johnnymk

http://online.wsj.com/article/SB125348494755626107.html


Before the housing bubble, a quaint notion held sway that homeowners should be able to afford the houses they live in.

One measure of affordability is to compare property prices with per capita personal income. Karl Case, co-creator of the Case-Shiller Home Price indexes, has tracked this for 20 major metropolitan areas. During the 1990s, most held steady in a range of four to six times income. But lax monetary policy and credit standards after that helped throw the notion of affordability out the window.

Cities like Miami and Phoenix are particularly noteworthy. After a long period of stable midsingle-digit price-to-income ratios, these exploded.

Most cities now have returned to "normal" ranges. Even so, don't bank on this portending a house-price rebound.

Sanity hasn't returned everywhere: Los Angeles still boasts a ratio of nearly 10 times. Moreover, the collapse of the bubble should recalibrate expectations. The relative stability of price-to-income ratios prior to the bubble, together with stagnant incomes and rising unemployment, suggests prices in many areas are about where they should be.

Against this stands Uncle Sam. Some four-fifths of new residential mortgages this year have benefited from government support, said trade journal Inside Mortgage Finance.

Government interventions remain a wild card. But it is worth noting that efforts to date have helped stabilize price-to-income ratios in their normal range. Without this, prices likely would have plunged further. In Detroit, the ratio has dropped below the historic range of four to five times. Banking on a big housing bounce-back on the back of Washington's grand fiscal experiment looks highly questionable. Quaint, even.

zippyjuan

San Diego is much closer to "normal". During the peak of the housing bubble, about twelve percent of the population could have afforded the median priced home on a single income. I recently heard that it was now up to 52% if I remember correctly.

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bachviet

Not here in Orange County especially in Westminster, Garden Grove, and Fountain Valley. People offered $50K over the listed/appraised prices, which is crazy IMHO.

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Daedalus

I am very confident that homes in my area are still far overpriced and have a ways to fall, but using an income multiple to gauge affordability is silly without considering interest rates. I see fixed rates today below 5% for 30 years with very small closing costs. In 1990 rates were around 10%. That's a difference of over 60% in the monthly payment.

I was sure there was a bubble in my area in 2002, but I had no idea it would go on for as long as it did. Let's hear it for greed and creative financing. I was conservative with my housing choices, but in hindsight I could have been better off if I was far more aggressive. For several months now I've been telling the little woman we will probably have to wait until 2012 to buy a larger house. But if the govt keeps messing things up it may be even later.

johnnymk

When I bought my house in 1980, I got an assumable Veteran's mortgage for 8-1/2% and that was an excellent rate back then. I am glad that I was able to pay the house off in 10 years.

I have kicked myself many times for not buying a little bigger house, but now I remember buying it because every other house was in the double digit figures for interest rates. And they were using the 30% affordable rule back then religiously.

Daedalus

Awesome rate for 1980. IIRC mortgages were near 20% at one point in the early '80s. Some tried and true standards of yore have more or less returned. No more liar loans or excessive DTIs. The other important best practice is to require some skin in the game. Freddie, Fannie and FHA need to step aside and let free-market lending institutions make good loans again, with 20% downpayments becoming common.

johnnymk

Daedalus, thanks for posting those figures and reminding me. I can forgive myself now.

Besides, with a smaller house, I have saved quite a bit on property taxes and heating bills. I could always build an addition with the money I have saved during the last 30 years.

Daedalus

The folks who bought at higher rates just before Greenspan got aggressive in the late '90s/early 00s really made out. Their principal balances were still large. Serial refis could be done with very little or no cost, as 1 of my co-workers did. His house nearly tripled in value while his mortgage payment dropped. Even now his house is worth a lot more than he paid for it, and I'm guessing his mortgage is less than mine, though my house is less than 1/2 the size (and in a worse neighborhood ).