According to the Internal Revenue Service (IRS), itemized deductions excluded $1.26 trillion in income from the 2008 tax base, amounting to 15 percent of total adjusted gross income (AGI). The mortgage interest deduction was the largest of these deductions, accounting for $470.4 billion, about 36 percent of the total.

    As Congress continues to discuss and debate the future federal budgetary and tax philosophy, it should consider reforming the overly complex, highly inefficient U.S. federal tax code, particularly the mortgage interest deduction. And given the housing market’s importance to the economy and economic growth, it is especially critical to review who would be affected by reforming the mortgage interest deduction….”

    http://news.heartland.org/newspaper-article/2011/08/18/case-dropping-mortgage-interest-deduction

    Sounds like if we cut this cash cow out against the federal government tax receipts from the rich, there’d be plenty for the poor’s health care….

  23. 23

    By David Losh @ 9:

    RE: Scotsman @ 6

    We elected Obama to end the war in Iraq. Mission Accomplished

    Actually we elected Democrats to control Congress in 2006 to end the war in Iraq. Despite the fact that was a clear lie (they had no intention of doing that), we allowed a Democrat into the White House on the same promise (although in 2008 the economy was more of the focus). That Democrat didn’t change course at all in Iraq from what his Republican predecessor charted. But some people (you) think that is an accomplishment. It’s only an accomplishment in that he didn’t blow it (although now some Republicans are claiming it’s a mistake).

    Republicans, Democrats, Tea-Partiers and OWS all make me sick.

  24. 24

    By MichaelB @ 11:

    Tim,

    You raise an interesting point regarding the valuation of properties. Is it really true that 41% of homes are rental investments and the rent versus buy ratio is 29? This means that a $400K home would rent for $400k/29 = $13,793 per year. That is a whopping 3.5% return on investment before expenses. As wages are actually dropping, and home prices are not expected to have capital gains for a very long time. In addition to the fact that rentals are a pain in the ass and require about 5% per year to maintain (you must count any sweat equity as an expense). How is this a good investment?

    I haven’t done the calculations for about 4 years, but back then the multiples on apartment buildings were such that the only way it would be a good investment was if the property appreciated significantly in the future. The market really got caught up in the idea that real estate could only go up.

  25. 25

    By David Losh @ 20:

    RE: Scotsman @ 10 – What I’m saying is that the conservative movement is corrupt.

    Not just conservatives. The liberals are just as corrupt.

  26. 26
    Pegasus says:

    RE: Jonness @ 15 – It’s obvious you have too much time on your hands.

    http://www.youtube.com/watch?v=kNYKxiRJ2LA

  27. 27

    RE: Kary L. Krismer @ 24

    Yes Kary

    We all know the three credit bureaus, banks in general and the heads of the Social Security know that a hoard [millions?] of Americans’ Social Security Numbers have been identity theft meat for America’s slave shops, yet hide this from the victims….liberals smile because their new voting block is in the skillet and the conservatives want Social Security paid in with no way to claim benefits by the sucker slaves.

    They’re all crooks….

  28. 28

    I’m curious what effect the disparity of wealth has on home prices? I don’t know the answer or even how to conjecture, but i just read that nationally, almost half the population now lives in poverty. I figure the poverty rate in Seattle is a little lower than that, but I’m reasonably certain that it’s much higher than it used to be. So even if the per capita income remains the same, the haves have more, and the have nots have less. Some of these have nots might have previously owned homes or at least been eligible to buy them, but aren’t now. Maybe that explains why the biggest price drop is in the low tier?

  29. 29

    By Ira Sacharoff @ 27:

    I’m curious what effect the disparity of wealth has on home prices? I don’t know the answer or even how to conjecture, but i just read that nationally, almost half the population now lives in poverty.

    It’s actually low income or poverty. And it’s not too surprising when over half the population has been convinced it’s not in their interest to join a union.

    I suspect that part of what is going on is defining low income at a particularly high level. It’s not like half the population doesn’t own a car, a TV larger than 32″, pay $50 or more a month for cable/sat., etc.

    Amazon is selling over 1,000,000 Kindle devices every week! iPhones and iPads are flying off the shelves. I don’t think it’s just 50% of the population doing that.

  30. 30
    Pegasus says:

    RE: Ira Sacharoff @ 27 – Now you are getting it. Wealth is being concentrated is fewer and fewer hands. This depression is tiered in its effect upon the population. The lower you go in tiers the more pain and suffering is occurring while those on top are profiting.

  31. 31

    By Ira Sacharoff @ 27:

    Maybe that explains why the biggest price drop is in the low tier?

    I think the biggest reason for the drop in the lowest tier is that those properties rose the most in the upturn. Unwinding the opposite of how they wound up. Yes first time buyers drove those properties up, but so did investors. They were attractive because of price.

  32. 32
    The Tim says:

    By MichaelB @ 12:

    Is it really true that 41% of homes are rental investments and the rent versus buy ratio is 29? This means that a $400K home would rent for $400k/29 = $13,793 per year.

    Yes, it is true that 41% of homes in King County are rentals. I linked the source for that fact right in the post.

    As for applying the rent versus buy ratio in yesterday’s post to an individual home, I guess you missed my conversation in the comments yesterday with 2kt. Here’s the bottom line:

    What the ratio in this chart is not showing: That all homes, a subset of homes, or any one home in the Seattle area can be purchased for 29.6 times what it would cost to rent said home or homes for a year.

    What the ratio in this chart is showing: The ongoing relationship over the last ~22 years between what Seattle area home buyers as a whole are paying to purchase homes and what Seattle area home renters as a whole are paying to rent homes.

  33. 33
    The Tim says:

    By Kary L. Krismer @ 29:

    By Ira Sacharoff @ 27:

    I’m curious what effect the disparity of wealth has on home prices? I don’t know the answer or even how to conjecture, but i just read that nationally, almost half the population now lives in poverty.

    It’s actually low income or poverty. …I suspect that part of what is going on is defining low income at a particularly high level. It’s not like half the population doesn’t own a car, a TV larger than 32″, pay $50 or more a month for cable/sat., etc.

    Yeah, check out the Seattle Times article, which has a helpful graphic. They’re defining “low income” as anything below $44,405 a year. That’s a pretty high threshold, IMO. In most of the US (i.e. not Seattle, SF, LA, or NYC) you could live fairly comfortably on $44k a year.

    Only 16% are below the actual poverty level of $22,314 a year.

  34. 34

    RE: The Tim @ 33 – Thanks. $44,000 would probably put you in the top 1% in some Washington counties!

    When you go to Mexico there are women sitting on the sidewalk with their babies, trying to raise money by selling gum. That’s poverty. Not having a full time job which earns over twice the minimum wage.

  35. 35

    RE: The Tim @ 33
    So why would they call it low income if a family of four could live comfortably on 44k a year in most of the US? Do you personally know families of four living comfortably on 44k a year?
    Also, rather than have people making 100k plus tell me that 44k isn’t poor, why doesn’t someone answer my question on how the growing income disparity affects the housing market?

  36. 36

    RE: Ira Sacharoff @ 35 – I think before you can determine how the growing income disparity affects the market, you need to determine whether there is a growing disparity. Just setting the upper limit of “low income” higher doesn’t mean there’s a growing problem. If you set the poverty level at $100,000 a year, over half of Americans would be living in poverty.

    But to answer your question, my guess would be the current REO market is creating more units which are rental units, so assuming there are more low income people, the percentage of owner occupied will be dropping.

  37. 37
    Pegasus says:

    RE: The Tim @ 32 – “Yes, it is true that 41% of homes in King County are rentals.”

    I know you have a link but are we confusing units with houses? Are you sure it is not housing units including apartments? I don’t believe 41 percent of SFH and condos are rented. As we all know renters are less then human and are dirty scum. That number would have turned King County into a countywide slum by now if that were true.

  38. 38
    The Tim says:

    RE: Pegasus @ 37 – LOL. No confusion though. Apartments are homes, too.

  39. 39
    MichaelB says:

    By The Tim @ 32:

    By MichaelB @ 12:

    Is it really true that 41% of homes are rental investments and the rent versus buy ratio is 29? This means that a $400K home would rent for $400k/29 = $13,793 per year.

    Yes, it is true that 41% of homes in King County are rentals. I linked the source for that fact right in the post.

    As for applying the rent versus buy ratio in yesterday’s post to an individual home, I guess you missed my conversation in the comments yesterday with 2kt. Here’s the bottom line:

    What the ratio in this chart is not showing: That all homes, a subset of homes, or any one home in the Seattle area can be purchased for 29.6 times what it would cost to rent said home or homes for a year.

    Don’t mean to burst your bubble Tim, but a house is worth a maximum of 15x its annual rent + appreciation. Especially when appreciation is expected to be zero or negative, and rents are expected to decrease due to wage decreases.

    If you can only rent a house for $1,666/month, it is worth 1,666 x 12 x 15 = $300K, not $400K. So, your assumption that home prices will only fall a maximum of 10% to hit bottom is quite optimistic.

    At any rate, your data is not valid to draw any conclusions regarding future real estate prices as it spans an unusual 30-year period of increasing debt in the USA and does not apply to a period of increasing deleveraging, which by the way is just beginning.

    Of course, no real estate sales model works well when both sales volume and prices are expected to decrease, so your position is understandable.

  40. 40
    MichaelB says:

    On the one hand you claim home prices are high due to the effect of wealthy investors owning/buying 40% of homes. On the other hand you claim that a multiple of 29.6 does not accurately represent values, because evidently renters are renting less expensive properties than buyers are buying.

    Which is it?

  41. 41
    vboring says:

    hmm…

    Maybe Seattle isn’t the same city it was 15 years ago. Maybe increased density can justify somewhat higher housing price to income multiples.

    Is it possible to compare total private income to total housing stock value?

    That would help correct for the increase in population during the dot com boom and also for the increase in housing supply during the housing boom.

    If the housing boom didn’t make up for the total income increase, then a higher multiple is justified.

  42. 42

    RE: vboring @ 41 – You would need to factor against the higher density (I think you mean population), increased inventory of housing units.

  43. 43
    Ray pepper says:

    RE: MichaelB @ 39

    Wow a home is worth 15 x annual rent. Wish this was true. Just bought two in the last 6 months. One for 21 k that rents for 675 and one for 62k that rents for 990.

    I would dump either in a heartbeat for 10x annual rent !!! But, unfortunately they are only worth maybe 5 to 6 x annual. 15x is insanely high!

  44. 44
    MichaelB says:

    RE: Ray pepper @ 43

    15X Maximum Ray! Over 15X is a poor investment.

    Ray, please remember to add in the costs of the environmental cleanup for those crack houses you are renting out… Also, the armed guards / gang members you will need to assist in your rent collection… By the way, are those houses in Everett by any chance?

    29.6?….Hmmm…Must be near the bubble bottom!

  45. 45
    MichaelB says:

    RE: Ray pepper @ 43

    Ray are you seeing a “wealth effect” in your industry? You know, .com billionaires and retired Microsoft executives investing in real estate and driving prices to 29.6 multiples? Cause I am pretty sure that Seattle is different, otherwise the new normal wouldn’t be 29.6 now would it? What is it that makes Seattle so different other than the truly disproportionate number of millionaires living here? It’s hard not to run into one on the street every day… I guess with all that money, they choose to live in the bestest place on earth!

    Interesting how some people latch onto the so-called “wealth effect” to justify their position that Seattle is different, but dismiss the “poverty effect”…

  46. 46
    MichaelB says:

    RE: vboring @ 41

    There is some increased density, especially for people who still believe Seattle is “different” and special.

  47. 47

    RE: MichaelB @ 44

    lol…no crack…just right place at right time..1 in Gig Harbor, 1 in Carson City, and 1 in Tacoma. I never liked Everett, North Seattle, Lynnwood, Mukilteo etc. However, Magnolia and West Seattle I’m all in! Also LOVE Bellevue Square and the 98062 but all my investments seem to be in the 98332 and 98335.

    Actually Tacoma house just closed on a flip at 100k…purchase price 52k with about 10k in rehab…net about 30k……

    lots of Buyers at Trustee sales but were all trying to buy the same ones. Homes here do get a premium because we actually have jobs unlike Reno/Carson area….

    15x annual income is unheard of at the Trustee sales from our flippers or people looking for rentals…again 5-6x MAX ………

  48. 48
    m-s says:

    RE: ARDELL @ 8
    “Does this student loan make my back end look big?”

  49. 49
    David Losh says:

    RE: Kary L. Krismer @ 23

    Obama went toe to toe with McCain about bringing the troops home.

    The Bush plan was set in motion when it was obvious that the war will tarnish Bush’s legacy. The military came up with the withdrawl time line while insisting on a troop surge. Obama compromised.

    It was his mandate, it was the mandate of the people, to end the war. McCain kept claiming he could win the war, the surge was to win the war. You can’t win a conflict that has been going on for two thousand years by wanting to.

  50. 50
    David Losh says:

    RE: raymond pepper @ 47

    I really don’t get why any one would gift an investor money in today’s market place. I am however sure you are telling a true story. I call it the idiot factor. Buyers today are brain dead.

  51. 51
    Jonness says:

    By Pegasus @ 26:

    RE: Jonness @ 15 – It’s obvious you have too much time on your hands.

    http://www.youtube.com/watch?v=kNYKxiRJ2LA

    True. But these are the best of times. :)

  52. 52
    Jonness says:

    By MichaelB @ 40:

    On the one hand you claim home prices are high due to the effect of wealthy investors owning/buying 40% of homes.

    That claim is obviously flawed. Investors are in business to make money as opposed to subsidizing the lavish lifestyles of the poor. Thus, those 40% of homes must be priced according to the renters’ incomes who live in them. If you don’t believe me, ask seattlebubble’s most seasoned investor of all time, Ray Pepper about cash-flow positive investing.

    Furthermore, the entire PacNW regions’ homes are priced well above historical relationships to incomes. It’s not just Seattle city. Which explains why prices are continuing to fall despite Columbia Mortgage in Gig Harbor offering a 3.5% no points 30-year fixed mortgage.

    Tim unwittingly admitted his claims about PCI were wrong when he said:

    “Ideally we’d be able to look at the median income of only those households that make up the potential home buyer pool, but that data isn’t available.”

    The truth is, that data is available. Thus, to bring this debate to a close, we simply need to look at the AHS, which has the necessary owner-occupied data. The AHS data proves PCI is not a useful comparator. However MHI remains tightly coupled to the AHS data through time. Thus, MHI of owner-occupied only is interchangeable with MHI of all residents.

    Seattle area homes are roughly 20% overpriced compared to historical relationships to meaningful income comparators. QED

    http://www.census.gov/prod/www/abs/h170.html

  53. 53
    Jonness says:

    By Ira Sacharoff @ 35:

    RE: The Tim @ 33
    So why would they call it low income if a family of four could live comfortably on 44k a year in most of the US? Do you personally know families of four living comfortably on 44k a year?
    Also, rather than have people making 100k plus tell me that 44k isn’t poor, why doesn’t someone answer my question on how the growing income disparity affects the housing market?

    I’m with you Ira. A family of 4 living on $44K a year can barely afford to live in one of Ray Pepper’s $29K rentals.

    People need a place to live. Most wealthy people don’t invest all of their money into housing, which is why PCI data is a meaningless comparator for price to income ratio. For instance, Bill Gates, does not own $100 billion worth of Seattle area rentals. His wealth is mostly tied up in Microsoft, his charitable foundation, etc. Thus, the main factor of the incomes of the super rich is the jobs they create. And the affect of this is well known in the RE world, “location, location, location.”

    Homes are priced higher the closer they are to the high paying job centers. Although I do not have the data available, I don’t expect that there is a massive and permanent decoupling occurring where Bellevue prices are shooting through the roof, while Federal Way prices are falling off a cliff. Instead, I suspect we are watching the less-rich areas falling first, because money in those areas lives tighter to the waistline.

    There is not a rigid wire connecting Federal Way and Bellevue house prices. Instead, there is a strong rubber band, the more variation occurs between the too areas, the more wire-like the rubber band becomes, and the stronger the affect one area has upon the other. Since the rubber band remains stretched while the massive housing bubble continues to unwind, there is pressure between the two areas to eventually equalize based upon median incomes of the two areas. When the rubber band finally becomes lax, the housing market will have fully corrected.

  54. 54
    Kmac says:

    By Kary L. Krismer @ 34:

    – Thanks. $44,000 would probably put you in the top 1% in some Washington counties!

    Two Washington counties are twice the poverty rate of King:
    http://budgetandpolicy.org/schmudget/poverty-skyrockets-while-governor-calls-more-cuts

  55. 55
    David Losh says:

    RE: Jonness @ 51

    So the woman wanted to have sex, but the guy wanted to talk about Goldman Sachs?

  56. 56

    RE: Jonness @ 53

    was actually 21k but the funny part was I found a tenant (fisherman) who paid the whole year UP-FRONT plus an 800 damage deposit to boot. I collected 8900 and the bonus to him was he got to keep ALL the furniture, bed, plates, pictures, and clothing left behind. (Elderly seller that lives out of state now with his family. ) I believe it was a VERY fair offer and apparently so did the seller.

    Turned out to only be about 13k out of pocket. Indeed a GEM!

  57. 57
    David Losh says:

    RE: raymond pepper @ 56

    Because it’s a cash on cash return with a lost opportunity.

    If I recall you paid $21K, your out of pocket is $13K. You collected $8900 the first year, and let’s say you do that for three years. Your cash on cash should have you at evens after three years. Now what’s the property worth to a buyer?

    My guess, or my strategy is if you paid $21K today in three years that will be $18K, minus costs, at best. Did you double your money in three years?

  58. 58
    Jonness says:

    By David Losh @ 55:

    RE: Jonness @ 51

    So the woman wanted to have sex, but the guy wanted to talk about Goldman Sachs?

    Up until the end that’s true. But then the woman reclaimed her power over the man. My guess is, he won’t be talking about Goldman Sachs for the next few days until he can get back into her good graces. :)

  59. 59
    Lisa says:

    By Jonness @ 53:

    Homes are priced higher the closer they are to the high paying job centers. Although I do not have the data available, I don’t expect that there is a massive and permanent decoupling occurring where Bellevue prices are shooting through the roof, while Federal Way prices are falling off a cliff. Instead, I suspect we are watching the less-rich areas falling first, because money in those areas lives tighter to the waistline.

    Over the last few decades, the inflation adjusted income for the poorest 10% in US has stayed flat while the top 20% actually saw some significant gains.
    [http://www.economist.com/blogs/dailychart/2011/09/us-household-income]
    If that kind of trend continues, the price difference between rich and poor areas would increase.

  60. 60

    […] said, based on my analyses of affordability, price to rent, and price to income, I suspect that we’re basically at “the bottom” for home prices, give or take […]

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