The WSJ Developments Blog features Sacramento today, telling us what we already know...that homes here aren't affordable!
"Median household income in the Sacramento metropolitan area, measured earlier in 2007 by the American Communities Survey, is $56,950. Realistically, if you don’t want to spend more than 33% of your take-home pay on a mortgage and you earn the median, you should pay no more than about $1,570 towards your mortgage and taxes. That caps your mortgage loan at $240,000 (which still leaves you a modest $150 a month to put toward taxes) at a 5.85% interest rate (this week’s going rate for a 30-year fixed). But the median single-family home price in the third quarter was $375,400 in Sacramento. That’s a $135,000 gap. What’s more, the median income to sales price ratio balloons to 6.6 in this equation. There’s nothing affordable about that.
You’d need to have a median income of at least $70,000 — or nearly 25% more than the median — and a 20% down payment to buy the same home in the Sacramento area. This situation plays out in dozens of pockets of the country every day, even as housing prices soften."
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9 comments:
"33% of your take-home pay"
Financial folks encourage no more than 25-30% anyways. I'm in agreeance with that.
I think 33%(even 36%) is a fair number to determine 'affordability' based on the median income. However, I agree with you that 25%-30% is a better goal.
I think 33%(even 36%) is a fair number to determine 'affordability' based on the median income. However, I agree with you that 25%-30% is a better goal.
The median home price in Sacramento definitely is not $375,400 (nor was it so in the 3rd quarter). It's substantially less than that -- more like $285,000 to $295,000, depending on which source is used as a reference. Things have come down a lot since the median home price of $399,900 at the peak in Q3 2005. You may need to revisit the calculations of the original post..
Ok we're actually making 95kish (not great, not bad) and there isn't crap all in the area we're looking at that is 285k. Even a basic rundown starter is 390 or more. I can only find that mid 200 home if I buy a tiny awful condo, live next door to a crack house or I commit to driving an 40 miles easy way.
285k would be the bottom of the market including all the teardowns in bad neighborhoods. I'm pretty sure the 25th percentile is about 280k now. So I'm afraid I'm going to agree with that 399k number because that's sure what it looks like out here.
First, HAPPY BIRTHDAY!!
Second, this just suggests how much farther local prices have to fall to bring them in-line with historical norms. Specifically, another +30% decline, assuming that prices do not "overshoot" on the downside as they overshot on the upside. We are living in very interesting times!
I'm questioning that even that 240K price is too high for a median household income of 60k. I believe it should be closer to 180K.
A monthly payment of $1500 would be fairly high, especially with kids to feed/clothe. It presumes NO other payments on car, credit cards, etc. And doesn't that presume 20% down, as well, to get to that payment range? That would be about 50K.
A very unrealistic scenario.
I've stated my frustration with prices for houses that I'd actually buy. There are over a hundred houses for less than 300K in fairly decent areas of Sacramento now, but unfortunately none of them interest me. Some require lots of rehab, some are just butt-ugly.
I am happy to report, however, that if the buyer of the repo Streng on Overbrook actually paid around 200K for it (the asking price), the comps in that Streng-heavy area will come down. Thank you, whoever you are!
Meanwhile, on Superb Circle in Elk Grove, one Streng priced at $315k went off MLS and another came on at $415K -- to which I can only shake my head in amazement. Says the owner is an agent, too.
I agree with Paul - this just shows why prices will continue to come down.
These analyses make two key assumptions that were shattered the last few years. First, that people wouldn't spend more than 33% of your pay on a mortgage. We know now that many people were going to 50% or above in order to afford more house. We also know that this isn't sustainable for most people, especially on an adjustable rate mortgage.
Second, the analysis assumes $1570 caps your mortgage at 240,000. Ha! Countrywide could get you into a Pay Option mortgage where you could get twice that much money for $570 a month. Of course, that's "could" meaning past tense - we all know how that turned out.
I'm struck by the chicken and the egg question - did prices bubble up because "financial innovation," or did the creativity start only after prices took off? Obviously the two fed off each other but I am curious how this all started...
By the way, when you guys are talking about what percentage of your pay to spend on housing, is that gross or net after taxes? Thanks.
I'm talking percentage of gross pay including Mortgage, Taxes and Insurance. HOA and Mello-Roos if you have those.
For example with easy numbers:
5k income
1500 mortgage
300 tax
250 mello-roo
50 insurance
no hoa
2100 total = 42%
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