When Did Median Incomes Afford Median Prices?
Readers suggested a look at rents and home prices as a topic. “Does anyone have linkable data that shows that historically that median income can afford median home price, and also, that median home payment equals median rent?”
“I know both of these mantras are just ‘common sense,’ but I was wondering if there was a graph out there anywhere, or a linkable source with that data.”
“The reason I am asking, a few family members have told me that I am crazy, and that those ratios never existed. Rent has never covered the mortgage on homes… They drank too much kool aid, and I need to help them on the road to recovery.”
A reply. “If you Google the US Census Bureau website you can see median income/ home prices for all states and metro areas. I checked Palm Beach County awhile back. I believe on 1/1/00 the median income was about $45K and the median price was $135K. I think we will see a ratio of 3:1 again as our economy doesn’t warrant $400K median prices.”
Another, “You can look at a chart that shows the ratio of home prices to rent. As you can see the ratio has never been so high as far as the chart tracks, back to the 70’s.”
“This site has a price to earnings graph.”
Another wants more graphs, “Weekend topic: Favorite statistics, charts & graphs!!!”
One said, “I believe the NAR Affordability Index shows how much median house the median income buyer can afford on a nationwide basis. As you would expect, it is at a record low now.”
A look back at the Economist, “The most compelling evidence that home prices are over-valued in many countries is the diverging relationship between house prices and rents. Just as the price of a share should equal the discounted present value of future dividends, so the price of a house should reflect the future benefits of ownership, either as rental income for an investor or the rent saved by an owner-occupier.”
“Calculations by The Economist show that house prices have hit record levels in relation to rents in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. This suggests that homes are even more over-valued than at previous peaks, from which prices typically fell in real terms. House prices are also at record levels in relation to incomes in these nine countries.”
The International Herald Tribune. “To buy or not to buy? (It) is being performed more frequently at kitchen tables and real estate offices around the world. That is because the math associated with the rent-versus-buy debate has grown a lot fuzzier lately, and the numbers threaten to swamp long-held convictions about the value of buying property.”
“Measured by cash flow, the cost of renting seems cheaper than buying: Even without the need to scrape together a down payment or pay closing costs, the monthly outlays of not only the mortgage payment but also local taxes, insurance, utilities and maintenance in many markets have actually tilted the balance toward renting rather than buying.”
“With house prices softening in many markets but not yet hitting bottom, and with higher tax assessments lifting the cost of ownership beyond more households’ ability to pay, more people are deciding to rent - at least until market conditions improve.”
“Noel Whittaker, a joint managing director of a financial services company near Brisbane, Australia, cited the example of a property that costs $300,000 and which can be rented for $300 a week. ‘If you rent it, the total cost is $15,600 a year,’ he said. ‘But, if you buy it, you will be up for at least $24,500 a year when you take interest rates and maintenance into account.’ That’s nearly $9,000 a year in favor of the renter.”
“A couple that rented for two years ‘will have an extra $18,000 to use as a deposit when they eventually do buy,’ he said.”
This graph is a good one to keep bookmarked.
That one makes me dizzy…
dizzy indeed………Yikes
I’m curious - that graph doesn’t jive with these statistics from the US Census Bureau:
http://www.census.gov/hhes/www/housing/census/historic/values.html
Shiller’s graph shows virtually no increase in home sale prices from about 1950 - 1995, and about a 20% gain from 1950-1990, however the census data shows about a 280% gain during the same period! (both data accounts for inflation)
Perhaps it’s because the census data includes new homes whereas Shiller’s data doesn’t? That seems like that wouldn’t be enough to account for such a large discrepancy - have our new homes really been that much bigger? I know they certainly haven’t been better quality, and most certainly have had smaller yards than in years past.
Or maybe inclusion or exclusion of condos contributes to the discrepancy?
The Census data is simply the median price adjusted for inflation, while Shillers attempts to track the inflation adjusted price of the same group of houses throughout history.
So, the census data is likely skewed upwards by the trend towards bigger/more amenitied homes through the period. Shillers is obviously somewhat biased by this as well (a house from 1890 clearly has upgrades) but not as much…
Don’t forget:
-indoor plumbing
-running water
-hot water
-gas furnace
-insulation
-air conditioning
All huge upgrades in your average 1890 house.
I think you should factor these in somehow.
houston we have a problem.
I saved that one to my computer. It’s an amazing illustration of just how out of whack things are. I showed it to a friend of mine who doesn’t think prices can drop 50% (friends of hers in the industry told her so), and sadly, even then she won’t consider it to be possible.
Well, it’s hard to predict for sure - real estate cycles in other countries have run even longer. I believe that the US’s cycles are shorter since it has a (relatively) free(r) maarket. But never say die is the motto of many an optimist. Till they’re on their deathbed, they’ll continue to gamble against the house because “someone wins”.
sure, in the Netherlands the current housing bubble is more than 15 years old, and the % gains are FAR bigger than in the US. People have repeatedly called the end of the bubble (e.g. around 2001) but it is still expanding.
And although the current correction in the US housing market is starting to look a bit more serious that the corrections we had in Europe over the last 10 years, credit is still expanding at enormous rates nearly everywhere. So I don’t think it is over, not yet.
nhz, I second that. In Finland (that’s also in Europe, side note for the ignorant) the amount of housing debt is climbing 15-17% y2y. Constantly, it’s been doing that for at least 5 years in a row. The population is not growing, inflation is low, and the number of housing units is not significantly growing either.
It is a pure credit bubble, induced by low rates, 100% financing, 60-year (no kidding) mortgages etc. We’ve taken the full arsenal of the mtg industry into use except for neg-am. I’m fairly sure that will come next.
There is no crash here yet, inventories are just mildly up, but all in all the mtg / RE business is humming nicely. If you breath and have some kind of crappy 6 month job contract, you get a loan. And the government subsidises the interest payments, all poticians happily ignore the warnings from OECD. After all, there is always an election down the road.
Good God! and I thought it was bad before, when this breaks it will get and stay ugly.
Whoa, look at the dip in prices for the depression and then look at what we are facing. This run up has just about everybody in it, not just the rich stock holders. Plus the stock market will tank at the same time. Duck, tuck and cover, its the big one. More like a mushroom cloud than a bubble.
remember that before WWII more than half of the population lived on farms.
Thanks for the topic Ben, this is going to give me all the data that I need to beat some crazy kool-aid drinkers away.
Even though I know I am right, sometimes you feel a little weak when you hear everyone telling you that “your crazy” and “prices will never be affordable again”.
Thx!
“prices will never be affordable again”
If someone says this, hit them with the bubble two-by-four:
“So, what changed in the last four years to cause RE to go from affordable to the average Joe to unaffordable forever more? What event or events caused this sudden paradigm shift? Or is it more likely that we are a market like the dot-com stock bubble, when common wisdom on the street was that ‘it’s the new economy, stocks can only go up’ and that ‘earnings no longer matter’?”
Good one. I also like (Uncle Git’s comment):
“I can’t be priced out of the market. I AM the market.”
Thought that was nice and succinct.
Before y’all go off beating Kool-Aid drinkers over the head with this graph, remember that these are inflation adjusted prices…dropping the graph back down to it’s long time trend is not *soley* conditional on a big price drop; it can *also* be accomplished with a big rise in inflation and a small drop in prices (or variations on that theme). At least that’s one point that a RE bear could argue.
I think it is very likely that the return to the trendline can only result from huge inflation numbers; a quick correction in real homeprices would kill the economy (even more so in Europe where the gains are bigger).
One could argue that in Europe this has been going on after 2001: if you use the actual money supply growth rate (8.5-11%) instead of the heavily manipulated EU CPI numbers (2-3%), all the RE markets in ‘Old’ Europe have been declining slighly year after year over the last 5 years or so.
The major difference with previous episodes is that this time wages are NOT catching up with money supply growth / real inflation. That will have to correct too, somehow - either by surging wages (unlikely because of globalisation) or by a contraction of the money supply (= severe depression). It will not be pretty.
REAL ESTATE
Growing number of Central Texans are house poor
More residents pay more than 30 percent of income on housing
By M.B. Taboada, Claudia Grisales
AMERICAN-STATESMAN STAFF
Saturday, October 07, 2006
Central Texans, following a national pattern, are spending a higher percentage of their income to keep a roof over their head than they did five years ago, reflecting both higher housing costs and the boom and bust of the local economy.
About one in three Central Texas homeowners spent 30 percent or more of their income on monthly mortgage payments last year, up from about one in five in 2000.
In Bastrop County and in Round Rock, the proportion more than doubled, from 21 percent to 44 percent for the county and from 16 percent to 37 percent for the Williamson County city.
The nationwide figure rose to 35 percent from 27 percent in 2000.
The census figures are based on a survey, not hard data. But the pattern is clear: Housing costs are rising faster than Americans’ ability to pay them.
From 2000 to 2005, the median home price grew twice or three times as fast as the median family income in most of Central Texas, the survey found. The only exception was in Hays County, where both incomes and home prices grew at 15 percent.
http://www.statesman.com/business/content/business/stories/realestate/10/07/7housing.html
The term “house poor”, as I recall, referred to couples just starting out who stretched a bit to buy a home, with the anticipation that, after a few rasies, or when the Wife starts working when the kids are older, things will be OK.
And with a FIXED mortgage, no uncontrollable costs (like HOA assessments), etc, and no second, third, and forth HELOCs and mortgages), “house poor” wasn’t always a bad bet.
However, with an ADJUSTABLE mortgage, 2nd mortgages, HELOCs, and HOAs:
HOUSE POOR == PISS POOR
Plain and simple. It’s no longer a different kind of poor.
today many households are simply aramanth’s. highly leveraged hedgefunds.
What do HOA’s run in SF and NY? Anyone have any idea? Reuven?
It’s all over the place…but it’s a cost that can’t be controlled. Suppose the people on the board do something stupid, like discourage someone who’s the “wrong religion” from buying there. (This happened to me, in Florida.)
And that person sues! And wins! (Or even doesn’t win).
Then, all of a sudden, the HOA needs to have an assessment to pay for the lawsuit. The costs would be divided among the homeowners. And if you don’t pay, in CA they can foreclose on your property WITHOUT a court case (”Non-Judicial Foreclosure). It’s just a ticking timebomb you don’t need to have, especially in a single-family detatched home.
(I’ve seen complexes with HOAs where the only common property was a little patch of land that had a sign on it with the name of the development.)
based on the how-much-a month mantra it’s only natural that home prices surged while interest rates declined strongly. Because of declining rates people could buy more expensive homes with the same or slightly lower incom (which caused home prices to rise) but it also made the suggestion that ‘home prices always go up’ more realistic. Because of the constant appreciation, people were willing to pay more a month for being a homeowner; they knew there was an additional bonus. This was all more or less as planned by the central banks. The trouble is of course that it only works as long as rates keep declining.
If you look at interest rates and home prices, in many countries prices have increased more than can be explained by just lower rates (= lower monthly cost for the same home purchase price). The other part of the equation is loose lending which has increased even more over the same time.
based on the how-much-a month mantra it’s only natural that home prices surged while interest rates declined strongly.
Even the how-much-a-months (who I passionately detest), should have realized that, at 40 year lows in 2004-2005, INTEREST RATES will RISE AGAIN, which could drive prices back down. Duh!
It’s not even how-much-a-month…it’s how-much-THIS-month. They figure that next month, something magical will happen to get them through another month.
Hokus-Pokus….Boom!
who knows … the bond market seems to think that rates will be going even lower in the next years. Bernanke has written a few years ago about the option of negative rates if the FED thinks this is required (e.g. by taxing 1% off all money in savings accounts every month).
Of course rates cannot decline indefinitely, but these manias often continue much longer than anyone can imagine.
At least (as far as I know) interest rates can’t go down below zero, can they?
As one of those crazy savers, this “war on saving” is really pissing me off.
Reuven - I use to think negative interest rates weren’t possible, because of the possibility of simply exchanging cash or deposits for other cash, but I’m actually not so sure. Before interest rates got to zero, it would be rational for banks to either levy service charges or else impose a negative interest rate on all demand deposits. So, extrapolating from that, if you eliminated cash you could theoretically have negative interest rates.
However, I think it’s possible even with cash. People would hold higher and higher cash balances which in a deflationary economy would of course have a positive real effective interest rate. Reserves and demand deposits would be converted into cash and so even without an outright ban on cash you could have a run on cash which could conceivably cause people to “pay up” for the right to own cash in the future.
Not saying it’s going to happen - just an intellectual exercise.
as mentioned above, Ben Bernanke has already written about using negative rates on savings accounts as a FED policy instrument. Savers have been warned …
Those negative savings rates would be good for stupid savings bond buyers such as myself. At least a couple of people on these blogs the last few months had tantrums about savings bonds. I bonds have a fixed rate that lasts 30 years. Can’t go negative. And people will simple switch from money market accounts and passbook savings to TreasuryDirect’s 5 year notes and 10 year notes if they see rates drop to negative. Of course, no one can see this coming until it happens, so this all is just another case for diversifying. Gold and Platinum are good to counteract bonds and ten year notes. Precious metals prices would really go sky high if savings rates go negative.
During the peak dot-com boom years (1999) I-Bonds were paying just north of 7%! And they had changed the rules so an individual could buy 60K/year of them (instead of 30K) because you could buy 30K from a bank and 30K on-line. A couple could buy 120K/year of inflation protected bonds…
So while all our friends were plowing money into Pets.com, we plowed it into iBonds! We’re quite happy we did.
“Precious metals prices would really go sky high if savings rates go negative. “
I doubt it - in the same paper where Bernanke suggested using negative savings rates, he also suggested that the FED could buy all gold mines (the market capitalisation of the whole sector is pocket change for the FED) so they can rig the gold price as well. With all those naked short plays from JPMorgan c.s. that should be quite easy to accomplish. One has to assume that most other central banks would gladly play along and keep selling paper gold without allowing any audits of their actual gold stock.
the FED could buy all gold mines
Including the ones in Russia and China (both major gold producers)? Yeah right.
Anyway the stock of gold is so much bigger than the flow there is no damn way you could control the price even if you owned all the mines.
Don’t confuse benchmark rates with mortgage rates. Benchmarks are indeed rallying, but it doesn’t mean that others have to. Once the default risks become evident, the two may diverge from each other, and it mortgage lending will drop out of favor.
Thanks so much Ben et al… For Everything this Blog has brought and continues to bring me. but most recently for the reminder of the Economist Article… Which shows that what at the time felt like perhaps the most dismal interpretation of the run up is in fact looking to be the truth.. That this is Global– not National. Sigh.. I am disappointed. I miss home ownership, alot. I feel unmoored and was seriously thinking about learning Spanish and spending the winter in a new home, some place warm and by the water.. But I guess its better to let the money run out than end up upside down. Seems like snatching up ANY house runs the risk of a knife falling through my catching hand..
Its interesting that things REALLY seem to picking up steam now- which confirms the predictions of some on this blog that This RE bust might be faster than past RE busts due to a constellation of new factors (e.g. Information dissemination thanks to Ben and the internet, the FB’s needing to escape faster when the arms reset, etc). What are peoples predictions now of Time till bottom? I know its a common topic, but I was wondering if it was a dymanic issue in the predictors heads as it is in mine.
I’m in the “long-term” crash camp, with the possiblity that we may not see these prices again, inflation-adjusted, in our lifetimes.
It’s not just the disemination of information, but how the suicide loans are handled. Will the spigot be turned off completely? Will there be a bailout? Will we see a currency devaluation or hyperinflation? Will the PTB set up an agency which converts the suicide loans to long-term I/O loans which require no principal payment until the FB sells the house?
If there is no intervention, there are FBs who have mortgages with teaser periods extending well into 2010 & beyond. Where is the critical mass of FBs, and how will the foreclosure “problem” be resolved?
I anticipate a rather quick decline over the next 1-3 years, but think it will continue downward for many years more.
Just MHO.
meant “dissemination”…
as for the bailout: I know Europe is not the US, but we have a very clear example of what will follow.
In Netherlands about 15% of all households participated in a stock lease construction, ‘Legiolease’, during the stock market boom years. Most people jumped on the train at the top of the market and were left with huge losses when the stock market tanked after 2001. At least some of them were thinking is was some kind of savings account, while it was a highly leveraged stock market play. Of course, most people didn’t want to know the details, as it was the easy way to richess (at the start, some people made loads of money of course).
After years of discussion in the courts and involvement of politics, it is now clear that the government is going to enforce a ’solution’ where all the FB’s (people who participated with other people’s money) are going to be bailed out for the most part, and only people who had their own capital invested will have to sit on their losses. It’s easy to see how this will play out in the housing market just as well - only difference is that the number of households involved and the amount of money involved for each household is many times bigger. The government enforced solution is extremely unfair and a sure way to encourage this kind of stupid activity in the future.
What appears to have been lost is that a home is a place to live. Shelter and a refuge if you will. It is NOT an investment with a guaranteed rate of return or a savings account or a line of credit.
GH you hit the nail right on the head. As I get older my wisdom is that the object of the “game,” if you will indulge me, is to get as close to zero on housing costs. In other words, buying outright with cash or paying the mortgage and then having enough left to put away in a CD or something that yields enough interest to cover the tax man and insurance and maybe some, if not all the maintenance. In terms of my housing that is all I want. I don’t need a McMansion or Faux Chateux, or even an ATM. in fact, most people, if they paid off the mortgage and saved for that “rainy” day would have enough to buy outright some, not all , of the toys they have to have. Just think if you had no mortgage and saved the $2,000/month, you could buy the $25K Harley in a year. You would also have time to reflect if you really wanted/needed those kinds of toys and you would also know the labor it takes to really buy one. You might also decide not to buy and then you would have 25K saved. What a concept, savings!
How much to rent a Harley?
Good analogy to housing, since there are two kinds of motorcycle riders:
Those that have gone down, and those that are goin’ down …. don’t want to own either when they crash.
the reality is that a home has become the favourite object for investment and speculation in many anglo-saxon countries because of all the special tax favors and incentives that politics has invented.
In my country (Netherlands) real estate is by far the most favoured investment in the tax system: no capital gains tax, 50% HMD (so the tax office pays half of your carrying cost), huge renter and developer subsidies, and loads of other subsidies and incentives. No wonder that people keep pouring money into real estate instead of considering homes just ‘a place to live’. And on top of that, we even have special laws to protect owners who use a home just for speculation and leave it empty for years while there is a shortage of homes in many areas.
nhz,
Repeat to yourself again and again: housing is not an investment. All of the tax benefits and subsidies in the world won’t change the fact that an unproductive asset (ie negative cashflow) is not an investment. I haven’t heard anyone say that buying a house at these bubble prices could ever produce a positive cash flow even including bennies.
To the extent that the Netherlands has handed out these subsidies (50% hmd, etc.) this just results in even more extreme run-ups in prices that you guys have seen. And those extreme prices mean negative cash-flow once again. You see, there no getting around the fact the SFR housing is not an investment at all but is rather a heavily subsidized liability. Once EVERYBODY realizes this, than maybe just maybe we can have a little sanity in the housing market and a house won’t be that BAD of a liability. BTW: The world’s greatest investors (Buffett, etc.) agree with me on this. Even Carlton Sheets knows that you must have at least a break-even cash flow to begin with, coupled with a rising rent environment to make SFR housing workable. We haven’t had either in quite a while.
BTW, I’m not disagreeing with anything you said, it just frustrates me to no end how corrupt the governments have become and how stupid the people.
You are absolutely correct in what you say, and people have acted like morons, but in a way(at least for some of them) you can understand why they “invest” in RE. Mainly because with the increasing costs of living, and the war on saving declared, they felt they had no other choice but to go out and speculate in order to stay even with the game. Unfortunately it will not work out favorably for most of them. Personally, for those types I am sympathetic. For those who were just plain greedy, I could care less about them.
to Darth Toll:
yes, I see your point; trouble is, I don’t see a liability for most homeowners who play in this pyramid game. The government is providing free put options for all homes up to a certain value (’National Mortgage Insurance’). If things go wrong, the losses are for the taxpayer.
People cannot loose in this game when they don’t invest money of their own to begin with. If things go well they can be millionaires within five years or so, just from owning a home. If things go really wrong they apply for a special bankruptcy protection: they will loose the home and have to live three years on 95% of the minimum security wage level (but they can still keep their car, boat, other expensive goods; big deal …). After those three years, they can simply try again. Because they didn’t really pay anything for the home (except for the monthly mortgage - rent payment, they are not loosing anything. This is not ‘game over’ for the stupid players, it’s more like ‘proceed to the next round’.
Although our housing market is slowing, the average Dutch household is gaining nearly the same ‘income’ from rising homeprices and stock market gains as from their jobs. I have seen too many (especially young) people buying luxury homes at 10x income, without any downpayment - it’s disgusting. In the Netherlands the trendline for home prices is about 85% down from current levels. If this bubble really corrects, everybody with some money of their own left will be holding the bag because of the bailout and the economic fallout.
Wait, so it’s not guaranteed? My hometown Realtor says differently. As recently as last month.
“When you buy in Billings it is like getting a corporate bond. You will get a steady decent rate of return of six to ten percent. It’s real value and it will hold.”
No Price Declines!
Gary Watts moved to Billings from the OC. That’s why they are still touting a 5% increase in selling prices for the rest of the year.
Wow, 6-10% ! Sounds like JUNK bonds to me ……
Seriously, anyone who can run a calculator and understands compound interest can quickly see that the 6-10% increase has to stop at a certain point when you run out of buyers who can afford it. Start with a 230K house and 10 years later at 10% it’s $596K locking out the original buyers and most eveyone else in the area.
I’ve been harping on this one for months - but most people on this blog do consider houses (not a home, which is an amorphous concept) to be an investment which is just temporarily mispriced.
Using Palm Beach though is perfect, try most of the Bay Area Counties, and Median Rents generally cannot afford median housing costs.
From the macrovestor.com link:
“Housing Valuation Methods
In the long run, home price increases can not outpace median household income. It is for this reason that variations of two valuation methods have traditionally been used by economists. One method compares home prices to household income (price/earnings), and the other method compares home prices to rent (price/rent).”
In the long run, flippers are screwed.
In the long run, home price increases can not outpace median household income.
And of course, they HAVE NOT outpaced median h-h income. Houses are one of the few things you can track back 100s of years! I’ve seen charts for 250 year old canal house in Amsterdam. They’re are strange blips at wartimes, etc, but the trend is obvious.
And the reason they track median h-h income is that people allocate a certain percentage of their budget to housing, just as they allocate a certain percentage to transportation, hobbies, or luxuries. Does this mean that cars, yachts, barns, or boats appreciate at the median h-h income? No, it means that as people buy these things the costs of buying them tends to appreciate at that rate, because they buy new and improved models. That’s what an increase in GDP or wealth means.
Older models of houses can only appreciate insomuch as they are being maintained or improved or occupy superior locations.
Anybody with an ability to see a time horizon of over 50 years can see that most houses eventually burn down or are otherwise destroyed or abandoned or have to be substantially rebuilt so that the only remaining value is the land. That McPOS Mr. Flipper paid $1mm for ain’t Monticello. (Oh, sorry, I almost forgot that went into disrepair and had to be rebuilt at a cost much. . . forget it)
A house, in practical terms, depreciates to “zero” in 50 or 60 years…even with maintainance. At that time, it will need a serious overhaul, and you’d start to do the “tear down vs. restore” equation.
And it’s a safe bet that modern construction techniques may not do as well as those of 50 years ago.
My house, built in 1963, has already had to have extensive renovations–new (ripped out to the studs) kitchen and bathrooms (which easily exceeded the cost of building the house in 1963), and of course “little” things like window replacement, seismic retrofits, insulation, HVAC system replacement, floor replacement and refinishing, etc.
One method compares home prices to household income (price/earnings), and the other method compares home prices to rent (price/rent).”
This seems to me to be an incorrect use of the term “P/E ratio.” In other areas of finance, the P/E ratio is used to compare the price of the asset to the stream of earnings (dividends) that it pays. For housing, the “earnings” is the rent, not the household income. So P/E in housing is the same as Price/Rent, while Price/Income is something totally different.
Your point is technically true. In practice, they don’t differ. If you look at the graph of Rent versus Income over time, it’s very close to a flat line.
“The reason I am asking, a few family members have told me that I am crazy, and that those ratios never existed. Rent has never covered the mortgage on homes… They drank too much kool aid, and I need to help them on the road to recovery.”
Most such people I have talked with are beyond help. No matter how many facts, figures and graphs you put in front of them, they just don’t get the picture.
I have to agree. I’ve described my discussions with my in-laws asbout the SD housing market here several times and it never seems to sink in with certain family members. Every time they come over to the house that we’re renting, I get the “why don’t you just buy this house? Do you know how much my smaller house in Diamond Bar is worth?” When I explain to them yet again why I don’ t want to catch a falling knife, the expression is such that you’d have thought I slapped them in face or something.
“I think we will see a ratio of 3:1 again as our economy doesn’t warrant $400K median prices.”
I almost hate to point this out, but that depends. If reasonable expectations are for much higher future inflation, then a higher ratio than 3:1 is, unfortunately, warranted. But in that case, you would not expect to see the long bond yields sagging below 6%. The conundrum has certainly outlasted the tenure of the fellow who pointed it out.
Shoot, it wasn’t that long ago the banks were looking for 2.5:1. Even 3:1 is a fairly recent move.
Wage inflation, GS, wage inflation. Global labor arbitrage, as Roach puts it, may effectively cap wage increases for most Americans. Furthermore, stagnant wages combined with inflation on all other goods will only decreases monies available to spend on shelter, thereby lowering home prices further.
In Eureka, California, half the households could afford the traditional mortgage on the median prices house 4 or 5 years ago. Today, it’s about 1 in 10 households who could afford it.
http://www.humboldt.edu/%7Eindexhum/realestate/affordability.GIF
The price to rent ratio has also skyrocketed over the last 4 or 5 years:
http://www.humboldt.edu/%7Eindexhum/realestate/pe.GIF
Yeah, GH, I do agree. And I do get that.
And when I buy again- I will not be expecting to make money off it– but nor can I afford to own a rapidly depreciating asset.
The aspects of homeownership I miss are not just related to the $ I made off it. I understand THAT might have been a one time thing.
But to rehab it according to my own specs, landscape my own gardens, and just play in my own damned sandbox.. Well, what can I say.. I am grateful not to be an FB, and that gratitude comes before anything, but I will also enjoy being a homeowner again, when the Market is ready for me.
So really- when will we know? I know this Blog is filled with intelligent people, and I know we all know the bottom is NOT now and may not be for 2-5 years. But what will the signs be of what the bottom IS? I know the most compelling sign I learned here is –when EVERYONE in my life tells me NOT to buy RE. But what else? The streets will be bloody soon.. How do we avoid falling for a false bottom? I assume there will be a FALSE bottom, if not several, many moons in the future, and that it will be hard to restrain ourselves as the brave money starts pouring back into RE and the prices start edging up again? (Obviously, with so many with so much to lose, after a fashion, companies with alot of power and money will put together some sort of organized PUSH that may skew some of our indicators and result in the ‘appearance’ of a fresh climb, no?).
sorry all- meant that to nest under GH’s post. I am typically a very infrequent poster (overcaffinated today) and didn’t mean to derail good dialogue or post in wrong places.
there will be many false bottoms. It is probably a good time to buy when RE has totally disappeared from the media and nobody is interested in talking about it (not even about the losses of the last years).
And when “Flip this House” has been canceled.
If you are looking for a place to live, you don’t have to wait for the bottom. You just have to wait until the relationship between sales prices, rents and incomes reverts to the mean. This thing is bound to “over correct,” but as long as you buy in at traditional valuation, you won’t get hurt. “Over corrections” are almost always temporary.
Besides, like the peak, no one will see the bottom except in hindsight. The numbers will show the bottom, and they are lagging indicators. The bottom, technically speaking, will only be identifiable when the data tells us prices have begun to rise again. And you will have missed it.
A “normal” market, historically, is 120-180 times one month’s rent. Heck, if there’s a house you really like that’s going for 200 times rent and you can afford it, go ahead and buy it.
My neighbors last year paid about 375 times my monthly rent for a virtually identical house. You really don’t want to do that.
Exactly! who cares if prices are going up or down. If you can afford the home and you need one, buy, but who could afford anything here in California or any of the bubble areas? OK, you can get an Option Arm loan and afford it a couple of years while you pretend you are a homeowner, but seriously, I intend to buy when I find it no longer makes sense to rent AND importantly I can do so without risking my credit rating and financial health.
Excellent point. There isn’t going to be any surefire way of buying at the exact bottom. The best you can do is be prudent and use the formula you stated above as a guide.
The big run-up seems to have started after 2000. It might make sense to research prices in 2000 and add 5% per year so if the house you’re thinking about was valued at $300,000 in 2000, it would be a buy at $400,000 today (but its probably listed at $600,000).
If you rent you know exactly what your exposure is. When you buy today you have to deal with risk, and lots of it.
Take a house listed for $500,000 today. When it gets that 10% reduction and becomes $450,000, you are looking at a $50,000 loss. Or from a rent perspective, this home might rent for $2,000 per month. That equates to 2 years of rent you just pissed away.
I’ll buy again when it makes sense, but not with this kind of downside exposure.
that’s the attitude people should have for any asset. too many people can’t stop themselves from buying and the economists all say “stocks for the long-run.”
A long term investment is just a short term investment that has gone bad.
The 2K wan’t pissed away. Either you rent money (a loan) or rent the home. If you can buy the home outright you lose the opportunity cost of the next best or better investment. (If you have $500 K cash… good for you) If you rented money the equity you gain is very small $200 - $400 a month…to see that again have to pay 3%-6% commisson to sell the home on $450K plus all the property taxes. Unless you plan on staying in a location for 7+ years. Don’t buy. Rent.
The Billings video said that prices should be 100-120 times monthly rent. Is that really true? If so, California is even more screwed than I thought.
Back in 1990 I worked with a guy from Kenneth Leventhal (CPA firm) who pinted me towards this simple, straightforward measurement for home pricing “logic”, at least in California.
When 40% of the population can afford the median home it is slightly “undervalued….the 25-40% is “normal market” and less than that is the froth.
Now that the OC is in the SINGLE DIGITS the logic clearly is that there will be problems. Again, the three variables are incomes, interest rates or prices —– incomes are tied to job growth/contraction. interest rates are creeping higher (and were artificially low the last few years thanks to i/o, neg ams) and pricing….which do you think needs to move to get back to 30% affording again?
As for median income affording median price, I think as long as the tax breaks are there and folks have under or unreported income the amount won’t typically tie out.
Thoughts?
- ‘ incomes are tied to job growth/contraction’
Where in the heck does this leave places like Palmdale, Lancaster, Victorville, Hesperia and the Inland Empire. The explosive growth mostly generated jobs at Blockbuster, 7 Eleven, Walmart, Jack in the Box. . .
On the Great Plains, even less I would think. Take a look at this listing just across the Canadian border. Figure out price versus rent!
http://tinyurl.com/zlaht
for 100 years price has been 110 x rent
if you adjust for historicly low rates you might say 130 x
the rest is expected growth, or BS
… or inflation and manipulated CPI numbers
Another factor that I think skews median income/prices (at least in places like California) is the big illegal immigration problem over the past 20 years. In So Cal, there are few working-class neighborhoods anymore that haven’t overrun by Mexicans. This factor alone tends to drive a lot of internal migration away from these areas by those who can afford to.
I’m no racist (family & in-laws consists of immigrants from around the world), but it shapes a lot of my decisions on where to live… For example, the neighborhood I’m in now is slowly “Mexifying”, enough so that I wouldn’t want to buy, as I can’t vouch for what it will be like in 10 to 20 years.
so cal has a high illegal per house ratio
The illegal immigration problem is going to bankrupt many municipalities. Once they are legalized when congress becomes controlled by the Democrats, watch the flood really increase. Parts of California will see rapid eviceration of property values. Many formally illegal, now legal MEXICAN immigrants can not stand the influx of illegals from across the border. No one likes mariachi music blaring at 2 am, cholo gangbangers struting up and down your street maurading law abiding citizens, trash thrown right out on the street as they do in Mexico, communities that begin to resemble Tiajuana barrio’s.
Quite a far trek from the Newport Coast lifestyle people idolize of California.
“A couple that rented for two years ‘will have an extra $18,000 to use as a deposit when they eventually do buy,’ he said.”
I am loving renting, the stove breaks, I call the landlord and it’s her problem. Taxes going up…I will still negotiate my rent down. I will never BUY again, Think inventory is high now?… wait till the boomers all retire and need to sell.
Doug__home,
great point. And even if they do want to stick it out in their overpriced homes, how many will be able to pay the inflated taxes that came with the place. Unlikely property taxes will go down soon, as governments become increasingly strapped for money,and with more illegals and their children, with their non-taxable cash incomes move in–they may even go up.
Doug,
A point that I don’t think enough people think about. All the boomers that are coming to bail out S. FL, Arizona, Cali, … They all need to sell their homes where ever they live now, and people need to buy their overpriced homes for them to be able to afford homes in .
Anyway, to me, the whole baby boomer thing looks like a zero sum game. So, yes, they sell in NY, and move to FL. Great, still a home on the market up in NY. Repeat this process a few times, values drop in NY, boomer does not have the $$$ to afford as much home in S. Fl. Repeat until FB cry for mercy.
Am I missing something here? It really seems like this “vast migration” that some areas are counting on is total BS. Zero sum game, until someone can afford the homes somewhere, very few are just going to be able to cough up 400K for the median home down here.
My husband will be retiring in 2 years so earlier this year, we were doing a lot of thinking and researching about moving to a lower cost area. Our real estate taxes of $12,000 in New Jersey are the big factor. But the RE commission to sell the house and cost of moving would probably equal 4 years of property taxes, net of the tax deduction benefit on income taxes. There will be property taxes at the next house, too, so all in all, it would likely take 5 years or more to break even.
The “less expensive” house we would look to buy in Delaware, South or North Carolina or Florida wouldn’t be comparable to the house we have, either. Would we be as satisfied with the new house as we are with this one or would it seem like a step down?
It was a great relief to me that we decided against moving. We’ll have the income to stay here, provided we look at savings as something we can use for income, rather than continue to look at savings as untouchable. I brought my mother into our home last year after she was diagnosed with dementia at age 83. She spent very little of her savings and its a shame because there is nothing for her to “spend” money on now. If your savings last until you’re 80 - 85, thats probably good enough.
Fair enough comments, though as counter point I would suggest that your mother used her savings habits to buy some peace of mind. If it is ever available to you that may be worth almost any price. No criticism, just calling attention to different points of view. Her savings is in some ways not unlike the dead weight capital that is tied up in a home. Useless–or is it?
“Our real estate taxes of $12,000…”
My rent for the YEAR is about $14,000. Screw all that!
“Noel Whittaker, a joint managing director of a financial services company near Brisbane, Australia, cited the example of a property that costs $300,000 and which can be rented for $300 a week. ‘If you rent it, the total cost is $15,600 a year,’ he said. ‘But, if you buy it, you will be up for at least $24,500 a year when you take interest rates and maintenance into account.’ That’s nearly $9,000 a year in favor of the renter.”
I live in the Brisbane area and Noel Whittaker is a well respected investment adviser. The example he gives in this article is common and would be considered good by current standards. I rent a 3200sf 4br home (owner paid $600,000 for it) for $1500 a month ($350 a week). The owners rates and taxes amount to $3,000 pa. So he gets a 2.5% return before mortgage costs are taken into account. Currently here in Australia cd’s pay around 5.5%. The only reason the owner continues to rent the house is because he tried to sell it and the best offer he got was $500,000. That would mean a $100,000 haircut. Those who think Australia has had a soft landing……..think again. We are only a third of the way in our desent, with a long way to go before we get to the landing strip.
FWIW
Wow, 400x rents! I think that’s the highest I’ve heard yet on this blog…
Jon
The house I rent would be at least 600x. California. Landlord is a VERY nice lady who has owned it since the 60’s.
in Netherlands the return is also around 2-3% now (used to be 8-10% 15 years ago). But mortgage rates are lower here, and because of that (and the still climbing homeprices) many owners don’t bother with finding a renter and just leave the property empty …
After a period of 15 years when 10-20% yoy appreciation was normal, it’s not surprising that owners have stopped thinking about the normal income stream that is required to make RE investments profitable.
nhz….
This can’t go on forever.
Which is why I sold “too early” (July 2004) in Canberra and now rent.
I don’t want to be considering retirement options in 2010 knowing that I have to sell or play landlord again if I want to move (which is probable given I’m already finding Canberra’s winter nights too cold).
Very good points- the rentx120-180 formula is helpful. Thanks all