One Reader's Analysis and Predictions
Someone sent me the following by email. Thanks and I think you are spot-on:
According to wikipedia (http://tinyurl.com/yb4835), income in Marin is like so:And keep up sending in the insightful emails.
The median price of a house in Marin County in July, 2003 was about $650,000. You have pointed out before on you excellent blog that 2003 was probably teh normal cycle peak in the housing market. But then Greenspan came along and (directly or indirectly) inflated housing by inflating credit. As a result, in 2007, as proclaimed with ill-considered glee in the IJ, the median house price was a tad over $1 million. How was a rise in prices of $350K to $400K over four short years possible? It wasn't because Marin is any more special today than it was four years ago that's for sure. It was possible only because of so-called "affordability" products aka "toxic" mortgages - 0% down, low teaser rates that reset later, interst only, neg. am., etc, etc, etc. that were given not just to subprime people with low credit ratings, but, as we are learning now, to people with good and even stellar credit. You've shown that recently about 80% of borrowers in Marin make use of these "affordability" products to some extent.
- Per Capita Income: $44,962
- Personal Per Capita Income: $67,682
- Median Household Income: $71,306
We are now finally and at long last returning to more traditional lending practices where borrowers are expected to make 20-30% down payments. If in addition to that lenders return to the traditional rule that teh amount you borrow should not be more than 3-4 times your income, then there is no way the $350,000 to $400K increase in Marin's house prices can be sustained.
Based on tradional standards, a household bringing in the median household income would only be allowed to borrow about 3.5 x $71,306 = $249,571. That implies a median house price of about $311,964 (assuming 20% down). Not $1 mill.
It seems to me there are only three likely outcomes:
I think #3 is pretty much where the market is now in Marin and why the county statistics show the county median house price still rising. The truth is that the majority of the Marin market is barely moving if at all and there are a few steep discounts now. I think #2 is incraedibly unlikely given the job market and outsourcing and globalization and the like which is not likely to change any time soon. #1 is the most likely and certainly the most desirable outcome in terms of long-term economic and societal health.
- House prices come down to levels sustainable based on incomes,
- Incomes rise to justify current house prices (if the Marin median house price stagnates, that implies the Marin household median income will rise from its current $71,306 to about $230,000 per year),
- The market's freeze up except at the higher end.
Keep up the good work.