Thursday, November 24, 2005

Dinner Conversation

It's Thanksgiving 2005! If your family is anything like mine, then the likely table conversation at some point will center around Marin's ludicrous housing prices. Given what's been going on in Marin's housing market (and many others, of course), families in Marin will be listening more closely to what their more bearish members have to say (better late than never I suppose).

In order to give you all more ammunition for your arguments (as if you don't already have enough) as you sit around your Thanksgiving dinner table, I performed the following calculation with the intention of answering the following question:
"How far does Marin median house prices have to fall so as to be affordable to a family earning the median annual Marin income?"
All calculations are based on September, 2005's real estate data. (Note: as of September, 2005 the median house price in Marin has fallen each month since June, 2005. So, the following calculations show how far house prices have to drop after having already dropped roughly -13%).

Here we go...
Median Marin house price: $900,000 (source)

Income needed to buy median priced house: $180,514.29 (assumes a 20% down payment, 30-year fixed rate loan at 6%)

Affordable house price ratio: $900,000 / $180,514.29 = 4.986

Marin's real median household annual income: $71,306 (source)

Affordable house price at the real median income level: 4.986 x $71,306 = $355,514.24

Implied market correction needed to bring Marin's median house price in line with the real median income: (($355,514.24 - $900,000) / $900,000) x 100% = -60.5%

Add on top of that the 13% drop we've already seen and we are looking at an estimate peak-to-trough drop of roughly -74%
Have a nice Thanksgiving weekend.


Anonymous Doc said...

Here's my question, does a "normal" real estate market assume that a median income CAN purchase a median priced house? Or has a normal market traditionally been priced such that you have to be in the, say, 60th percentile income to purchase a median priced home? And how has this historically been the case in the Marin market?

Nov 27, 2005, 1:55:00 PM  

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