Median Income vs Median Price
I feel most people simplify this whole thing a little too much. It seems the mantra is: Median Income is X, you should buy a house worth 3X, and therefore prices must fall to 3X.
The median house price is flawed, as has been discussed before, but it's a number that gets used, and so I'll use it for the purposes of this post.
First, it's not that a HOUSE "should" be 3 x median income, it's the MORTGAGE. I'm not suggesting that everyone brings savings to the table, but it's a reality that as people increase their incomes/family size, they decide to buy a bigger and more expensive house. Commonly, they'll bring along the equity in the previous house.
If someone bought a 100K house and sold it for 200K, then bought a 400K house (that *was* 200K when they bought their prior house) they have a mortgage for 300K and 100K in equity. So you have to look at the 300K and ask whether that's affordable or not, and not look at the 400K house value. Not everyone is a first time buyer.
If you want to exactly equate median income to median house price, then you have to assert that ALL houses are purchased with no down-payment of any kind, and that ALL house buyers are distributed evenly with regards to income. i.e. a burger flipper is included, so is a lawyer, and so is a retired old lady.
So, what to do? I don't have an exact answer but I'm thinking along the lines of the following: Split buyers up into demographics, perhaps by age group. For each group, get median income and statistics regarding how large a percentage of overall purchases are made by this group. Use historical figures for the latter so we're not skewed by booms and busts. Then approximate (or calculate from somewhere?) how much equity each demographic will have, on average, and add *that* to their 3X median household income.
So for each demographic we should then have the value of a house they can reasonably afford using mortgages where you actually have to pay principal <horror>. We'd also know how many houses are being bought by each group. This would allow us to create a new "curve of affordability" that would show demographic on the x-axis, and affordable house price on the Y-Axis. If the actual listings on the market do not follow a similar curve in terms of price and distribution, then the market is not affordable.
For the record, I'm on the side of decreasing prices due to complete LACK of affordability, but I'm looking for a better measure of what is affordable, to whom, and with that resources.
If there is anyone on this board with some better understanding of statistics/math that is interested in taking this on, go ahead! I'm not sure I have the aptitude for it...
PS Please be civil in your responses. Let's have a debate and not an argument! Thanks.
The median house price is flawed, as has been discussed before, but it's a number that gets used, and so I'll use it for the purposes of this post.
First, it's not that a HOUSE "should" be 3 x median income, it's the MORTGAGE. I'm not suggesting that everyone brings savings to the table, but it's a reality that as people increase their incomes/family size, they decide to buy a bigger and more expensive house. Commonly, they'll bring along the equity in the previous house.
If someone bought a 100K house and sold it for 200K, then bought a 400K house (that *was* 200K when they bought their prior house) they have a mortgage for 300K and 100K in equity. So you have to look at the 300K and ask whether that's affordable or not, and not look at the 400K house value. Not everyone is a first time buyer.
If you want to exactly equate median income to median house price, then you have to assert that ALL houses are purchased with no down-payment of any kind, and that ALL house buyers are distributed evenly with regards to income. i.e. a burger flipper is included, so is a lawyer, and so is a retired old lady.
So, what to do? I don't have an exact answer but I'm thinking along the lines of the following: Split buyers up into demographics, perhaps by age group. For each group, get median income and statistics regarding how large a percentage of overall purchases are made by this group. Use historical figures for the latter so we're not skewed by booms and busts. Then approximate (or calculate from somewhere?) how much equity each demographic will have, on average, and add *that* to their 3X median household income.
So for each demographic we should then have the value of a house they can reasonably afford using mortgages where you actually have to pay principal <horror>. We'd also know how many houses are being bought by each group. This would allow us to create a new "curve of affordability" that would show demographic on the x-axis, and affordable house price on the Y-Axis. If the actual listings on the market do not follow a similar curve in terms of price and distribution, then the market is not affordable.
For the record, I'm on the side of decreasing prices due to complete LACK of affordability, but I'm looking for a better measure of what is affordable, to whom, and with that resources.
If there is anyone on this board with some better understanding of statistics/math that is interested in taking this on, go ahead! I'm not sure I have the aptitude for it...
PS Please be civil in your responses. Let's have a debate and not an argument! Thanks.
Comments
I have the stats and math. What I lack is the data.
Dig up the data, and I'd be interested in working with it.
EXACTLY!
That's been then Achilles heel of the whole median income/median price theory from the beginning: EQUITY.
Desirable areas like Seattle not only have higher wages, but also are drawing a large number of new residents from other high Equity markets, especially California.
Additionally, people who bought into the market early, often with what was then an affordable starter home below the median price, are bringing 100s of thousands of dollars in equity with them when they buy again.
For example, the previous owners of my house bought it for $160K in 97. They sold it for $430K in 2005 and bought a bigger house close by for $550. But I looked up their mortgage, and guess what? They're only paying a mortgage that is $214K! Very affordable for median income folks....and I'm pretty sure they're actually well above median income.
So you can see, the median income/median price theory is totally flawed. There's simply too many people in the market with large amounts of equity. That's why in a market like this you have to work your way up the equity ladder.
In reality however, people have been pulling equity out of their homes at a massive rate.
Nationally, we have the lowest level of homeowner equity in history.
Calculated Risk
And this is taking into account that more than a third of those homeowners own their homes free and clear. That means that a vast majority of the remainder must have little or no equity to speak of. When home prices fall an additional 10-30% (or 80% iif Eleua is correct!
Of course I don't have data for the Puget Sound region, so if someone does, give it!
One other point. If everyone is going to be climbing their equity ladder to a million dollar home, what's going to happen when the first time buyer can't buy that starter home because market appreciation has pushed the price up to 10X his/her annual income. Won't the whole scheme get stuck and/or collapse?
What you see is that starter homes get smaller and smaller. It's happening incredibly fast...when we were looking back in 2005 there were lots of nice 3 bedroom SFH in Ballard and Fremont for under 400K. Now there's nothing under 500K except condos, townhouses, and very small 2 bedroom SFH. So those are really the starter options in the city now.
Which is a good reason why the whole thing will collapse. At some point, people will realize that this isn't NYC and a 700 square foot 2 bedroom condo for $400k is ridiculous.
So they'll move elsewhere. Denver, Portland, Austin.
Without a steady stream of buyers, those values won't be able to be sustained.
...which is exactly what we have. A steady stream of buyers lured to the area by high paying jobs. If you're looking for a local housing crash you need find weakness in the local economy.
TheLadders.com's Quarterly Executive Job Market Trends Report measured hiring activity across a variety of metrics and found the hottest $100,000 plus job markets to be New York, San Francisco, Boston, San Diego, Washington D.C., Chicago, and Seattle.
If you are saying that recent housing appreciation in Seattle will be sustained solely by the influx of $100,000 + annual income workers, I believe you are vastly oversimplifying the issue. There are too many other influencing factors, such as; mortgage interest rates, real estate speculation activity, mortgage lending standards, available real estate inventory, quality of life issues, etc.
These high wage earners aren't propping up Boston's housing market. There's no evidence that Seattle is "special" or different.
http://realestate.msn.com/buying/Articl ... tid=421723
"Boston: This one is in Winzer's backyard, his firm is based in Wellesley, Mass., so he sees what is happening there every day.
"Until about a year ago, homes would go on sale and be gone in a week," he says. "Now they're sitting on the market for a year." He doesn't see the prices dropping rapidly here -- or in any market, for that matter -- because while real estate prices escalate rapidly, they drop slowly.
"In markets that are well-overpriced, prices don't really fall because people just won't sell," he says. "The adjustment mechanism is skewed by people's emotions getting involved. People will grit their teeth and hang on as long as they can to get the price they want."
They might not be able to hang on for long. Burns ranks Boston fourth on his list of markets likely looking at a bubble; Winzer's analysis indicates the market is 33% overvalued. "