Can home prices continue to grow faster than income?
I’ve had a grand ‘ol time reading the great Realtor’s Anti-Bubble reports for San Diego. A particular line of this publication made me delve a bit deeper into the thinking. The line was:
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Housing equity will most likely continue to accumulate to local homeowners. The equity gains under three price growth scenarios are presented below. One scenario assumes a historical conservative price appreciation of 1.5% above consumer price index inflation. With most credible inflation forecasts pegged at 2.5%, home prices can expect to rise by 4% per year under normal circumstances. The two other scenarios assume slightly below (1.5%) and slightly above (6.5%) the normal rate of appreciation.
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I always appreciate a good meaty discussion about cost of living. One of the assumptions that gets thrown around quite a bit lately is exactly the kind of nonsense that is put out by the good folks over at the NAR. Essentially, it goes like this…
Housing prices outpace inflation, and therefore is a good long-term investment.
This old-wives tale really has to parts, one independent, and on dependant. Therefore, if you can prove that the independent one is not true, it makes the entire statement untrue.
Therefore, if you can prove that house prices do not outpace inflation in the long-term, you can prove that housing is not a good long-term investment; or at least in the way they mean.
This one is so easy, I won’t even have to factor in some of the more difficult issues such as maintenance costs, just the known and easily calculable. Here are our assumptions:
- Current Median Household Income is $104,414
- Current Median Home Price is $605,600
- Wages match inflation at 2.5% increases per annum
- Per the NAR, home prices inflate at 4.5% per year (seems kinda paltry, huh?)
- Interest Rates average 8% over the long-run (we need this for first time buyers)
- Insurance rates are .15% of insurable property
- Tax rates are 1.5% of property (assuming Prop 13 stays, but this is a low amount and does not include typical mello-roos for many SoCal neighborhoods, but oh well, we’re being conservative, right?)
- First-time buyers will be able to put down 20% of the purchase price and finance the remainder
This is a sample of the next 30 years.
This is the graph:
Next, the trick was to calculate the percentage of income that a median household would need to spend towards PITI assuming the NAR was right.
This is the graph:
This means, if the NAR were right, we would be spending 88% of our GROSS INCOME BEFORE TAXES on housing by the year 2034 in San Diego. Glad to see we’re keeping it real.
This is what stops the trees from growing to the sky. If people can barely cover the 50% of monthly GROSS, what makes people think they can do it at 88%?
Thanks for that post. That’s awesome.
Ralph Roberts, Thankful for his Good Fortune, will Waive Listing Commission for Homeowners Hurt by Layoffs and Plant Closings
DETROIT, Nov. 23, 2005 — Ralph Roberts will waive the listing commission for the first ten families in each of three counties — Wayne, Oakland and Macomb — who contact him between Thanksgiving and Christmas Day who have been laid off or lost overtime and can no longer afford their homes as a result of layoffs and plant closings faced by employees of GM, Ford, Delphi, Daimler-Chrysler and other automotive related companies.
“The families of metro Detroit and Michigan are facing a terrible situation, with these recently announced massive plant closings and layoffs, the likes of which we have not seen in many years,” said Ralph. “I feel very strongly that those of us in real estate who have been fortunate and enjoyed success have a responsibility to extend ourselves to individuals and families who are facing some very hard choices.”
Ralph’s goal is to connect families who need to downsize and get into a smaller house that they can better handle financially with families who are interested in selling their homes.
As an example, on the sale of a $200,000 house, the listing commission of usually 3%, or $6,000, will not be charged to the selling homeowner. Interested property owners should contact Ralph Roberts or his three listing partners Paul Corona, Jenny Kelly, Joy Santiago or Sarah Hodges at 586-751-0000 or email to RalphRoberts@RalphRoberts.com.
Ralph Roberts, recognized by TIME Magazine as “the best-selling REALTOR(R) in America, is the owner of Ralph Roberts Realty, LLC, and author of Walk Like a Giant, Sell Like a Madman, Real Wealth By Investing in Real Estate, 52 Weeks of Sales Success and Sell it Yourself. Ralph is recognized as one of the top REALTORS in America. Ralph Roberts Realty, LLC, is located in Warren, Michigan and online at http://www.ralphroberts.com/, tel. (586) 751-0000.
Lois Maljak 586-751-0000 loismaljak@ralphroberts.com
What happens if you don’t assume salary increases at only 2.5%?
People making $100,000 are likely seeing greater increases than that. A second year lawyer a any major firm in Los Angeles or Orange County is currently making about $135K and will receive an increase to about $150K in January. According to the senior partner in my firm, entry-level salaries have doubled every 10 years for the past several decades. And, as appalling as you may find those numbers, lawyers are not the most well-paid people in Los Angeles. Entertainment industry, CEOs and corporate executives, doctors, financial industry professionals, contractors, small business owners all make more.
Looking at “median” numbers is really misleading as we increasingly become a two-tier economic population.
the median household income in Orange County, CA is $76,000 not $105,000.
JD
This is a Red Herring defense. AKA Chewbacca defense.
It is a widely held economic rule that money supply to private citizens is dictated by income. Else, how would they have the money? Even intergenerational transfers have to be earned at some point; hence inflation (which is a measure of the money supply’s effect on prices) is the best indicator of income.
Contrary to what you might believe, not everyone in LA is a doctor or lawyer. Hence, affordability measurements are a percentage of the population that could afford the median house. I have no doubt that many people can afford a house, but there are far fewer that cannot.
Most importantly, I have worked in the music business, and know firsthand having been a music industry executive at one of the top 3 that most are paid abysmally low; and I was paid better than many. Your defense holds little water; facts are supported by scientific evidence. Anecdotal evidence, while a form of evidence is not widely believed or supported; otherwise I could provide you with far more evidence to the contrary.
John Doe
Median income for single person in Cal. is ~43k. 1st year attys in San Diego for defense firms start at ~40-60k. Good luck with the whole 2d year $150k stuff. People are squeezed BIG time right now. With Credit card payments doubling in January, heating oil spike, etc., there will be a GIANT problem come feb. 06. Problem may be that lenders may extend crisis by loosening lending standards even more and/or Govt. may print/borrow more money which could actually set off more inflationary activity. If your worried the air’s comin out, keep blowing!!!