So everyone believes that housing always goes up. History tells us this is true, but is it really? How much history do we really have to back up that claim? Let’s take a look at some historical numbers and compare them to what is going on today.
In looking for numbers to compare, there are two main components we want to concentrate on. The first is the average home price, and the second is the average annual income. These two numbers should be related, as income dictates how much house someone can afford.
We went back to 1975 for our data. In 1975, the average home cost $42,000. The average income was $8631. In 2010, the average home price was $270,500, and the average income was $40,711. Over the past 35 years, using these numbers we can see that the average home price has increased 544%, while the average income has increased 372%.
This inequity is worrisome. These numbers are taken not at the top of the housing market, but after the fall. If we used numbers from the top of the housing market, this inequity would be even greater. What this tells us is that housing has increased 68% more than incomes over the past 35 years.
That fact by itself may not be cause for worry, but let’s also take a look at wages. From 1975 to 1985, wages almost doubled. From 1985 to 1995, they increased by almost 50%. From 2000 to 2010, that increase was less than 25%. With the economy where it is today, it seems doubtful that we see any significant wage increase when talking about the average American. Wages are stagnating, plus unemployment is still incredibly high. Couple this with loan programs that are very stringent with regards to qualifications and it gets easier to see how we may not see housing continue to appreciate as we have over the past 35 years.
With all that being said, however, we are still not done. Take into account our current interest rates. We are at all time lows when talking about interest rates tied to 30 year mortgages. Right now, a 30 year mortgage can be had for less than a 5% rate. Compare this to the 1980’s when rates were fluctuating between 10-15%, and you see that we are having housing adversity despite ultra low rates. What happens when these rates go up (and they will)?
Let’s look at the numbers. For the San Francisco Bay Area, the median household income is $76,476. Using a 5% interest rate, 20% down and zero monthly debt, this could allow someone to purchase a home for between $319,000 and $414,000. The median house price for this area today is $337,250, right within range. Remember, the large range we used was for someone who has no debt, and is putting 20% down. Just to give a point of reference, that same household who has just $600 per month in debt obligations and puts down only 10% would qualify for somewhere between $260,000 and $322,000.
Now things start to get interesting. Using the same numbers as above, but adjusting the interest rate to 8.5%, we get a range of $236,000 to $307,000 for our 20% down and zero debt borrowers, and $195,000 to $241,000 for our 10% down, $600 per month in bills borrowers.
Let’s go one step further and bump that rate to 12.5%. Using the same borrowers from above, our 20% down, zero debt borrower can qualify for $177,000 to $231,000, while our 10% down, $600 per month in bills borrower would only qualify for $147,000 to $182,000.
How far out of the box is it to believe that current incomes stagnate, and interest rates rise back to historic levels here in the near future? This does not even take into account that homeownership levels are still at historic highs and likely have to shed a couple percentage points to come back into line. Nor does it take into account that there is a little over 9 months of housing inventory on the market right now. It also does not account for the homes currently facing foreclosure, the homes the banks own but have not put on the market, nor the homeowners who will be in foreclosure or short selling their homes. Finally, this does not account for the change in attitude that many will have if their home continues to decline in value.
When all the intangibles are added into the mix, along with the hard and fast numbers based on current wages, it seems very unlikely that we see housing recover anytime soon.
Chris Goulart specializes in