the family economy
April 4, 2004 4:33 PM   Subscribe

In California, a middle-class family with two earners each making $50,000 a year now owns, on average, an $830,000 home. "It is a dangerous situation indeed when neither home buyers nor the institutions that finance them are concerned with the ultimate price being paid for the housing asset."
posted by the fire you left me (48 comments total) 1 user marked this as a favorite
Interesting article, but how is it possible to buy an $830,000 home on $100k a year, or even $200? Mortage payments along are around $5k/month, not including taxes, or anything else, that would be more than 100% of take home at $100k, and most likely the same at $200.
Seems like they're playing with numbers on that quote a bit, but the bubble talk is scary.
posted by Blake at 5:28 PM on April 4, 2004

The key word is owns a $830,000 home. They probably bought at a lower amount.

As an example, my parents, whose combined taxable gross income is in the $40,000 range, now own a $350,000+ home (according to recent sales). You can't pick up the mail without some real estate agent sending junk mail offering to rid our hands of it (which is not going to happen, as the mortgage well be paid off in four years). They bought the home in 1989, incidentally, at the end of the boom, for $125,000. Most of the appreciation has occurred in the past three or four years, due to the inflated housing bubble and the fact that the local city council just declared it a historic district, which sent prices zooming about $100,000 or so.
posted by calwatch at 5:39 PM on April 4, 2004

...that is, declared it and the surrounding neighborhood historic. Now, the city council has applied for placement of the neighborhood on the National Register of Historic Places, which will only increase the price by another $100,000.
posted by calwatch at 5:41 PM on April 4, 2004

I don't believe this "average $830,000 home" number. San Francisco is one of California's most expensive housing markets. The median house price in San Francisco is somewhere around $600,000. Where does the other $200,000 come from? I don't think it's a median vs average issue.

Which isn't to say $600k isn't a lot of money. If you put 20% down on a $600k house and get a 5.5% 30 year fixed mortgage your monthly payment is $3390 or about $40,000 a year. (After taxes it's $2100/mo, $25,000/yr). The median household income is around $60,000. So the median San Franciscan has no hope of affording payments on the median San Francisco house, nevermind coming up with a $120,000 down payment

Dan Gillmor has been pointing out a potential bubble too. Despite all this I'm still glad I bought a house. My biggest fear isn't a market collapse, it's a serious earthquake.
posted by Nelson at 6:01 PM on April 4, 2004

This is somewhat of a scary trend everywhere, especially when an increase of confidence as a result of the increasing value of assets in the form of a home leads to purchasing other properties as investments with further low interest rates and high demand. Working on the regulatory (sort of) end of real estate up in Ontario, it seems obvious that people will not be able to afford making payments on second properties if interest rates rise, which will lead to a sizable rise in defaults, foreclosures and a possible drop in home values between 10-20% depending on the area. Of course, as the article alludes to, this means no more purchasing of consumer goods, which leads to....
posted by loquax at 6:05 PM on April 4, 2004

What will happen to me who wants to own a home before I turn 35?
posted by Keyser Soze at 6:09 PM on April 4, 2004

There's a little undisclosed extrapolation going on. According to the Christian Science Monitor, the average house price in the City and County of San Francisco is $615,000. So, given your median income figures there, the average income to house factor is about 10X. Averaging out places like Crescent City and Redding, which have seen little growth in housing prices since the collapse of the logging industry, with markets such as Orange County and the SFBA, the 8.3X factor between household income and house value seems perfectly fine to me.
posted by calwatch at 6:09 PM on April 4, 2004

Keyser: Buy a home, just make sure you can afford it. Don't live above your means and you'll generally end up OK. It's when people upgrade their homes every two years, along with new cars every year and rack up the credit cards that they have a problem. That, and not thinking about what their mortgage payments might be a few years down the road. Also, renting is not necessarily the worst idea in the world, especially with vacancies up generally speaking across North America, and people owning investment properties they are desperate to rent out.
posted by loquax at 6:14 PM on April 4, 2004

Keyser - you and I are going to swoop in and get sweet deals in about 3 years when the broke-dick shithouse that is the CA housing market finally crashes.

posted by scarabic at 6:15 PM on April 4, 2004

Scarabic: That's what I'm waiting for too! It's gonna happen.
posted by loquax at 6:28 PM on April 4, 2004

better off buying my first house here in Central Japan (where the real estate prices are currently at a twenty year low) than anywhere near my ridiculously inflated hometown of San Francisco.

Even my father's ramshackle house on the backside of Bernal Heights is valued at 580k (which makes me wonder what the meth lab around the block from his place is worth....)

If there are no children in the equation (as in my case) then renting to the death seems much less ridiculous than it onceus than it once
posted by squasha at 6:33 PM on April 4, 2004

Damned truncated must be Monday.
posted by squasha at 6:35 PM on April 4, 2004

Nelson: I believe that it certainly is a mean-median issue. It only takes a few houses 4 or 5 standard deviations away, say in the several million dollar range, from the median to significantly skew the data and shift the mean upward. Housing prices are not normally distributed; they don't fit the bell curve that most data, like height, do. Means are misleading measurements of central tendency in cases such as these.

Also, I think lending institutions have been quite irresponsible in their approvals, and I think this is chiefly due to online companies like Lending Tree that dramatically increase competition. It used to be that you had only 3 or 4 banks to choose from in your geography, and this local oligopoly regulated their lending standards pretty well. Now that banks must compete nation- and world-wide, they are forced to approve loans they previously would have deemed too risky. Who really profits from all this are insurance companies, which are cleaning up because banks are forced to insure many more loans than they have in the past, due to the dropping down payments, low interest rates, and overall riskiness of the loans.

Also, I don't know if SatireWire links are considered acceptable, but I always quite enjoyed this one:

Low Interest Rates Help Many Fulfill The American (Banker's) Dream

posted by ChasFile at 6:54 PM on April 4, 2004

I bought a 4-bedroom house in a historic district in Salem, Oregon two years ago for $70k. It was a nice place too. The meth labs were going for $20-25k. Sell your house in frisco and buy a whole street up here. Buy up three streets and you can put up big red hotels and charge anybody that stops on your street.
posted by fatbobsmith at 6:55 PM on April 4, 2004 [1 favorite]

I'm stuck renting a beautiful place in Redondo -- views of ocean & city, Hollywood sign from the kitchen table, etc -- as I wait for the bubble to burst. Problem is, as I figure it, even if prices drop, properties are only going to come onto the market from the least-desirable end. Think about it: if you're in a killer place that you can make the mortgage payments, but you happen to be under water, you're not going to sell and take the loss -- you're going to sit back and enjoy the view, the fireplace, the backyard. It's only the nasty places that were really really overpriced when sold, that people will default and abandon.
posted by spacewrench at 6:57 PM on April 4, 2004

Keyser, just avoid NYC, Boston, DC, LA, and SFO and you'll be fine. And if you get out of the Northeast and west coast entirely, you can probably buy a house tomorrow. I wouldn't sweat it.
posted by PrinceValium at 7:08 PM on April 4, 2004

Is it schadenfreude to hope that a sudden halt to the free money debt refinancing gravy train will nudge enough people over the cliff of default, thereby keeping a nice churn of cheap (i.e. accurately priced) real estate on the market for those of us like spacewrench?
posted by Vetinari at 7:12 PM on April 4, 2004

The home I live in is a 3 bedroom 2 1/2 bath I purchased three years ago for $127,900. It's a three-level split, built in 1991, and is a modest 1600 square feet on about .21 acres. My mortgage payment including taxes and insurance is $1030 a month.

The company for which I work is closing my office this year and consolidating it with three other data centers into a new building in Massachusetts. They've offered me a fairly substantial increase in base pay to move there, somewhere around 70%.

I still can't afford to move.

To purchase a home there that's comparable to what I own now would cost me $300K+. Considering the higher taxes, if I moved back there my mortgage payment would easily double and perhaps triple. I can't understand how the people that already live there can afford it, especially since pretty much all of them I have met drive brand-new cars that they trade in every two years like clockwork. I drive a 25-year-old car that I paid $1500 cash for, my wife drives a six-year-old minivan with 110,000 miles on the odometer, and we have only two credit cards, both with just $2500 limits, and still some months we struggle with making the utility payments or letting one or two slide until the next month.

To brace ourselves for my potential unemployment, I've borrowed against my 401(k) in order to pay off everything but the mortgage, and we're refinancing that to knock another $100 or so off the monthly payment. If I'm not able to find comparable work here before my unemployment runs out, at least we'll be fairly sure we can make the mortgage payment by flipping burgers.

I'm really, really concerned about what's going to happen if the economy tanks again like it did after the 9/11 attacks. It seems like there's a big crash coming, and it's going to be ugly.
posted by mr_crash_davis at 7:35 PM on April 4, 2004

Crash, wouldn't it be possible to live, say, forty minutes to an hour outside of whatever urban center you'd be working in and commute daily? I know it would be something of a grind, but is it at all workable?
posted by The God Complex at 9:06 PM on April 4, 2004

The real estate bubble should have burst 2 years ago...I can't believe it's just gotten more insane.

The bubble has to burst's just not sustainable at this level. But when the housing bubble's going to be a nightmare for the rest of the economy. Housing starts and refi's are the only thing propping it up at the moment. Without them, it's going to make the Depression look like fun.

Remember kids, the Federal Reserve is a private corporation...and as Thomas Jefferson said, "If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."

Right now, the vast majority of homeowners are mortgaged up to their eyeballs, any pittance in the bank is earning 0-2% interest, credit card interests are still as high as 25% on some insanely high percentage of Americans own virtually nothing that can't be taken away by a private lender.

Let's just hope that people keep refinancing, and that nobody talks about the elephant in the living room, shall we?
posted by dejah420 at 9:57 PM on April 4, 2004

Here in southern Michigan I keep hearing radio ads for ARMs with four-year terms with interest-only payments on high leverage purchases. You take out a mortgage for 100% of the purchase price because, (nudge nudge wink wink) the place is worth more than that and you pay only interest on a mortgage that could go up in payments at any time for four years. Then as the real estate agents here will tell you, you can sell to the next generation of folks moving up in the world and buy a bigger home.

Yeah, and I can sell some of my Enron stock and some of those Dutch tulip bulbs…
posted by arse_hat at 10:57 PM on April 4, 2004

Similar thing, but far worse, has occurred in Australia. Relative to income, housing in Australia is now the least affordable in the western world. Its depressing to think that housing is now more affordable for me in Tokyo than it is in my home country of Australia.

Also "Australia now has one of the highest debt-to-income ratios in the developed world"

I fear the future social consequences of this. I'd really like to find some research that investigates the longer term consequences of such massive widespread debt and housing value levels that have priced entire future generations out of the market.
posted by Meridian at 3:05 AM on April 5, 2004

Similar warnings are being made about the housing market here in the UK. Seems untenable to me, but then what do I know?
posted by cbrody at 3:31 AM on April 5, 2004

Crash, I don't know where in Massachusetts you are describing but it gets worse than that. Take, for example, a house in Cambridge (similar to yours but without the land and slightly smaller) and that number you reference (300k+) is what it cost in 1995. Today's market value: $650,000. Even the assessed value is in the 400k range.

Even the little burg of Shepherdstown, WV (where I am currently), has seen housing prices move to the point where affordable housing within town is an important local issue. A house in quite poor condition, again about the size Mr. Davis mentions, 20' from a busy freight rail line (and I mean 20' to the centerline of the rails) with a shared driveway and NO PARKING sold for $115,000. The end number does not sound crazy in this context. Six years ago it sold for about $72,000.
posted by Dick Paris at 3:37 AM on April 5, 2004

The UK housing market is crazy at the moment. My partner and I bought a red brick terraced house in Manchester in October last year. Two months later, a house sold on the same street for £13,000 more. Now, 6 months later, an almost identical house has sold in the next street for 50% more than what we paid.

I appreciate that the house that we bought needs a fair ammount of TLC (who knew textured wallpaper could hold plaster on to a wall) but this sort of price increase is insanity.

It can't last.

What worries me now is whether our house will retain its value if the market corrects. If it doesn't we're fucked when the fixed mortgage rate we got runs out in 18 months time.
posted by davehat at 4:08 AM on April 5, 2004

[gloat] i ride my bike 4 miles to my downtown office, from my 2000 square foot brick home built in the 40s which i purchased for 130k 5 years ago. [/gloat]

i live in a collegy town in north carolina. it's not as super exciting cool as killing myself to live in a major metropolis, but it's a damn good life. i seriously don't know how anyone manages to get by in places like San Fransisco,Boston,etc... The home prices there completely blow my mind.
posted by glenwood at 5:49 AM on April 5, 2004

south Florida rules.

undeveloped 90x120 lot: $4,000-$10,000
1500ish sq ft entry-level home, 2 car garage by a competing bidder: $110,000

and it aint nothin but 300 yards to the ocean.
posted by shadow45 at 6:03 AM on April 5, 2004

Keep your ratios in line and stick with your criteria and you'll be fine.

We decided to take a mortgage under 2x our annual income, and insisted on 4 bedrooms and a good school district. It wasn't easy, but we did it. A 40% housing crash would lower our paper net worth, but wouldn't affect us one bit, because we can afford our house, even on lower incomes, and don't have to move when our oldest kid starts kindergarten.

In any market, you can't stop other people from being irrational, but you CAN keep their irrationality from seriously impinging your welfare.
posted by MattD at 6:19 AM on April 5, 2004

Whether or not there's a crash, I wonder about the social consequences of all that personal debt. People with big mortgages quickly become desperate to maintain their income. A spell of unemployment can destroy their lives. Changing careers or starting a new venture becomes unthinkable.

People are basically signing up for indentured servitude in a large corporation for decades. A nation of debtors is a nation of people with comfortable lives, but they are completely controlled by their need for security and their fear of change.
posted by fuzz at 6:32 AM on April 5, 2004

Something similar has been happening in the UK (especially the south east, although now the north and Wales are catching up) since the mid-90s, driven by much the same economic forces...

As to how people can afford expensive houses relative to income, many of those people bought low, sold high a few years later, and were able to pay off a big chunk of the mortgage on a more expensive house with the proceeds. (A bust has been predicted since about 1999, but it's not happened yet, although there have been relative slowdowns in some areas...)
posted by plep at 6:51 AM on April 5, 2004

i live in one of the lowest property value areas in the united states. i just inherited a 1500 square foot house on 22 acres of land with a 180 foot barn, pasture, riding trails and i nice stream.
As i am too young, not done with college and dont want to live here i am selling at a public auction.
i am holding my breath to break 50k.
meanwhile my grandma lives on about a 1/4 of an acre in Ventura CA and her modest house has just approached the value of 450,000.
it just makes me sad.
posted by Recockulous at 7:10 AM on April 5, 2004

It makes me sad, too. I moved to Atlanta in '98 and bought a tiny condo when I was 23. I moved to New York, sold the condo last year, and actually made a decent chunk (considering what I paid for it originally, which wasn't much.) But now I'm in New York City, and there's NO WAY I can afford to even put a down payment down on anything, even with what I made from the sale.

And I'm talking outer boroughs here...I don't know how anyone can afford to buy in Manhattan without being a tycoon, a drug dealer, or a lottery winner. It's weird -- I'm college-educated, have a decent job with a good company (a Fortune 50 corporation) that's well-respected in the industry, and I can't see a way for me to ever become a homeowner without moving far out of town.
posted by Vidiot at 7:37 AM on April 5, 2004


> better off buying my first house here in Central Japan (where the real
> estate prices are currently at a twenty year low) than anywhere near
> my ridiculously inflated hometown of San Francisco.

This is totally off-topic, but how have you arranged to stay in Japan long enough to make it worthwhile buying a house?
posted by jfuller at 8:59 AM on April 5, 2004

Has anybody noticed that several of the metro areas most deeply effected by this bubble have rent-control?

Before you ask what ilsa is smoking didn't she catch on to the fact that we are talking about owned housing not rental, consider this:

When a region has rent control, there is no incentive to build rental property. Why? Because no developer or real estate management company in their right mind wants to build/own a property that they can't raise rents on. They want to make money. This means there is an artificially low supply of housing for rent, and what is available is at artificially low prices. These artificially low prices also drive down the quality of the properties in question, because the owners can't raise rents to pay for things like parking lots without sinkholes and rooves that don't leak.

Because there is not enough rental housing, housing for purchase is in greater demand, spurring higher prices. People at the bottom end of the middle class (who normally would rent and save money until they had a bigger downpayment and maybe paid off the student loans and credit cards) decide to purchase a house because they can't find an apartment (either at all, or in a location/condition they will tolerate). Now, just add speculators who see that housing prices are rising above the national average piling into the momentum.
posted by ilsa at 9:03 AM on April 5, 2004

"Crash, wouldn't it be possible to live, say, forty minutes to an hour outside of whatever urban center you'd be working in and commute daily"

The_God_Complex, that is with an hour's commute each day. To live within ten minutes of the new data center, I'd have to spend $550,000 to get a comparable home.
posted by mr_crash_davis at 9:14 AM on April 5, 2004

Keyser - you and I are going to swoop in and get sweet deals in about 3 years when the broke-dick shithouse that is the CA housing market finally crashes.

I thought that way as well, then bought a place last year. I realized that when the crash comes, I won't be able to afford anything as I'll be out of work, and figured that I might as well enjoy a few years of deducting mortgage payments from my taxes before the whole thing goes ka-blooey...
posted by jalexei at 9:18 AM on April 5, 2004

ilsa, in San Francisco, there is a "new construction exemption" for all rental housing built after June, 1979. I don't think rent control is as large a factor as geographical limitation. San Francisco is 7 miles by 7 miles, and isn't getting any bigger.
posted by ambrosia at 10:01 AM on April 5, 2004

And to second ambrosia - rent control in Massachusetts (specifically Cambridge and Brookline - my current home) was abolished about 10 years ago. Hasn't stopped the average single family home in my community from climbing to over $800,000.

And no - we don't live in a house here - we've got a 1000 sf condo (with a small yard and a garage) that's the downstairs of a two-family that we love, but I have no idea how we'll stay here if/when we need more space. We were happy to pay a premium for location - I work in downtown Boston and am a 20-minute door to door train ride or 15 minute bike ride from home, in a community with good schools and wonderful shops and restaurants, etc. but once child #2 eventually comes along, I have no idea what we'll do.
posted by jalexei at 10:31 AM on April 5, 2004

The crash may not be as severe as the article predicts. As housing prices begin to fall, all of those folks who could never afford to buy a house suddenly can, and flood into the market.

And to third ambrosia, the prices in the entire SF Bay Area are insane, although only a few cities like San Francisco and Berkeley have any sort of rent control.
posted by Daddio at 12:30 PM on April 5, 2004

but once child #2 eventually comes along, I have no idea what we'll do.

How about not having child #2 until you can already afford the solution?
posted by archimago at 12:30 PM on April 5, 2004

How about not having child #2 until you can already afford the solution?

Agreed. Sorry if I wasn't clear - kid #1 just arrived - no plans yet for #2. We'll obviously plan for him/her, the "no idea what we'll do" meant, at this point, I don't know if we'll be able to find a place in our current neighborhood (the ideal outcome) or need to move (the probable, but sad outcome).
posted by jalexei at 1:03 PM on April 5, 2004

Sorry - that's not so clear either. If I wait until we can afford #2 in the current neighborhood, my wife will be well past child-bearing age unless we win the lottery. If that means moving, so be it, but I don't need to be happy about it. Our current living costs are about 25% of income, and I plan on keeping it around that amount.

As to lower prices bringing in a new crop of buyers - I assume that would depend on how gradually things happen. If there's a violent "pop" to this bubble, then the disruption to the economy would be such that unemployment would keep a wide swath of folks from buying, even if prices drop appreciably (I assume interest rates would also be hgher at that point).
posted by jalexei at 1:12 PM on April 5, 2004

Hey Recockulous, that property sounds fabu...I actually might be interested, if you want to drop me an email with some details. :)
posted by dejah420 at 9:34 PM on April 5, 2004

The best time to buy is right now. When it comes to real-estate if you want to buy the sooner the better.

A note for Recockulous -- sorry about your loss. Having driven all over this country there are incredible lots like you describe for very little money. In the end anyone who wants a little piece of land to call home, America has plenty and very affordable.
posted by stbalbach at 9:55 PM on April 5, 2004

How interesting that this comes up on MeFi; as a non-home owner in Seattle, I've been talking to a home-owner friend of mine a lot lately about housing, and we both agree that the housing prices seem insane, unsupportable, and soon to burst.

Personally, I very much want to buy a house and go all "Trading Spaces" or "Design on a Dime" on it, but dno't feel I can realistically afford much of anything in this area- and I'm a single, debt-free male with no dependents making a pretty darn decent salary at a certain software company in the Redmond area.

The great confusion we've had is, by supply and demand, how can possibly enough people exist to support so many 3, 4, 500,000 dollar or more modest homes- simple lack of funds should have killed the out-of-control pricing, regardless of what the market wants to demand, and simple common sense says you shouldn't pay half a mil for a place that is no better than the quiet home you grew up in that was 1/10 that much only 15 years ago. When I was growing up, $500k meant a huge brick house with tennis courts and swimming pool, those big columns out front, and perfectly manicured lawns. "Craftsman style" or "charming bungalow" was not what came to mind.

One thing he did say is that when he was seeking out a loan for his $250k home, he was being offered loans as high as ~450k, which he freely admits there's no way he could afford if he wanted to ever save money or even eat out again. Apparently, a lot of Americans are getting the highest loan they can- said loan size no longer being held in check like it used to, per the article- and using every penny of their earnings to cover it, and then paying for the rest of their lifestyle on credit.

Sometimes, I think I can't wait for the crash to come and see the pain of these people (and hope I don't get 'unfairly' sucked down the rathole with them) because I feel cheated for the "crime" of being ethical and not having the beemer, the condo, the big wardrobe, the frequent vacations, and instead saving and living modestly, well below my means.

Other times, I think I must be the crazy one- the only one who doesn't realize that you have to die some time, so if you can just juggle and keep the creditors at bay, you can live the high life that surely you alone among God's children so richly deserve- and leave it to your children and grandchildren's generations to clean up the mess you made.
posted by hincandenza at 1:06 AM on April 6, 2004

While there are elements of a bubble - waiting in a tent to be the first in line to buy a house and "over the budget" loan offers - there is a possibility that things might not be as bad as they seem.

Enter the "Greenspan argument": new financial instruments are available to lower the risk, thus an increase in level of debt is not a burden. For homeowners, refinancing means lower monthly payments and /or higher loans.

CAPM / Equity Risk Premium Puzzle literature says that people should pay higher prices for assets which provide high returns during periods of low consumption (recessions). Stocks pay during booms, when one already has higher income, so they are not “very useful” from that perspective (more here [pdf]).

House prices tend to go up (in nominal value) most of the time, however nearly all growth takes place at the end of the boom and during the recession that follows [pdf]. Since interest rates are high at the end of the boom and get lower afterwards, most people will tend to refinance during a recession. The financial instruments allow them to benefit from the price increase without relocation (high transactions costs).

This is something new in the market: while house prices had the same evolution before, people, in most cases, were unable to extract the surplus. Thus, a house has become an asset that pays during periods when normal income is low, and, hence, part of the price increase is justified by the new found use.

A word of caution: the above is not an empirical fact, it just a hypothesis that waits to be proven right (or wrong). We cannot use past data to test it since the financial instruments were not commonly used during the ’91 recession; we have to wait for few more data points.

If this theory holds, I would also expect to see a steady increase in house prices (ignoring the bubble effect) for the next several years, as more people realize the value of “old assets.”

What happens when the boom starts? Even if prices were to go down in nominal value (little empirical support) so that the value of the loan will be higher than the house price, most people will still pay the mortgage - the default brings too many bad consequences. Moreover, it should not be a big problem for the household, as employment should start to become available and stock prices go up. Hopefully, house prices will go up again as more people will afford them (higher income and stock earnings for the duration of the boom).

Additional link: House Price Index.
posted by MzB at 9:58 AM on April 6, 2004

Terrific post, Mzb.
posted by keithl at 11:06 AM on April 6, 2004

Just chiming in from New York on ilsa's rent-control error: since 1974 new construction here is not rent-controlled or stabilized unless its developer takes city money or tax credits to finance construction.
posted by nicwolff at 6:29 PM on April 6, 2004

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