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Sunday, April 30, 2006

How Are People Affording Seattle Homes?

In a discussion this weekend over at RCG, contributor Galen Ward commented that "Home prices will probably be flat until inflation prices back to 'normal' levels." To which I replied that currently "in King County a family making the median household income has just 45% of the income necessary to afford the median-priced home," and that "For wages to catch up with prices, we would need a median income in King County of $77,000."

Another RCG contributor, Ardell DellaLoggia, responded with the following argument:

The Tim,

I never understood the median income vs. median purchase price analogy. If, as you say, King County has increased by 70% since 2000, doesn’t the average family then have a large downpayment from the sale of their current home? A "family" is not usually a first time buyer scenario. Most "families" already own a home that they purchased for much less than its current sale price.

When someone factors the income needed to purchase a home, do they assume zero down or 20% down?

If a young couple purchased a home in 2000 for $250,000, that home would now be worth $425,000, using your 70% increase since 2000. Now that they need a larger home, they have a substantial downpayment. Even if their income stayed the same or only moderately increased, if they bought the first home with zero down, they now can afford more as they won’t need a second mortgage.
I attempted to post the following reply this morning, but for some reason it has not shown up yet. Since I'm impatient, I'm posting it here.
Okay Ardell, let's do some math.

First I'll look at your hypothetical couple that cashed out a $425,000 home. So they make $175,000 on the sale (assuming they haven't been cashing out on their equity with a HELOC or refinancing their credit card debt into the mortgage, which in my opinion is a pretty big assumption...), minus commission (assuming they use an agent), minus whatever other fees or taxes there are... Let's say they walk away with $150,000, which I think is a pretty generous estimate.

Now, you said that they need a larger home, so you know they're not going to find it at the same price they just sold for, so let's say the new place they find is $475,000 - again a pretty modest estimate. They put down $150,000, and get a mortgage for $325,000. At an interest rate of 6.25%, their monthly mortgage payment would be roughly $2,000. That is not even considering taxes, insurance, and other costs of owning.

If this family is making the median household income in King County ($55,114), their gross monthly income is ~$4,600. The historical definition of affordable is 30% of gross income. That would be $1,380 for the median family, which is incidentally almost exactly what the monthly payment would be on a $225,000 loan at 6.25% (their old house). However, the $2,000/month mortgage payment is 45% higher than what would be "affordable" for them. For this family to be able to afford $2,000 per month, they would have to be making $80,000 per year, meaning that their current income is just 69 percent of what is necessary to afford the upgrade.

All that said, I also take exception to the way you just totally write off first time buyers. Tell me, how can the market continue to grow if no new buyers are able to join the party? Are you saying that the market is totally sustainable by simply having existing homeowners trading houses back and forth? Who is being sold to when people leave the market (old folks moving into apartments/group homes, death, speculators cashing out, people moving away, switching to renting, etc...)?

For the first time buyer, the above numbers are even worse. Even if you assume they have $81,000 laying around for a 20% down payment on the median $405,000 house, the monthly payment comes out to $2,000, so they're in the same boat as the family that is "upgrading" and cashing out on their appreciation.

I restate my position that the only way that many (most?) people can "afford" a house in today's market is through "exotic" financing. Unless mommy buys a house for you, that is. I welcome you to provide actual numbers that show otherwise.
So how about it? Can Ardell or anyone else out there demonstrate a scenario to me where the "average" family in our area is able to reasonably afford a home without "creative" financing or a large cash gift from mommy and daddy?


Anonymous said...

Well put, I have friends who work at Microsoft and Boeing who are making well over the median income (MORE THAN 80k/year) and having saved roughly 50k for downpayments. Even with these numbers the only places they can afford are $hitboxes.

But then again income has NOTHING to do with it so long as you don't mind taking out ARM's and other types of exotic financing which will inevitably mean that you really can't afford your mortgage when they readjust. No thanks.

S Crow said...

Readers -

I just posted over at Rain City Guide an additional comment regarding the 100% ARM products, under Chuck's main post about a "Bubble in Seattle."

Today, while continuing with our yard landscaping project, I was discussing with my wife about the types of loans we close-- she mentioned two huge things that I neglected to mention.

I forgot to mention that with these 100% loan deals, many had pre-payment penalties and many allowed the borrower to pay their own property taxes. Paying your own property taxes is something that many do not budget for. Traditional loans include that as part of your montly payment. So, while it looks good on paper and it may be the only way to qualify for a loan,it can be a recipe for disaster--if you don't budget for property taxes.

Anonymous said...

I always paid my own property taxes.

Hard to imagine though, with how unbelievably sloppy Americans are right now with money, that most people can handle that sort of "sudden" (!) expense.

Ardell DellaLoggia said...

I would like to know anonymous' definition of a "shitbox".