# Actual Home Prices Edging Above the “Affordable” Price

As promised in yesterday’s affordability post, here’s an updated look at the “affordable home” price chart.

In this graph I flip the variables in the affordability index calculation around to other sides of the equation to calculate what price home the a family earning the median household income could afford to buy at today’s mortgage rates if they put 20% down and spent 30% of their monthly income.

The “affordable” home price hit \$496,051 back in April, but has since dropped off as interest rates have inched up from 3.67% in April to 3.91% in August. As of last month, the “affordable” home price in King County is at \$486,233, with a monthly payment of \$1,837.

If interest rates were at a more reasonable level of 6 percent (which is still quite low by historical standards), the “affordable” home price would be just \$382,986—about \$103,000 lower than it is today.

Here’s the alternate view on this data, where I flip the numbers around to calculate the household income required to make the median-priced home affordable at today’s mortgage rates, and compare that to actual median household incomes.

As of August, a household would need to earn \$75,551 a year to be able to “afford” the median-priced \$499,950 home in King County. This is up from the low of \$46,450 in February 2012, and just barely below the recent high of \$76,202 set in June. Meanwhile, the actual median household income is around \$73,000.

If interest rates were 6% (around the pre-bust level), the income necessary to buy a median-priced home would be \$95,918—31 percent above the current median income.

It’s no wonder the Fed is terrified to raise interest rates.

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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.

## 22 comments:

1. 1
Nic says:

I’m reading this as having a front end ratio of 30% as the assumption for “affordable”, is that correct? If so, when banks issue loans, do they not take into account everything that is wrapped into your payment for your front end ratio (i.e. taxes, insurance, HOA, etc)?

2. 2
Matt the Engineer says:

I think you have the economics a little bit backward. Affordability sets home prices, not the other way around. If interest rates increase to a point where people can’t afford homes, home prices will drop until they’re affordable again. Other than short term phenomena (bubbles, recessions, etc.), this has always been true and will always be true.

3. 3
A says:

RE: Matt the Engineer @ 2 – I’m not even sure that it makes sense to “normalize” interest rates by looking at past rates. At the very least, the assertion has to be unpacked. Is there an assumption that real required returns are stable over time (they aren’t), or that inflation expectations are expected to rise, or that term premiums will rise (basically just saying that the residual increases)? The variety of circumstances that causes higher interest rates imply different things for the housing market. Just looking at past rates for a guide is misleasing because rates are just the price points for different underlying factors.

4. 4
Mike says:

If interest rates increase to a point where people can’t afford homes, home prices will drop until they’re affordable again. Other than short term phenomena (bubbles, recessions, etc.), this has always been true and will always be true.

That’s actually never happened before, so it’s difficult to tell if it’s true. It certainly could happen, but it’s only one of several potential outcomes.

5. 5
redmondjp says:

So tell me, what impact will rising rates have on the Eastside where the all-cash deals are currently setting the high bar for housing prices?

6. 6
Erik says:

RE: Matt the Engineer @ 2
Yeah, you are way off on this one. Instead of using math logic, look at history. Affordability is only loosely correlated with housing prices.

7. 7
whatsmyname says:

Houses, like any good, only need to be affordable to those that buy them. As a rule; for median priced houses, that is not median income people.

8. 8
wreckingbull says:

RE: whatsmyname @ 7 – Affordability is a metric, not a mandate.

9. 9
whatsmyname says:

RE: wreckingbull @ 8 – It is not enough for a metric to be measurable; it also needs to be meaningful.

10. 10
m-s says:

Houses, like any good, only need to be affordable to those that buy them. As a rule; for median priced houses, that is not median income people.

Of course, but at some point you run out of the pool of buyers with the wherewithall to buy, whether or not their income or the house prices are “median”. Of course, this does not apply to the pool of rich investors, who can buy however many houses they want. But they can only live (be homeowners) in one of them at a time.

I’d like to know (The Tim?) what is the mean (and sigma) of the time that homeowners occupy their abode before selling. Is it the standard 7 years? With admittedly a bit of elasticity, houses will come on the market for whatever reason at that sort of rate. Seems to me if you drain the pool of potential buyers, prices must adjust, or they all become rentals.

11. 11
ess says:

So tell me, what impact will rising rates have on the Eastside where the all-cash deals are currently setting the high bar for housing prices?

Exactly – in an area of limited supply with lots of rich people pouring into the area from other parts of the world, it doesn’t matter what the interest rates are.

Furthermore, many of those people can afford and will buy houses that seemed excessively sized to “normal” folks, but that won’t many from buying houses that most of us would consider huge.

There are other factors involved in this real estate market. Vancouver BC has an “affordability” crisis, because foreign investment has overwhelmed that market. But what is a “crisis” for some is irrelevant to others.

12. 12
boater says:

It is amusing to hear people here complain about how expensive homes are. I was just on a flight with folks from San Francisco, LA and San Diego. All commented on how affordable Seattle was. All things in life are relative.

Just in case it’s not 100% clear they really perceive Seattle to be an inexpensive place to live and with a job market that makes it easy to transfer up here. Several had children going to UW.

13. 13
Kip Wallbanger says:

Rising interest rates will most definitely strengthen the USD. As the USD strengthens, the foreign investor pool will dry up. Rising rates will also deflate assets.

Rising Interest Rates
Deflating Assets
Decreased foreign investment

Future looks bright to me. :P

14. 14
Erik says:

RE: Kip Wallbanger @ 13
We’d all be rich if there were just 3 variables of our choosing that drove prices up or down. You sound like Matt the engineer who believes that when houses are less affordable, house prices go down. This isn’t algebra kip. I’m with boater. Snohomish and pierce county may go down, but Seattle prices will go up.

You may already be a wallbanger, but you’ll really be wallbanging your head in 5 years for not buying in Seattle.

15. 15
greg says:

By boater @ 12:

It is amusing to hear people here complain about how expensive homes are. I was just on a flight with folks from San Francisco, LA and San Diego. All commented on how affordable Seattle was. All things in life are relative.

Just in case it’s not 100% clear they really perceive Seattle to be an inexpensive place to live and with a job market that makes it easy to transfer up here. Several had children going to UW.

just to be clear, if they move here they will have to take a big pay cut….

16. 16

RE: ess @ 11

People who buy all cash are not necessarily “richer” than those who buy with financing. Often the difference is the cash buyers from outside the US can’t qualify for a mortgage and the cash is “pooled” from a variety of sources and not just a single “rich” person.

17. 17
boater says:

By greg @ 15:

By boater @ 12:

It is amusing to hear people here complain about how expensive homes are. I was just on a flight with folks from San Francisco, LA and San Diego. All commented on how affordable Seattle was. All things in life are relative.

Just in case it’s not 100% clear they really perceive Seattle to be an inexpensive place to live and with a job market that makes it easy to transfer up here. Several had children going to UW.

just to be clear, if they move here they will have to take a big pay cut….

Don’t be so sure. If it’s an internal transfer they probably will get paid exactly the same. Which as it turns out is a huge bump when you factor in lower cost of living and lower taxes. That was true for me and many of my friends who have transferred between the various west coast states. When I lived in California you just generally got paid less and had a lower net income than what you get in Seattle. The difference is the climate and the fact that both LA and SF are much larger more significant cities. People pay a premium to do that.

It might be true for people completely switching jobs but looking at payscale.com the difference in salary is pretty much the difference in the 9% income tax California charges. Take home pay is pretty much the same.

18. 18
greg says:

RE: boater @ 17

perhaps.

On the other hand most of top tech employers in WA, have higher pay rates in CA to compensate for the increased cost of housing….

19. 19
boater says:

By greg @ 18:

RE: boater @ 17

perhaps.

On the other hand most of top tech employers in WA, have higher pay rates in CA to compensate for the increased cost of housing….

The difference is pretty much eaten up with just the income tax difference. Working in WA will get your a higher take home pay. You won’t be in the center of the tech world but in a nice suburb of it.

20. 20
Shoeguy says:

So tell me, what impact will rising rates have on the Eastside where the all-cash deals are currently setting the high bar for housing prices?

All-cash deals are rampant because housing has become purely speculative. Once the crash starts again, all-cash will evacuate the housing market (all cash is already starting to evacuate the housing market), leaving conventional buyers to pick up the slack.

That’s where interest rates come into play again.

EDIT: It doesn’t even need to be a crash for all-cash to bail and interest rats to become relevant again, just a year of slow declines will do it.

21. 21
boater says:

RE: Shoeguy @ 20
Presuming those all cash buys are not being rented or used as a currency hedge.

If they’re being rented then you need rental rates to drop.

22. 22
redmondjp says:

RE: Shoeguy @ 20 – I have to disagree with your theory about all-cash offers being purely speculative (although that could be true in certain cases). In my neighborhood, all-cash offers are typically from immigrant tech workers (possibly with money kicked in from their extended families), who move into the house as their primary residence. They then have kids, and the grandparents from the old country soon move in with them.

Another driver of purchases is asset preservation, due to concerns about keeping excess liquidity in their home country and currency.