Author: TheArcadian
May 4, 2008
Zip Codes: 91006, 91007
Current Market Listings as of May 3rd, 2008*
Properties for Sale: 218(-13)
Median Listing Price: $779,000 (-0.12%)
Weekly Foreclosure Update*
Properties in Foreclosure: 24 (+0)
Properties in Pre-Foreclosure: 66 (+2)
*+/- is compared to previous week’s data.
For our regular property profile posts, SavedbyGrace has a section labeled “Income Required.” It gives an estimate of how much a household should typically be earning in order to comfortably afford a mortgage. Simply put, the total home price should not be more than four times the home price.
This number establishes a base for affordability after factoring in a 20% down payment, taxes, insurance and other debt. During the last 4 years, buyers put aside these factors and just focused on the affordability of temporary monthly payments. You had no down, interest-only, 1 year teaser rates and other forms of short-term exotic financing. The problem was that these loan programs would eventually reset to the current market rate and the home buyer was no longer able to “afford” their higher payments.
Take a look at the following graph from Mr. Mortgage:
If you look on Redfin, over half the homes in Arcadia are listed for $700,000+. With the median household income estimated to be $73,992 (2006), there is a wide gap between home prices and actual affordability. You may argue that real estate in Arcadia has always carried a premium, but with a population of over 55,000 people, how many households have $150k+ for a downpayment and earn $200k a year?
Property and foreclosure numbers obtained from U.S. Census, ZipRealty, Trulia, Yahoo Real Estate and Foreclosure.com. Market listings and price data obtained from DataQuick News.
It has been speculated that majority of existing home owners can not afford their own home based on your affordibility consideration. The reason they are still happily there in their own homes is because of the bubbly appreciation and hence equity accumulated.
I thought Arcadia is relatively well to do. 2006 median household income of $73992 is surprisingly low to me. However, all available data shows that it is correct.
So, if fundamental affordibility plays its way through, Arcadia and in general all CA real estate prices indeed have long way to go down…
Just for some clarity lets look at this another way…
$73,993 is the median income. That means 27,500 people (55,000/2) make more then $74K.
To purchase the average $779K home you need of $160K with about 155K down.
There are 218 home for sale.
So here is another question…
Are there 218 people in the population above the median looking for a home with an income of 160K?
I bet it is a VERY safe bet that 0.8% (218/27,500) earn more then 160K. In my line of work I know many families earning over 160K a year, it’s more common then not. Most white collar jobs in SoCal pay >80K, thus if the husband and wife both work in professional jobs then 160K is a very easy number to attain. And if they rent, saving up 155K should not be overly difficult, if they can’t save the 155K then they won’t be able to afford the $5356+ house payment anyway and they shouldn’t be buying a home.
^ I am not saying the home prices are in line…I am just saying that there are some people that can afford them at the current prices.
With that said…I think the prices are still out of line! Homeownership is sold to everyone as the “American Dream” so it’s wise to have homes for all incomes. I believe that LOW home prices are much better for the economy then high home prices. The less people spend on homes they more they have to spend on other goods and services that make the economy flow.
I never really thought of looking at it that way, but I like it. That being said, I don’t doubt that many families gross $160k/yr, but I do question how many of them actually save anything. Unfortunately, we are part of a culture with a negative savings rate and I see evidence of that day in and day out. Surely that doesn’t apply to everyone, but it’s not about how much you make – it’s about how much you save.
For the average American, saving is more difficult than you would think. You make a great point. And yes, I agree that lower home prices is much better for the economy.
It is very true that we are taught and told that instant gratification is the American way. Buy now, pay later – repeat. (Well, it’s later since the free credit is running out.)
I agree with your assessment of the negative saving rates. A 3% return an online saving accounts offers little incentive to save. That 100K downpayment in the savings account is worth 103K in one year – 1K income tax. So you end up with 2K more. It’s very sad. Even with 1 million in the bank you would only have 20K in interest after tax, hardly enough to retire on.
Where are the 8-10% yearly returns investment bankers sell you? Even the stock market (DOW) has only returned about 11% total (not yearly) in the past 8 years! That is around a ~1.25% yearly rate of return with a lot of risk.
That explains why many people who bought homes in 2000 saw home ownership make them wealthy, compared to those of us who invested in DOW stocks/savings. Stock holders are 10% richer and home owners are 200-300% richer on a highly leveraged buy.
Example:
2000 (100K to invest)
a) Buy a 600K home with 20% down.
vs
b) Buy 100K in DOW stocks.
2008
a) Stocks are worth 112K.
b) Home worth 1.2M – 1.8M.
With that said, it’s easy to understand why people are pro home ownership. It is a hard argument to win until that 600K home comes back down to 700-800K.
But hind site is always 20/20.
Hey Sean,
I always love the comparison of stocks to the housing market because even though they are so different, Wall Street encouraged investors to trade residential real estate as if they were day-to-day securities.
After seeking their 200-300% gains, many “investors” failed to realize 2 things:
1) This type of appreciation is not the norm and clearly unsustainable.
2) Real estate is a highly illiquid asset so unlike stocks, you can’t sell sell them immediately (for either gain or loss).
So now that the market has slowed down, many people are left holding the bag on a highly illiquid and quickly depreciating asset.
I agree that there are many families out there that can afford to purchase $700k+ homes (either /w 160k+ income or equity from existing real estate). With the current market conditions, I don’t think they are in any hurry to buy though!