Thursday, August 23, 2007

Housing: should be 3 to 4 times your income

Just as stocks break free of fundamental metrics of value in speculative manias, so too do houses. But just as stocks retrace to historical levels of price-earnings ratios, so too will housing retrace to historical levels of income-to-value ratios. Historically, this is about 3-to-1: long-term, houses cost about 3 times household income. Since the median household income in the U.S. is abour $46,000, U.S. incomes would support house values of abour $125,000 - $140,000.

As I have noted before, my parents/step-parents each bought houses in highly desirable locales in the early 70s (Honolulu and Pasadena) at 2:1 (twice annual income) and 4:1 (four times a schoolteacher's annual income to buy in highly desirable Manoa Valley in Honolulu.)

As recently as 1997, friends were purchasing small homes in very desirable S.F. Bay Area communities for $160,000 - $175,000--four times a modest (for this area) household income of $40,000.

In other words, to return to a normal trendline, one that was in place a mere decade ago, even the most desirable areas will command no more than 4 times median income. That would put house prices in Honolulu, the S.F. Bay Area, West L.A., Connecticut, Northern Virgina, etc. at about $180,000 - $200,000 -- not $600,000.

Real estate trends stretch out over much longer time spans, and as a result we can foresee a lengthy, painfully drawn-out decline in housing values over the coming decade.

Could this really happen in the Bay Area?? High paying jobs + Land Use restrictions?



Anonymous RayW said...

I don't think the Bay Area is immune from the correction. A house we looked at in lovely Livermore started out at $575,000 back in June and is now at $519,500 and still hasn't sold.

The housing downturn ripple hasn't got here yet. The 5 year adjustables from 2002 just adjusted. Now comes 2003 the peak of adjustables is due to start coming home to roost. It is only going to get worse, not better. Doesn't matter anymore.

People making $130,000 a year are not going to live off of Railroad Avenue in one of those sh*tboxes.

Fundamentals and reality have a way of forcing themselves back onto the dellusional. Sometimes it just takes a little longer.

2:29 PM  
Anonymous Anonymous said...

I am by no means a "housing bull" and I do agree that pricing in the SFBA will come in, but pls help me out with your data:

"As recently as 1997, friends were purchasing small homes in very desirable S.F. Bay Area communities for $160,000 - $175,000--four times a modest (for this area) household income of $40,000."

What "desirable ... communities" are you refering to? Single family homes?

Having lived in the area during 1997 and having been a homebuyer during that time I can tell you that your #'s are not right. Your housing prices are low, as are your median income figures.

8:06 AM  
Anonymous Anonymous said...

I hold the same view with anonymous above.

A friend of mine purchased a two bedroom condo in cupertino for around $300,000 in 97. I thought he was crazy, then he sold it for $500,000 in 2001 and bought a big house in San Jose for $1 million, I thought he was crazy too...

Housing data can be easily checked, 160,000 will get you a 2 bedroom old shack in Fremont in 97, which is 300,000+ now. So going back to 97 still means 50% retracement.

10:02 AM  
Anonymous Anonymous said...

The 2 bed room old shack above is an apartment or a fourplex, of course.

10:40 AM  

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