patrick.net

I think the debt-to-income ratio for conforming is 28% and for FHA 29% (FHA has 40% market share for loans now)

This is PITI over gross basically.

So a $100,000/yr gross can support a $2400/mo PITI.

At 5% interest, that works out to a $375,000 home, so 3.75 is the current ratio.

If interest rates go back up to 6%, the price for a $2400 PITI falls to $340,000, 3.4.

10%, $230,000, 2.3.

It is entirely interest-rate dependent.

Thanks for the analysis.

The question is what is the "new normal" now in terms of interest rates?

(Looking at link below . . .Imagine 10% mortgages coming back!... housing prices would be down 25-35% more!)

http://research.stlouisfed.org/fred2/series/MORTG/

Troy says

It is entirely interest-rate dependent.

It's also assuming first time home buyers. For "move up" buyers taking a lot of equity with them, the same income can afford the debt service on a more expensive house, since the loan-to-value is lower.

Not that there are many move up buyers these days...

@ robertoaribas

LoL!

Troy says

So a $100,000/yr gross can support a $2400/mo PITI.

At 5% interest, that works out to a $375,000 home, so 3.75 is the current ratio.

The OP is correct, the ratio is being raised by cheer leaders. The classic budget for housing is 25% of your income.
At 100K a year that would be $1900-$2000 a month. But even for a cheap Bastard like me, it would be in sane to put your self out there on a $2000 30 year mortgage. 15 year mortgage, and in your prime might be O.K.

Anyone over 45 dumb enough to think they have job security 15 years out, and still making anything near what they were making in their prime, hasn't been paying attention for the last 40-50 years.

Hey,
I was just doin' my taxes and my college kids' FASFA today. Remarkable how "income" can be decoupled from "ability to pay".

Moose alert!!!! In globalism, you are best off asking what houses cost on average in the world rather than in relation to your local pay rate inconsistencies. "Competition". Coming to a city near you!!!!

The is such a moose one has to gawk at how hard the "experts" try to ignore it! Take a look at this laudable summary. Not one mention of the real prices.
http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----

$700K in one city and under $100K in another?!?!? And that's just in the USA. Sure, people in McLean, VA are having truckloads of taxpayer dollars coming to them but even the fiscal blowout party of Washington may yet have competition. Surely, your city will.

According to this study Australia is about to blow: http://www.dailytelegraph.com.au/money/sydney-homes-more-expensive-than-world-cities/story-e6frezc0-1225872954360
Well, these articles remind me of those talking about some bloke in Africa living on $300/year... but not bothering to point out he pays no taxes, grows his own food, and builds his own house etc.

A more revealing study would be to list the world's top 100 most over-valued cities. That would be worth something to an "investor". Here's a 3-4 year old study. Even its estimates were optimistic. I'd love to see the real numbers today!
http://money.cnn.com/magazines/fortune/price_rent_ratios/

TimJowers

"The bigger they come the harder they fall". ;-)

Trulia doesn't admit the global moose:
http://www.trulia.com/home_prices/Georgia/Atlanta-heat_map/

But "DeptOfNumbers" does at least point out the moose. Obviously people in San Jose are way overpaid but $480K versus $205k will surely raise some Globalists' eyebrows. And $320K Boston versus $135K Indianapolis. Or $275K DC versus $169K JAX. nice to be in gov, tech or finance for now no doubt!
http://www.deptofnumbers.com/asking-prices/

And this 2008 article suggests major cities of India may be more expensive than New Orleans.
http://www.globalpropertyguide.com/investment-analysis/Mumbai-housing-is-the-priciest-in-the-developing-world
So, "there be mooses" all over perhaps.

It really begs the question: How overpaid do you need to be to live in certain cities? E.g. if your house costs $150K over a comparable house elsewhere then is $50K salary bump enough? I guess.

The book "Sell Now!" by John Talbot has a nice chart of that ratio over time.

Oh, and by the way, that ratio of house price to salary has gone way up. It's risen for all "status" goods like Bay Area housing, yachts, elite private school education, etc.

It's frightening to think that much of this was driven by spending to impress friends.

And it's incredibly ironic that Republican hate for liberals results in much lower taxes on liberals.

Mr.Fantastic says

robertoaribas says

what about “move over” buyers, who take a lot of saved non payments from their last foreclosure, but crappy credit?.

Unless they were paying all cash, could they even buy a home? I’m not a loan officer, but having a foreclosure or even short sale on record has got to raise a few flags.

Yeah,. The GO Flag!

"The book “Sell Now!” by John Talbot has a nice chart of that ratio over time."

Thanks, Patrick.

On some other post (unfortunately I lost it...there are so many) someone was claiming a "floor ratio" of 6.0, but I think it was for the Bay Area...

E-man says

Here you go. It’s missing 2010 data, but pretty up-to-date other than that.

in 2009 we were still above the last peak at 5.5 times income.

not surprising.

@E-man,

Your graph is really appreciated...Great! Interesting that there has been a divergence...especially in th 1970s... California didn't have a much different ratio than the rest of the US in 1950!

Maybe the chart means pay will go up!!!!

The book “Sell Now!” by John Talbot has a nice chart of that ratio over time.
Oh, and by the way, that ratio of house price to salary has gone way up. It’s risen for all “status” goods like Bay Area housing, yachts, elite private school education, etc.
It’s frightening to think that much of this was driven by spending to impress friends.

JTs other book..The Coming Crash in the Housing Market was also a great book. JT did raise some great questions regarding GSE before the investions in cooking the books. His analysis was spot on.

Your right about rising prices in the BA, but much as you stated was to impress friends. Keeping up with the Jones mentality. Gotta have the new IPAD, IPOD or some other junk to show off. Prices were also fueled by sellers of services. The greater perception of wealth inflated services and some products. With the pull back expect many service providers to fail.

In The Fortress, it is driven less by Spending to Impress Friends than it is by the mistaken notion that High Average Standardized Test Scores in your public K-12 are required for success for your kids when they become adults.

Hard to undue centuries of cultural learning on tying success in life to success on civil service exams.

I have long thought that those who are wealthy and are buying into *The Fortress* are at least moving the stats (a little) toward wealth equality among Americans as their net worths drop down to those of average folk. Money is spent on a non-appreciating asset that they could have otherwise invested to bring themselves in top % of net worth Americans!

See this one:

http://patrick.net/?p=621151

They are not buying real estate.

They are buying access to a K-12 with higher Standardized Test Scores. It is an investment in human capital (of their kids); I have read that such an investment can be expected to return 15% ROI.

However it is actually a malinvestment because those kids would do just as well in "decent" schools outside of the coveted Fortress, as long as the school offers the challenging courses and also is not one where the students are not safe. (It is not a choice between Monte Vista/Lynbrook and a school ruled by gangsta thugs. That is an artificial choice.)

The local Billionaires with only a high school degree is a good example of this.

sybrib says

(It is not a choice between Monte Vista/Lynbrook and a school ruled by gangsta thugs. That is an artificial choice.)

Whats the difference between that Gangsta Thugs in HS at 16 vs. Political Clowns you are going to face in your career at age 30? It best to learn early to carry yourself.

One thing that's interesting about the graph is that the divergence begins about the same time the California Master Plan for Higher Education was enacted. I'll leave it to the reader to decide the current trajectory of the UC system...

as long as poor can borrow insane amounts against their own future prices will be out of this world. it's how the world works, poor will spend the money they don't have on liabilities, while prudent once will invest it into assets. This happens this way because poor always think their liability is actually an investment, it's a mindset, it can't be helped much considering they are brainwashed from day one with constant streams of advertising that some x product is an investment in their future, be it a house or some random trinket/phone/etc...

Tenouncetrout says

Anyone over 45 dumb enough to think they have job security 15 years out, and still making anything near what they were making in their prime, hasn’t been paying attention for the last 40-50 years.

This link claims it is down to around 3 times the average income (US nationwide) in 2011:

http://www.mybudget360.com/financial-elixir-that-is-falling-home-prices-lower-home-prices-good-for-the-economy-median-home-price-3-times-annual-household-income-down-from-5/

California is certainly higher at present...

American in Japan says

California is certainly higher at present…

"They" said back a few years ago even SF was immune from drops. 38% per case-shiller certainly busts that myth. Certainly plenty of room for more corrections to get back to normal.

I still think a simple ratio of home price to income isn't very meaningful unless you normalize what is meant by "home". For three years' gross income, I got 400 square feet (not so much) in a depreciated old building (undesirable) in one of the world's most expensive locations (Tokyo; very desirable).

Would a three-dimensional graph with a Z-axis added in to show what each multiple of salary would buy you at each point in time be useful? You could then draw a line through 3-D space showing the price:income ratio and home size for each year and see how this has changed over time.

thomas.wong1986 says

American in Japan says

California is certainly higher at present…

“They” said back a few years ago even SF was immune from drops. 38% per case-shiller certainly busts that myth. Certainly plenty of room for more corrections to get back to normal.

Case Shiller Index for San Francisco includes surrounding areas including Oakland, Contra Costa, Fremont, etc.

*[Case-Shiller defines San Francisco as the San Francisco-Oakland-Fremont, CA Metropolitan Statistical Area, which includes all of the following counties: Alameda, Contra Costa, Marin, San Francisco, and San Mateo.]

http://blog.redfin.com/sfbay/2008/12/case-shiller_san_francisco_home_prices_getting_hammered.html

Syphilis says

Case Shiller Index for San Francisco includes surrounding areas including Oakland, Contra Costa, Fremont, etc.

Yes even the Ubber Rich Class area of Marin ...

@Michinaga

>I still think a simple ratio of home price to income isn’t very meaningful unless you normalize what is meant by “home”. For three years’ gross income, I got 400 square feet (not so much) in a depreciated old building (undesirable) in one of the world’s most expensive locations (Tokyo; very desirable).

The values for Tokyo would be different. I have heard of historical values usually in the 5.5-6.5 range for Tokyo (exceeded during thire great housing bubble of 1987-200?).

Syphilus' "since 1950 graph" is interesting.

What seems to escape our attention is that most households now are double income. The real increase in housing to income ratio is significantly more.

Thanks for the info and links everyone.