No Family? No Equity? You're Screwed.

Slowly but surely the downside of exploding house prices is being highlighted in our local media. Maybe not so much in Seattle proper, but at least down in Tacoma (where houses are quite a bit cheaper than in King County) the issue is being given some attention.

The price of a home may be relatively modest in Pierce County when compared with our neighbor to the north, but that doesn't mean it's any easier for a first-time buyer to get into a house here.

"Affordability has been at the lowest level I've seen in 12 years," said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University.

For example, the affordability index for all buyers in Pierce County at the end of 2005 was 104, meaning that all the families pulling in the county's median income, $62,437, could afford the median-priced home, $255,000. The median is the midpoint, with half above and half below.

However, a look at first-time homebuyers, who don't have equity to put toward a home, shows a drastically different picture, Crellin said.

The affordability index drops to 61 percent in Pierce County. That means first-time buyers here can afford a home priced at 61 percent of the median, or $155,550.

The picture is worse in King County, where the affordability index on a median-priced home, $390,000, is 80 percent. For first-time home buyers, the index falls to 45 percent. That figures out to a home price of $175,500.

Keep in mind that the figures they are quoting are for "families," meaning that single people are completely excluded from those statistics. Here's a good explanation of the difference between "median family income" and "median household income." Despite the shrill insistence by local real estate cheerleaders, the numbers clearly show two things: 1 - Many would-be first-time home buyers are totally priced out. 2 - If you aren't part of a "family" that has two incomes, you are priced out.

"Their choices are limited," he said. "Either they have to choose a less expensive home or take out an alternate mortgage instrument."

But as mortgage rates rise – up to 6.61 percent on a 30-year-fixed-rate mortgage in Washington last week – homeowners are finding adjustable-rate mortgages or interest-only products less and less attractive, he said.

Also, the cooling of the superheated housing market is a concern to homebuyers looking at these products. A yearly equity jump of 20 percent is no longer a sure bet, he said.

"I thinking we're not looking at a housing bubble, but a balloon," he said. "We're on the verge of deflating, but we're not looking at any severe reduction of values in this area."

Wow, so many great quotes in there. "Alternate mortgage instrument," "20 percent is no longer a sure bet," and "not a bubble, but a balloon." I especially like the bit about deflating, but not "in this area." Sounds a lot like the polls that came out a few weeks ago where some large percentage of Americans now predict housing reductions, but very few predict such reductions in their own backyard.

(Barbara Clements, Tacoma News Tribune, 05.02.2006)