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The fact of the matter is what happens in the housing market over the next couple of decades is going to depend greatly on the attitudes/desires of the 20-30's group. I just don't see this generation driving up real estate like their baby boomer parents did. Baby boomers had this odd habit of "moving up" in the housing world every 10 years or so, this behavior drove up prices. Oddly the generation before them tended to stay in the same house most of their lives. Regardless, the point is that even after real estate bottoms it may never behave like it did when the baby boomers reigned. So not only will there be no rebound but buying a house will become want it use to be, buying a house not some half baked investment.
Very interesting observation. You're right, the demographic/pendulum could swing the other way. And in addition to pure matters of preference, there may be economic and ecological pressures on the types of homes that are in demand as well.
As for the children of baby boomers and their tastes? I have plenty of faith that all those "blondes" in their Paris Hilton sunglasses will still have a taste for excess wherever they can find it. (The only difference will be finding a bank to fund it.)
In the last half dozen years all of the tradition methods and ratios that were commonly used by lenders (and buyers) to calculate affordability were thrown out the window. A few years of this has everyone thinking a $500k house is a cheap house. It's NOT!
Lets take a look using traditional ratios how much home you can afford. The old quick and dirty method was 2.5 times your yearly income. If you make $100k per year, you can afford a $250k home. Easy, peasy. Now this does not take into consideration interest rates, other debts you might have etc. So the lenders used the 28/36 ratio. Basically 28% of your income for payment, taxes, PMI and insurance. The 36% adds in your other debts like credit cards, student loans and car payments. In the good ole days if you could not make those ratios you rented or found a cheaper house.
Using the quick and easy method of 2.5 times your income you need to make the following to afford the median priced home.
In Corona last month the median priced home was $385k. You need to make $154k per year
In Riverside the median priced home was $284k. You need to make $113k per year.
In Moreno Valley the median priced home was $218k. You need to make $87K per year.
Now taking that Corona home and figuring a 10% down payment and using the 28% ratio lets see what your monthly and yearly needs to be.
Corona at $385k. 10% down ($38.5K plus your closing costs) leaves you $346k to finance. Assuming perfect credit you can get a loan at 6.5% giving a payment of about $2187/mo add in $200 PMI (you put down less than 20%), add in taxes of $450/mo (most newer homes are 1.6% to 1.8%) and another $100/mo for insurance gets you to a grand total of $2937/mo. Using the 28% ratio that means you need to be making $10,489 per month (or $125,871 per year).
Now you can clearly see that using traditional ratios home prices are still FAR too high in most areas for the average or even above average family. Maybe I'm out of touch with how much people make these days. I just don't think there are that many families out there making $125k per year. And who are they planning on selling all those $700k homes to? How many families are making $250k per year. Not many I think.
That's the beauty of numbers. Maybe it's the engineer in me but laying out the numbers sure makes it crystal clear. The prices still have some distance to fall.
I'm not even talking about labor arbitrage, I'm talking about more people having jobs and jobs with competitive wages
Great and why do you think you can ignore the global market place when you think about
"competitive wages" etc?
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It's already happening now, all those who lost jobs in Michigan can move to Alabamba, Ohio, Georgia and soon Tennessee to work for Nissan, Kia, Toyota, Honda, VW, etc.
This is funny, because the Japanese companies are non-union shops and pay less and give less benefits. Its unclear how this fits the picture you want to paint, as these jobs pay less than the ones that are being lost.
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So, if median income rises, so shall housing prices.
Great and I wonder how the median income is going to magically raise to justify current house prices? You say return back to basics yet the median income was lower when we manufactured more. You speak like innovation is something new and there have never been other periods of innovation. The median income from 1986 to 2006 only increased by $4,502, yet this period saw rapid innovation in technology. So magically the economy is going to change faster than it has in the past and increase median wages! Here is income data from 1967:
Historical Income Tables - Households (http://www.census.gov/hhes/www/income/histinc/h05.html - broken link)
As can be seen median income (adjusted for inflation) has risen rather slowly even during periods of rapid innovation. But this is a new one for me, house prices are going to rebound because we are going to see historic increases in median income! That has to be one of the most odd "rebound" stories I've heard yet.
Additionally, increases in median income don't necessarily go into housing. After all there are many more devices that are considered standard items to have today then 20 years ago. People need higher median incomes just to keep their standard of living up with current standards.
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Although this is just a forum, I'm sure there are stats that show the same propensity of parents toward housing and the suburbs.
Well then, cite them instead of a stupid forum with no data? Regardless, the issues are more than city vs suburbs (I didn't even mention that in my previous post). But rather more general attitudes towards housing, like keeping the same house for most of your life like people use to do, how one thinks of renting etc.
Using the quick and easy method of 2.5 times your income you need to make the following to afford the median priced home.
Just to be fair historically California has been 3~3.5 times income depending on the area (In fact some areas are 4~5 times, but these are areas with a lot of wealth).
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Maybe I'm out of touch with how much people make these days.
Well, apparently everyone is going to start making much more money now that Boeing's orders are up.
Right on So Cal bottomrider!!! It amazes me that people can't (or won't) do the math!! And now we ALL get to suffer for it in some way after the trickle down effect. Thanks people!!
We don't always see eye to eye, but I applaud you for clarifying that California does not necessarily abide by the 2.5 times rule.
You also make a great point about the jobs leaving the Midwest being high pay/high benefit manufacturing jobs that are being replaced by lower paying foreign auto jobs. In my experience, here in Chicago these manufacturing jobs are being replaced by lower paying service jobs. Our economy as a whole is suffering, no matter what the pumpers may say.
SoCal,
You need to adjust your numbers accordingly for 4-5 times income. This would allow a family making $100K per year to afford a $400-500K home, not a $250K home.
In Chicago, I could see 3 times income being a good benchmark for house affordability.
As a funny side note, in 2003, I was approved for $380K purchase (20% down, so $304K loan) making only $52K per year. That is insane to loan someone 6 times their income, though I realize in coastal markets such as California some have gone up to 10 times or more income.
I think the HOI (Home opportunity Index) that KC talked about is a better measure of afford ability since it accounts for interest rates, median incomes, and median prices. It also gives you the percent of ARMS vs. Fixed, etc. to better understand how financing worked over time. I think accounting for these things is a better measure than just taking an arbitrary 3X median income without considering how interest rates changed during that time.
According to the figures after the First Quarter Q108, we're already at 2004 afford ability levels. I'm sure by now end of Q208 we're probably already back in the 2002-2003 levels.
Great and why do you think you can ignore the global market place when you think about "competitive wages" etc?
I didn't ignore it, I said a shift in jobs and new types of jobs raising medians.... the wages could still be globally competitive.
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This is funny, because the Japanese companies are non-union shops and pay less and give less benefits. Its unclear how this fits the picture you want to paint, as these jobs pay less than the ones that are being lost.
But they most likely pay more than retail or having no job at all. Also, in the most part having FDI coming in beats having money going out and we've seen more FDI in '06 and '07 as our currency deflates and the cost of fuel rises.
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Great and I wonder how the median income is going to magically raise to justify current house prices (I'm not talking about a return to peak house prices, I'm talking about how there can be a "rebound" in prices which is what you asked Humboldt1 to answer)? You say return back to basics yet the median income was lower when we manufactured more. You speak like innovation is something new and there have never been other periods of innovation. The median income from 1986 to 2006 only increased by $4,502, yet this period saw rapid innovation in technology. So magically the economy is going to change faster than it has in the past and increase median wages!
It is interesting how you use inflation adjusted for wages but not inflation adjusted for housing. Of course inflation adjusted wages show small increases. In 1967, 7k then is equivalent to 36k in 2006. Also, if you want to measure "real" wages and the effects of innovation on wages you would have to use % change instead of a dollar amount.
Using 10 year periods:
Between 1996 - 2006 Real Incomes: $45,416 -> $48,201 which is a 6.13% increase in real wages on top of inflation. So, if normally wages should increase at inflation, than any increases in wages above inflation is contributed to... Production and Productivity? Innovation?
Between 1986 - 1996 Real Incomes: $43,699 -> $45,416 which is a 3.93% increase in real wages on top of inflation which was at a slower rate.
If you want to use inflation adjusted income to compare to housing you would have to apply the adjustment to both incomes and housing. Since I can't point out all the innovation and growth in the last 50 years, here's a graph of average income increases over time outlining recession periods effect on incomes. The general trend is up... partially from inflation and partially from Production and Productivity (innovation).
Tracking GDP growth and wages you could see that growth in the most part induces higher median wages. Here are the figures for Income and GDP change plot them to see some correlation. Basically in good times wages increases which is pretty common sense.
But they most likely pay more than retail or having no job at all.
Right Toyota is hiring previous fry masters or sales man in their auto plants. You seem to ignore the fact that jobs pay among other things based on skill. If you don't have any useful skills you aren't going to get a better job. The people getting jobs at Toyota etc are people that were previously working for other auto plants, machine shops etc, not people working retail.
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I'm talking about how there can be a "rebound" in prices which is what you asked Humboldt1 to answer
Yes I did, but I was clear each time I was speaking in real terms. So, what the hell do you mean by "rebound"? Do you simply mean one day the prices still stop declining? Is that a rebound? Perhaps you could define rebound in real terms?
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Tracking GDP growth and wages you could see that growth in the most part induces higher median wages.
"in the most part". All I claimed was that growth in GDP does not necessarily cause median incomes to go up. This data shows just that.
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It is interesting how you use inflation adjusted for wages but not inflation adjusted for housing.
What are you talking about? I've been trying to get you guys to talk in inflation adjusted terms the whole time. In particular with the rebound talk. When I ask how prices are going to rebound in real terms, I'm asking now they are going to rebound in inflation adjusted terms!
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So, if normally wages should increase at inflation, than any increases in wages above inflation is contributed to... Production and Productivity? Innovation?
Obviously. But most of the innovation in computers happened pre-1996. Some of the increase in the 2000's can be attributed to the credit expansion and will effect future increases.
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The general trend is up... partially from inflation and partially from Production and Productivity (innovation).
Is there a reason you switched from talking about median income to average income? Median is what matters here, so stick to it instead of being misleading.
Regardless, my point stands. Historically median income has increased .20~.50% a year and will not support a rebound in housing. Of course, I'm not even clear what you guys mean by "rebound". I have a feeling its fun and games with inflation, but Humbolt1 has been silent on the matter.
Regardless, talking about economic growth right now is a joke. So much credit is vanishing that it will take awhile for the economy to recover. Just look at the declines in MEW:
The decline in MEW this year will be around double that of all the economic stimulus payments. And this is just MEW!
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(The only difference will be finding a bank to fund it.)
Good Post Humanoid
