patrick.net

All excellent points but folks are looking for some way to compare where we have been to where we are now. Sometimes bad data is the only data available. As for me, I always suspected that the median house hold income was not a good indicator to utilize as I believe like you that it most likely underestimates the true figures. What are your favorite numbers to utilize when comparing the monetary health of groups of people/individuals/cities, etc?

Even if you want to ignore median house hold income the housing market is still pretty fucked if you go comparing prices vs avg. wages or avg. house hold income or wages by quintile.

SFace says

It's probably based on tax returns data. These things are only understated and never overstated as no sane person will claim more income than they have to on the returns or on any survey.

Most people's income is already reported by their employer. The rich or the well off are the ones who really have the opportunities to abuse the numbers, but most of their "income" is capital gains and not wages. Even if you really dislike median income and hate avg. wages and avg. house hold income and wages by quintile for whatever reason they're still the best data we have to go by and are probably accurate enough for our purposes which is calling trends on a local, state, or national level.

Is there even a valid stat to use?

For a long time, the drum was beating for the notion that we had to consider the income of "potential buyers" as the standard, and not the median income. Of course this was simply realtor mindfucking, and almost entirely nonsense. That lasted from about 2007-2010.

Anyway, from what I've seen on this site and other sites like Dr Housing and Irvine Housing Blog is the median family income ALONG with rental prices, which does in fact seem to be quite accurate. Rental prices can't exist at their level without incomes that support that level, and seems to me to be the truest measure of what people actually can afford.

This is an excellent point. So how would you find out what the income is for that 75-95 percentile for a given area?

I know many do go by the rental prices but I rent in Irvine, and the Irvine Company has many section 8 units, which in my opinion raises rents simply by supply and demand. No doubt in my mind that these families do not have the income to support $2000 per month in rent.

I think this is very relevant in San Francisco, where 65% of the population are renters. It would be great to see average or median HH income for the 35% who are owners in SF and compare that to property prices.

Jimbo in SF says

I think this is very relevant in San Francisco, where 65% of the population are renters. It would be great to see average or median HH income for the 35% who are owners in SF and compare that to property prices.

Isn't that a largely nonsense stat also? Who cares that a minimal number of units sold at an inflated price to people duped into fantasyland.

price to income ratios are relatively stable over long periods of time (decades).

this makes it a good indicator of whether houses are over priced, under priced or somewhere in between.

when price/income was over 10 in SF in 2005 that was a clear indication prices were too high. now they are around 5-6 which is slightly elevated but not exceptionally so.

anyone that chooses to ignore price/income is lacking serious common sense. as income is used, in the vast majority of cases, to pay the mortgage. there is a direct relationship between income and price.

SFace says

How about 401K match, ISO's RSU's gains that are not counted and especially lucrative in Silicon Valley?

We saw a Tech Stock bubble with new IPOs back in 1998-2000 with nose bleed valuations that were not sustainable, and some still think its the norm today. Add to that changes where SO are now expensed and the stock option back dating scandal has burned some.

Whats the point of having SO in a very mature industry anyway.

SFace says

On the other hand, there is a significant non-compliance gap according to the IRS, the majority of which probably relates to individual not reporting their income and (overstating their charity $$)

No longer true as it relates to under-reporting capital gains, since of last year your actual gains are now recorded and sent directly IRS by the broker, like your employer sends W-2 info. So non compliance is not an issue going foward.

I generally agree with SFAce. While it is convenient to get things into simple terms, taking complex demographical factors and spitting out one or two numbers is likely a misuse of statistics. Realistically, something like a distribution plot of income versus % of the population, separated into locales would be more useful. While there is a compelling argument for the use of median income over average income, it is still of limited usefulness without a standard deviation or some other quantification of the variability. I am not sure what the distribution looks like, but I would bet that it is not a nice Gaussian distribution. I would assume that it is bimodal with a large skew on a large peak for lower incomes and a smaller second peak with some severe kurtosis at the high-end.

Hopefully, my usage of statistical jargon will buy me some e-cred. :p

Great points - the data isn't close to clear. But if the point is to measure changes and trends over time, it's a good enough indicator for most things.

Jimbo in SF says

It would be great to see average or median HH income for the 35% who are owners in SF and compare that to property prices.

I suspect you'd find it to be lower than expected compared to non-California cities and even compared to many California cities with fewer long-time owners, since many SFers bought those houses a while ago, aren't paying very much in property taxes due to Prop 13 and its progeny, command relatively high rents (even with aggressive rent control) on rental properties, and get massive windfalls when they sell. Average would probably be a lot higher than median because there are some ultra-rich to skew the numbers. Even though Pacific Heights has always been expensive, one thing to remember for somewhere like Noe Valley is that it used to have a lot more working class and middle class before the current dot-com trend which raised prices.

Also, SF has numerous "affordable housing" programs for people who aren't in poverty that help subsidize things so that some owners who wouldn't have been able to buy are able to buy. This artificially raises the price of market rate housing.

SFace says

What is included in income anyway? It's probably based on tax returns data. These things are only understated and never overstated as no sane person will claim more income than they have to on the returns or on any survey. On the other hand, there is a significant non-compliance gap according to the IRS, the majority of which probably relates to individual not reporting their income and (overstating their charity $$).

As other people have said, it's harder and harder to do this these days. Wages have been reported to the IRS for ages. Investments are starting to be reported now, by brokerage houses having to file cost-basis statements. I believe reporting for stocks started this year, mutual funds will start next year, and options and bonds and other items will be 2013.

If people are overstating charity, it actually doesn't matter unless you are looking at stats for taxable income. Even if you are looking at stats for Adjusted Gross Income, that's before itemized deductions. Also, many people who don't live in NY and CA, and live somewhere with lower taxes and lower housing costs might not even be itemizing.

Sure, I know people who probably don't report income, but reporting for housing prices isn't perfect either. Some houses are sold off-market/FSBO, and some used house salesman report incorrect figures on MLS. I would trust tax returns far more than bullshit told to me by realtors.

@dodgerfanjohn
"Isn't that a largely nonsense stat also? Who cares that a minimal number of units sold at an inflated price to people duped into fantasyland"

Do you have a point where you feel the price of a house is justified, is that 2, 3 or 4 times income?

Or do you feel that, no matter the income, houses should never sell for let's say $750k in SF ?

I agree with the OP. Household income is a pretty useless stat without knowing the number of persons in a household. A few examples of how this stat can be grossly misleading

1. If household A makes $100k and household B makes $120k, an uncritical analysis might lead one to conclude that household B is better off financially than household A. But what if household A is a single person living alone and household B is a family of 5?

I recall reading an artcile recently where a sociology professor was attempting to prove that married men were better off than single men. His proof: married men had a higher household income than single men. This evidence does not support the professor's conclusion, as a single man living alone on $100K is much better off financially than a married couple that each makes $51k, although each of those married persons would technically have a household income of $102K. (This, I believe, largly accounts for the fact that places like San Francisco often seem much wealthier than suburban areas with a similar household income - - all those singles and DINKS in the city have far more disposable income, even assuming similar household incomes)

The problem here is that per capita income can also be grossly misleading. Which household is better off financially, a single man with no children making $50k or a married man with 4 children making $280k? The married man's household has a lower per capita income at about $46.6k (280/6=46.6) per person, but their standard of living is likely to much higher than the single guy making $50k, even though the single man's household has the higher per capita income. This is largely a function of the fact the family of 6 shares certain large expenses, primarily housing.

In the end, I really agree with the OP - - income reporting is not of much use without accounting for numerous other factors.

tjjenkins says

The problem here is that per capita income can also be grossly misleading. Which household is better off financially, a single man with no children making $50k or a married man with 4 children making $280k? The married man's household has a lower per capita income at about $46.6k (280/6=46.6) per person, but their standard of living is likely to much higher than the single guy making $50k, even though the single man's household has the higher per capita income. This is largely a function of the fact the family of 6 shares certain large expenses, primarily housing.

This is why, when federal, state, and local governments calculate these numbers, the number of people in the household is included to determine housing affordability. I have a friend who works with affordable housing groups, and there are indices that adjust for the number of people in the household.

The typical stat to determine affordability, by the way, is not per capita income, but rather household income (which is adjusted based on household data).

Jimbo in SF says

Do you have a point where you feel the price of a house is justified, is that 2, 3 or 4 times income?
Or do you feel that, no matter the income, houses should never sell for let's say $750k in SF ?

It really depends on the level of income. I think for average incomes, a mortgage (not purchase price) of about 3 times pretax annual income is probably about right. However, as incomes rise, the ratio of the amount of money that can be spent on housing also changes. This is because it is much, much easier to spend 33% of your income on housing when you take home 20k than when you take home 8k. the guy taking home 8k has $4,800 left over to live on after his housing expense, while the guy taking home $20k has about $12k take home after his housing expense. So the guy taking home 20k probably has more room to up his income to mortgage ratio, if he chooses to do so.

All in all I think a mortgage of 3 times annual income is reasonable for most people, while higher earners can get away with 4-5 times income.

@tjjenkins

"All in all I think a mortgage of 3 times annual income is reasonable for most people, while higher earners can get away with 4-5 times income."

I think that is totally reasonable ... That's why I was asking about income for the home owning 35% in SF.

Although, after considering corntrollio's comments about long term owners, I guess there is no easy way to compare median HHI to house price.

My guess is MOST home purchasers in SF might be in the following groups:
- Above average income renters, who want to convert from renting to owning
- Previous home owners upgrading, who have a large downpayment, but have not been long enough in their house that they need to maintain their Prop 13 valuation.

Thoughts?

Jimbo in SF says

My guess is MOST home purchasers in SF might be in the following groups:
- Above average income renters, who want to convert from renting to owning
- Previous home owners upgrading, who have a large downpayment, but have not been long enough in their house that they need to maintain their Prop 13 valuation.
Thoughts?

I bought (2001) and sold (2011) a home in SF, and have known many others that have done so. From my (somewhat limited) experience, I think those buyers would fall into 3 catagories: the two you mentioned, and also *low or moderate income renters who want to convert from renting to buying that are being given substantial financial assistance from their parents.* Think 32 year old Marina princess from Marin, making $90k working as a [[fill in generic chic job here]], and buying a $700k condo in Russian Hill with daddy kicking in about 300k for a downpayment.

tjjenkins says

From my (somewhat limited) experience, I think those buyers would fall into 3 catagories: the two you mentioned, and also *low or moderate income renters who want to convert from renting to buying that are being given substantial financial assistance from their parents.* Think 32 year old Marina princess from Marin, making $90k working as a [[fill in generic chic job here]], and buying a $700k condo in Russian Hill with daddy kicking in about 300k for a downpayment.

You know, I've heard this type of story anecdotally from some other people too, but I always wonder how common it actually is. There's probably no way to verify whether this is more broadly applicable.

Is there some phenomenon that means this happens in SF more than it happens in other cities? I know plenty of people (including boomer-age people) who borrowed some amount of money from their parents to buy a house, not just in the city of San Francisco, but why do people assert this as if it's a unique thing about SF?

Also, my guess was that most of the $700K Russian Hill condos you gave as an example are 1/1s. According to Redfin it appears there are a very limited number of condos that have more than 1BR in that range and they seem to move relatively quickly -- I guess prices have dropped more than I thought on some of these condos: http://www.redfin.com/homes-for-sale#!market=sanfrancisco&region_id=2352&region_type=1&sf=1,2&uipt=4,3,2,1&v=6

corntrollio says

You know, I've heard this type of story anecdotally from some other people too, but I always wonder how common it actually is. There's probably no way to verify whether this is more broadly applicable.
Is there some phenomenon that means this happens in SF more than it happens in other cities? I know plenty of people (including boomer-age people) who borrowed some amount of money from their parents to buy a house, not just in the city of San Francisco, but why do people assert this as if it's a unique thing about SF?

I can't say how broadly applicable this phenomenon is, only that I have had two different girlfriends that did this and heard similar stories from friends of friends, etc.

I think it might happen more in SF because a lot of spoiled, entitled people with wealthy parents move there.

And yes, they were both 1/1's.

As far as condo price drops in SF, I can only give my personal story. Bought for $1m in 2001 and sold for $1.39m in 2011. During the peak I was told that my place was worth $1.6m. [[And no I did not get a dime from my parents or anybody else.]

Hysteresis says

price to income ratios are relatively stable over long periods of time (decades).

this makes it a good indicator of whether houses are over priced, under priced or somewhere in between.

when price/income was over 10 in SF in 2005 that was a clear indication prices were too high. now they are around 5-6 which is slightly elevated but exceptionally so.

anyone that chooses to ignore price/income is lacking serious common sense. as income is used, in the vast majority of cases, to pay the mortgage. there is a direct relationship between income and price.

Ugh, can the creator of that graph use colors besides different shades of blue..

Trying to tell the difference between NY, LA, SF, US, and Denver is giving me a headache and making me feel color blind.

http://www.theatlantic.com/business/archive/2011/10/50-of-all-workers-made-less-than-26-000-in-2010/247059/#

Seriously I'm gonna start calling BS on these types of things. That CANNOT be the case.

controllio said: You know, I've heard this type of story anecdotally from some other people too, but I always wonder how common it actually is.
Well, the newspapers seemed to produce heart warming stories from the bubble years. Here's one I remembered:
Amanda Stipe turned to the next best person, her father, when she bought her 800-square-foot, junior one-bedroom condominium in San Francisco's lower Pacific Heights...But it'll take more than a hug to repay her father's generosity. The two had agreed up front that his money was an investment and not a gift. When she eventually sells, which she guessed will be in five to seven years, she'll repay him with interest. Zillow shows the value of her condo down 16%. YMMV. The down payment assistance cases are heartbreaking as it makes it that much harder for the buyer to walk. And so the zombie continues to feed off the mortgages payment....

EBGuy says

Zillow shows the value of her condo down 16%. YMMV. The down payment assistance cases are heartbreaking as it makes it that much harder for the buyer to walk.

Oh, Mr. Stipe shouldn't be so worried -- he got what he needed:

"I thanked him with a big hug and high five."

The Alameda couple that's in the first anecdote -- their value is down 19% from their purchase price on Zillow.

And the son and the daughter from the third anecdote, their parents pulled out of the deal. This is actually in line with my own anecdotal experience: I had one friend whose parents were going to chip in for a place probably after the bust had already begun but the place in question was still at a bubble price. When the Bank of Mom and Dad's stock portfolio, upon which the down payment assistance was based, tanked between the offer being made and closing, the deal went south in a hurry. Of course, all parties are glad they didn't make the purchase now.

Remington says

Seriously I'm gonna start calling BS on these types of things. That CANNOT be the case.

Is that sarcasm?

SFace says

I'm a stats person and a median in itself is meaningless without understanding

It means a random distribution, differences between samples are random. Since you gave examples that were not random, they don't belong to the same distribution and so there isn't a median among them.

Hysteresis says

price to income ratios are relatively stable over long periods of time (decades).

I tend to think this ratio has more psychological importance then actual economic importance. Otherwise median-house-prices-to-median-income is an absolutely useless ratio.

this makes it a good indicator of whether houses are over priced, under priced or somewhere in between.

It is an indicator for determining if there are factors (such as low/high interest rates or large gifts from parents to children to buy a house, etc) other than earned income involved in the housing market. This ratio is not an indicator for determining if house prices are cheap or expensive.

anyone that chooses to ignore price/income is lacking serious common sense. as income is used, in the vast majority of cases, to pay the mortgage.

I don't think so. This is just one indicator and a very simple one at that which will never explain the entire picture. To tout this ratio as some form of a god given rule that must not or cannot be broken is completely ridiculous - more as a result of psychological conditioning rather than actual financial factors.

As a pilot you learn " NOTHING MORE USELESS THAN AIR IN THE FUEL TANKS ". A fuel gauge is just an indicator. Look inside the fuel tank, dip a stick in it. Median sales price, Median income, Square footage cost, How many acres, Distance to the closest hospital, How deep is the well. Those are ALL GARBAGE intended to confuse and distract buyers. Nothing matters more than a list of ready, willing and able BUYERS. NO BUYERS, NO VALUE. WHO remembers "MULTIPLE OFFERS" ? Did someone bitch slap those appraisers ?

As a Buyer, Do your research. If you are comfortable with the purchase price, Climb on in !