Where Can the Middle Class Buy a Home?(blogs.wsj.com)
blogs.wsj.com
Where Can the Middle Class Buy a Home?
http://blogs.wsj.com/developments/2013/10/10/where-can-the-middle-class-buy-a-home/?mod=trending_now_1
13 comments
From that it seems to assume a four times salary purchase that is largely borrowed. The calculation is based on current borrowing cost and looking at historical interest rates a doubling of the current rate seems plausible in 5 to 10 years potentially putting those buying these currently affordable houses into trouble.
I wonder about that too. The thing that seems to remain constant is your monthly payment which is of course influenced by the interest rate. So presumably a high interest rate would make a lot of home prices go down.
Which is why you get a fixed-rate loan...
Can you get a multi-decade fixed rate mortgage in the US? I don't think that they are obtainable in the UK, most fixes only cover the first couple of years. Is it a two way commitment so that you are locked in for that time period and it makes it harder to move/downsize or can you pay it off early?
Yes you can. The product most people get these days is the 30-year fixed rate. 15- and 10- year are also available; as you shorten the term, the APR decreases. They typically don't have any pre-payment penalty.
Awesome, thanks. The whole time I was reading the WSJ piece thinking, "What's 'affordable'?"
What I would love to see would be an annual rent/house price ratio report.
Anything below 6%, and buying is basically stupid. You are paying more in interest to borrow the money than you are to borrow the house each year. Hence one of the motivations that's making me want to leave the DC metro area. Here you are either stuck renting or having an ultra long commute from one of the shitty exurban communities. The Federal Gov't is a bubble that never really pops.
Anything below 6%, and buying is basically stupid. You are paying more in interest to borrow the money than you are to borrow the house each year. Hence one of the motivations that's making me want to leave the DC metro area. Here you are either stuck renting or having an ultra long commute from one of the shitty exurban communities. The Federal Gov't is a bubble that never really pops.
That's ignoring the tax deductions for mortgage interest and property taxes as well as home value increase.
Correct. The tax deductions make it so that more something over 3% is stupid. Here that's what I find in the communities that aren't exurbs.
Home value increase is not something I count on anymore. The housing bubble was never allowed to fully deflate. The Fed has kept interest rates extremely low to ensure this.
The recent home value increase (my father is a real estate broker, so I'm into this stuff) is mainly powered by an artificially low supply of houses for sale. The reason the supply is so much lower than it should be is due to a large percentage of owners who are waiting for further price inflation to put homes on the market. Many of them are currently underwater.
I really don't like the mortgage interest tax deduction. Its nothing but a scheme to enrich banks by encouraging debt. All the other bullshit about home ownership is warm, fuzzy, and absolutely not connected to reality.
Home value increase is not something I count on anymore. The housing bubble was never allowed to fully deflate. The Fed has kept interest rates extremely low to ensure this.
The recent home value increase (my father is a real estate broker, so I'm into this stuff) is mainly powered by an artificially low supply of houses for sale. The reason the supply is so much lower than it should be is due to a large percentage of owners who are waiting for further price inflation to put homes on the market. Many of them are currently underwater.
I really don't like the mortgage interest tax deduction. Its nothing but a scheme to enrich banks by encouraging debt. All the other bullshit about home ownership is warm, fuzzy, and absolutely not connected to reality.
"For those of you in the coastal elite who are reading this post for the perverse pleasure of finding out just how unaffordable your city is . . ."
You caught me.
You caught me.
SF better go high-rise or they will suffocate their economy.
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The market-god spin is that San Francisco has an advanced economy, with advanced jobs, which is why there are so few poor paying ones.
The article is saying housing in San Francisco is unaffordable compared to San Francisco's own median income. I'm not an economist (nor a San Franciscan,) but that sounds unsustainable no matter how you spin it.
This can occur when an influx of high paying jobs raises prices but the original, poorer inhabitants are unwilling to move out. Eventually the median income rises as people retire, die or can no longer afford the property tax on their now-very-pricey homes. The few remaining low income jobs are staffed by commuters.
Interesting topic and relevant to SF for a non-obvious reason. Most people don't know this, but if you earn between 70% and 90% of the SF median income, you are eligible for below market rate housing in the city. This means you can buy a apt in a brand new building for far about 1/3 of market rate. i.e. a $900k 2 bedroom in Hayes Valley would be around $300k BMR. Why do I bring this up? Because if you aren't in that narrow range, then you need to earn like 3-4x or more of the median income in SF to afford a house otherwise. This leaves an entire chunk of the market without any options for purchasing a house. I find it strange that the city feels that a solution like this that favors one small group and ignores everyone else is an acceptable solution to the problem. Programs like BMR need to be replaced in favor of permitting enough housing permits to satisfy demand so that housing is accessible to people earning the median income and above.
I make almost exactly what is listed as the median household income for my area, and I would never dream of buying a $200k+ house. My price range when I was house hunting was around $120k, which is around 2.5x my salary. I didn't find anything worth buying, so I rented.
Who buys a house that's 4.5x their salary?!
Who buys a house that's 4.5x their salary?!
The historical "best practice" max home loan ratio was 3x your gross income. However, that was at a time that interest rates were significantly higher. Therefore the amount you are paying now over the life of the loan is smaller and thus more manageable. This assumes you make a large enough down payment that you don't need private mortgage insurance.
However, this presumes you will have 20-30 years of (more or less) uninterrupted prosperity which I think is unlikely.
People also do things like rent out a room or two to give themselves more of a cushion.
Here are some calculations using this site: http://www.mortgagecalculator.org/
I assumed a loan of 250k, 30 years, with no property tax or PMI since this is just for comparison.
Right now rates are ~3.5% so over 30 years you would pay $404k and $1122/month. Over the past 30 years the average interest rate has been 7.45% so over 30 years at that you would pay $626k and pay $1739/month.
So a very significant difference.
However, this presumes you will have 20-30 years of (more or less) uninterrupted prosperity which I think is unlikely.
People also do things like rent out a room or two to give themselves more of a cushion.
Here are some calculations using this site: http://www.mortgagecalculator.org/
I assumed a loan of 250k, 30 years, with no property tax or PMI since this is just for comparison.
Right now rates are ~3.5% so over 30 years you would pay $404k and $1122/month. Over the past 30 years the average interest rate has been 7.45% so over 30 years at that you would pay $626k and pay $1739/month.
So a very significant difference.
I guess I'm either making significantly more than people in my area who are my age or I must spend a lot more, but there's no way I could afford a $1122/mo house payment with my student loan bills and a small car payment. I mean, I could afford it, but I would be incredibly uncomfortable every month knowing that one missed week of pay meant a bill that wasn't going to be met that month.
I did at one point rent a room from someone who was making $35k/yr who had just bought a $90k house and couldn't make the payment. It wasn't much cheaper than an apartment and the person made it clear almost every day that I was only welcome in the house because I paid more than half of his mortgage every month. He was an ass and I had no rental contract with him, so I left. His house got foreclosed upon a couple months later; I was going to buy it from the bank but he had trashed the entire inside and ripped out chunks of the exterior wall. Anyway, this was just a long winded story to say yeah, I can see what you're saying about renting a room to pay the mortgage. It would still make more financial sense to just buy a house you know you can afford.
I did at one point rent a room from someone who was making $35k/yr who had just bought a $90k house and couldn't make the payment. It wasn't much cheaper than an apartment and the person made it clear almost every day that I was only welcome in the house because I paid more than half of his mortgage every month. He was an ass and I had no rental contract with him, so I left. His house got foreclosed upon a couple months later; I was going to buy it from the bank but he had trashed the entire inside and ripped out chunks of the exterior wall. Anyway, this was just a long winded story to say yeah, I can see what you're saying about renting a room to pay the mortgage. It would still make more financial sense to just buy a house you know you can afford.
I agree with the sentiment. I bought at about 2X my salary with plenty of savings in the bank and a combination of bad luck and weather (Sandy) have required over 10% of the house value just in functional repairs in the last 2 years. If I had bought at 4-5X my salary and had the same issues completing the repairs would have been much more stressful or even impossible.
I did a little research in London a while back:
assume that the Rich dad poor dad idea of 2.5x income is the value of an affordable house, and the average median UK income is 25k that leaves houses at ~70k. Do you know how many houses are for sale in London at less than 70k, in this city of 8million? 6. just six.
ridiculous
assume that the Rich dad poor dad idea of 2.5x income is the value of an affordable house, and the average median UK income is 25k that leaves houses at ~70k. Do you know how many houses are for sale in London at less than 70k, in this city of 8million? 6. just six.
ridiculous
Median London salary is probably higher. This[1] says about £35K.
Now it doesn't change the reality that much, prices have been driven ridiculously high by the escalating levels of borrowing. We need a strategy to limit the amount of borrowing taken rather than government encouragement for even bigger mortgages.
[1] http://career-advice.monster.co.uk/salary-benefits/pay-salar...
Now it doesn't change the reality that much, prices have been driven ridiculously high by the escalating levels of borrowing. We need a strategy to limit the amount of borrowing taken rather than government encouragement for even bigger mortgages.
[1] http://career-advice.monster.co.uk/salary-benefits/pay-salar...
I'm reminded of Brain Burn's "Welcome to Texas": http://www.youtube.com/watch?v=YPQHghD3Ddw
Why are Texans so sensitive? I would never make fun of a Texan in Texas. I only do that when they're seen skiing in jeans in New Mexico.
If you're an older native Texan, you might remember the days when the majority of the residents were actually born in the state and also had parents born in the state. Fast forward a couple of score of years and if you're not a farmer and don't live in the sticks, odds are that you are surrounded by people from the surrounding states, from the coasts and around the world.
So culturally and demographically the state has changed tremendously over the last two censuses. The urban sprawl and traffic is starting to remind people of California. And the people from California remind people constantly they are from California. And the neighborhoods could be from California. (Sans the climate since we have earthquakes here now, too...)
Plus the growth is fueled by short-sighted policies of the modern slick version of the good-ole-boy, fake Christian, supposedly conservative state government. (Don't blame me, I didn't vote for them...) In the long run, lack of water resources, too many damn people and a stupid government will crash the state hard. The area around Austin is as flammable as SoCal, the traffic is DFW is becoming a monster and the social net is non-existent except for federal money.
But hey, my house would be worth 9 times as much if it were in San Francisco. :)
So culturally and demographically the state has changed tremendously over the last two censuses. The urban sprawl and traffic is starting to remind people of California. And the people from California remind people constantly they are from California. And the neighborhoods could be from California. (Sans the climate since we have earthquakes here now, too...)
Plus the growth is fueled by short-sighted policies of the modern slick version of the good-ole-boy, fake Christian, supposedly conservative state government. (Don't blame me, I didn't vote for them...) In the long run, lack of water resources, too many damn people and a stupid government will crash the state hard. The area around Austin is as flammable as SoCal, the traffic is DFW is becoming a monster and the social net is non-existent except for federal money.
But hey, my house would be worth 9 times as much if it were in San Francisco. :)
I've been considering moving to the Austin/New Braunfels/San Antonio region for a while now (I'm currently in Arlington, VA). Any reasons I should reconsider, other than what you just mentioned? The housing prices here are insane, and are only affordable if you work for a contractor. Hence my motivation to look for a more private sector fueled economic area with sane prices.
Austin is OK. San Antonio is better. Definitely move there.
I recognized your username, but couldn't remember where I remembered it from. I then looked in your comment history. After seeing the medical malpractice comment you left, I don't think I want to live in Texas anymore.
My wife and I were victims of malpractice in 2006. The result of it was our son was born 3 months early when otherwise he could have been born full term. We lucked out. He appears to have no complications from being so premature. But the emotional hell that dumb bitch doctor caused us I will never forget. (yeah, dumb bitch is a nasty term, but we were in a Christian hospital due to proximity, and she judged us for our hippy-like appearance and failed to do the most basic diagnostic activities before sending us on our way)
My wife and I were victims of malpractice in 2006. The result of it was our son was born 3 months early when otherwise he could have been born full term. We lucked out. He appears to have no complications from being so premature. But the emotional hell that dumb bitch doctor caused us I will never forget. (yeah, dumb bitch is a nasty term, but we were in a Christian hospital due to proximity, and she judged us for our hippy-like appearance and failed to do the most basic diagnostic activities before sending us on our way)
I rather disliked San Antonio. Not much culture. Not particularly well educated. Nothing to do but eat and drink. No one is athletic or particularly interesting. Go 2 miles away from the River Walk and you see just how poor the area is.
Granted this was about 10 years ago. I much preferred Austin and even Houston.
Granted this was about 10 years ago. I much preferred Austin and even Houston.
Equal opportunity hate. Everyone in the rocky mountain west hates people from California.
But why should Texas be upset people are settling there form elsewhere? After all that's the story of Texas for the last few hundred years. Maybe it slowed down a bit in the 20th century, but it was quite a hotly contested area preceding that.
But why should Texas be upset people are settling there form elsewhere? After all that's the story of Texas for the last few hundred years. Maybe it slowed down a bit in the 20th century, but it was quite a hotly contested area preceding that.
Texans love Ruidoso.
> "...Just don't forget to go back home."
Or at least, if you're staying, I hear Dallas is lovely. Or Fort Worth. Or Houston. Or San Antonio. Or Corpus Christi. Anywhere but Austin really. Austin sucks. Stay far away.
Or at least, if you're staying, I hear Dallas is lovely. Or Fort Worth. Or Houston. Or San Antonio. Or Corpus Christi. Anywhere but Austin really. Austin sucks. Stay far away.
This doesn't seem to fill in the gap of where people are living if most of the housing is above median income. They did imply that the median income was calculated per city so that rules out any wealth concentrations. This seems more of a market/response problem than a 1%er debate.
EDIT: Now that I think about it, I would bet that the SF numbers were heavily influenced by the <2000 DOTCOM bubble
EDIT: Now that I think about it, I would bet that the SF numbers were heavily influenced by the <2000 DOTCOM bubble
Building smaller starter homes, with more "basic" decorator options would help, e.g., does a starter home have to have 2.5 bathrooms? The counter-argument, right or wrong, is that builders say that with the proffers they are required to pay, they can't make a decent profit on smaller, more basic homes and that the buying public doesn't want them.
No. Homes they are unaffordable are not expensive homes, they are expensive land. Building a mini house is a waste of effort and drives costs up, as it will need to be knocked down or mangled later to support expansion.
Mini houses use less land. More likely, they are small apartments, though; single dwelling houses are not very practical where land is expensive, even if Americans tend to pretend so.
So much this. I will never understand why somebody would want to own a one-family house if they aren't going to at least have a goat or something.
Doesn't have to be a farm, but houses are for people who want to work the land at least in some capacity. Hell, at least have a solid garden!
Doesn't have to be a farm, but houses are for people who want to work the land at least in some capacity. Hell, at least have a solid garden!
You can have a community garden in an apartment complex, or at least garden on your balcony.
Yes you can. But it's stupid to have a whole house and not have any of that.
I've so far lived 3 months in the Valley and those houses are ridiculous. Super big, with a yard that is huge, but useless for anything other than parking your bike, possibly having a few deck chairs, and keeping the front-lawn perfect for absolutely nobody.
I've so far lived 3 months in the Valley and those houses are ridiculous. Super big, with a yard that is huge, but useless for anything other than parking your bike, possibly having a few deck chairs, and keeping the front-lawn perfect for absolutely nobody.
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They can - profit per square foot actually goes down as the size of the house increases. Will be interesting to see the demand when this project gets completed http://www.huffingtonpost.com/2012/11/29/san-franciscos-tiny...
It's interesting that the affordability is calculated relative to median income. If SF is the most expensive, relative to household income, doesn't that imply that either San Franciscans are living above their means, or there are more renters in SF than any other city in the country? Is there another possible explanation?
It implies that there's a housing shortage, and that housing is purchased by the rich and those willing to live above their means (or willing to skimp in non-housing areas of their budget) bidding up the small quantity of available housing, and everyone else moving away. A similar thing happens in most expensive housing markets, driving the population growth in low-wage, easy-to-build areas of the Sunbelt like Texas, Arizona, and Nevada.
Or alternatively, that everybody else doubles up and lives the bachelor lifestyle for a long time. Roommates are very common in the Bay Area, as is youth. The large number of 20-somethings just starting out in their careers skews median incomes downwards, and many of them don't have the same housing needs as someone with a family.
> Is there another possible explanation?
Other elements in the cost of living do not scale the same as housing, so you can expend more of your median salary bidding up the real estate.
Other elements in the cost of living do not scale the same as housing, so you can expend more of your median salary bidding up the real estate.
Another possibility is that people bought their houses before the prices rose.
As an extreme case of this, my girlfriend's house in Denver could sell for $850-900k. But, it's been in her family for years, and the original price when her grandparents bought it in the 1910s was <$10k.
As an extreme case of this, my girlfriend's house in Denver could sell for $850-900k. But, it's been in her family for years, and the original price when her grandparents bought it in the 1910s was <$10k.
That was $230k in today's dollars. Also, incomes were generally lower then, even accounting for inflation, your girlfriend's grandparents (who must be 60 or 70 to have grandparents from that era) were pretty well off. Her family most also still be well off to pay the property taxes on such an appreciation.
Tons of reasons for the price difference:
* Land was less scarce.
* Different amenities - doubt you saw many granite countertops or stainless steel appliances in the 1910s
* Sparse (or no) plumbing/electricity
* Fewer building codes/regulations
* Land was less scarce.
* Different amenities - doubt you saw many granite countertops or stainless steel appliances in the 1910s
* Sparse (or no) plumbing/electricity
* Fewer building codes/regulations
> Land was less scarce.
True, but this is also Denver. It depends on the location.
> Different amenities - doubt you saw many granite countertops or stainless steel appliances in the 1910s
Pretty sure your fancy 1910 house has been renovated more than a few times. Homes actually require maintenance and upgrades to be livable.
> Sparse (or no) plumbing/electricity
In 1910 I'm sure they had something. But see the previous point.
> Fewer building codes/regulations
Again, the home should have been upgraded unless the codes/regulations were superfluous; grandfather clauses only take one so far.
As an investment, a 3X appreciation over 100 years sans property taxes is still a quite crappy return, but at least you (and your progeny) get to live in it.
True, but this is also Denver. It depends on the location.
> Different amenities - doubt you saw many granite countertops or stainless steel appliances in the 1910s
Pretty sure your fancy 1910 house has been renovated more than a few times. Homes actually require maintenance and upgrades to be livable.
> Sparse (or no) plumbing/electricity
In 1910 I'm sure they had something. But see the previous point.
> Fewer building codes/regulations
Again, the home should have been upgraded unless the codes/regulations were superfluous; grandfather clauses only take one so far.
As an investment, a 3X appreciation over 100 years sans property taxes is still a quite crappy return, but at least you (and your progeny) get to live in it.
Of course it's been renovated, but the GP was talking about the original purchase price.
After 100 years of renovation and property taxes, how much of the original house's purchase value is even left? I guess an argument can be made that all of the latter costs are incremental and therefore easier to afford.
A fine point, but not really relevant as the discussion was about the cost of acquisition.
I thought that that the original discussion was about how the house increased in value, not about costs of acquisitions. My mistake!
* no insurance
Now every single developer, contractor, sub-contractor, general contractor, professional engineer, material supplier, home owner, renter, insurance agency .... must have insurance.
Now every single developer, contractor, sub-contractor, general contractor, professional engineer, material supplier, home owner, renter, insurance agency .... must have insurance.
nah, just look to laws that are not friendly to building. Most in the name of protecting something or someone popular to disguise the fact those making the laws don't want others there.
It is possible that the homes were bought at lower prices in the past, and are now 'worth' more than the owners could afford to buy with thier current income.
People who have lived in rent controlled apartments for many years skew the stats, as they're paying much below market rate (not saying this is a bad thing).
Yep... in LA and just watched a hundred-year-old, boarded up crack-house across the street list and sell for almost $700k.
But then you have to live in Ohio.
As someone from Ohio, I can understand why so many others here have felt the need to leave the planet. http://webcache.googleusercontent.com/search?q=cache:gesERte...
Have some pride in where you're from! http://www.youtube.com/watch?v=bV_E8SPc_jo
This is absolutely perverse and unsustainable.
I don't know what "fixes" this - a massive correction in tech wages? Another recession? Not sure.
I don't know what "fixes" this - a massive correction in tech wages? Another recession? Not sure.
I thought this way too, then I moved to London and took around and European real estate, and now I think maybe it's just the future.
Is all European real estate ridiculously expensive?
Yes. Most people rent flats also, and it works fairly well.
[1] http://trends.truliablog.com/2013/10/middle-class/