Sunday, July 1, 2007

Housing Market Woes?

In response to a MyMoneyBlog article.

There is a lot of stuff going on here.

OK, US median household income: right around the $45k range with about 1.4 income earners. A quick search brings up some median house sales numbers of around 220 to 250k. Interest rates are going up, 6.84% may be causing less house competition and the WSJ is writing articles about people losing their (150k) places. We're all talking about housing being kind of a giant bubble right now and we now have the wonder of the 50-year mortgage.

I mean 45k = $3750/month or about 3k after taxes. On this salary you have an allowance of maybe 1700/month for housing if you want to stretch it, especially if you plan to operate a car and still feed the family. Now really, between utilities, repairs, insurance and taxes, you're talking like 5-700/month, which leaves you with about 1000 for a mortgage.

Clearly, 1000k/month doesn't buy the median 220k home. So the median income does not safely buy the median home. Let me put this differently: average people cannot afford average homes.

Jonathan, I'm with JW here these numbers just don't look good. Obviously, as you've pointed out, housing cost increases are also coinciding with larger houses. Some markets (like Vancouver) actually have people taking "interest-only" mortgages (let's not even talk about that level of crazy). As you've also discussed, the inflation adjusted median income hasn't changed very much in 30 years. So technology may have provided us the means for somewhat larger houses, but I don't think that we've magically doubled our ability to make larger houses, people are just taking out 50-year mortgages instead.

So with all of this talk, maybe we're finally pushing the edge of the big bubble. I mean, check out this board, look at Red's example, people are in really deep and digging deeper b/c they don't know what they can afford. We all know people in too deep, heck we probably all know a dozen people in too deep and the american economy is sliding downwards. The market will only bear this hysteria for so long.

People will miss their payments, interest rates will rise, banks will foreclose record numbers (already happening?) and the value of homes will go downhill b/c nobody will be able to afford them.

There will be resistance of course, people will avoid selling for less than they owe, but then the foreclosures will come, rates will go up and the cycle will continue until those people that really can't afford homes will be shoved out. Banks don't care, it's not their job and the US government can't stpe in. If the US government intervenes in foreclosures, then USD will plummet internationally.

Either way Jonathan, I'm with JW here when it comes to buying, patience will definitely be a virtue b/c we're peaking here.

1 comment:

Jonathan said...

Perhaps, I hope you're right. In many less dense areas, median income can buy median homes. In major metro areas, they can't, and so lots of people just rent.

It will certainly be interesting to see how this unfolds!