Tuesday, March 21, 2006

"I'm eating ramen and PB&J every day, but at least I have a house"

That quote just says it all, doesn't it? It so well defines the term "house poor" which characterizes today's California.

Anyway, I was doing a little research regarding what percentage of people's incomes are now being spent on the mortgage and I came across this article from way back in August, 2005. It's still fresh.

Is this an accident waiting to happen? Or does it even matter; is living in the Bay Area just so wonderful that it is worth giving up living?

Some choice quotes:
The housing market is red-hot in the Bay Area. So, who's buying those pricey homes -- and how are they able to do it? The answers: Young professionals. Riskier loans. Longer commutes. Smaller houses. And, in some cases, a lot of peanut butter and jelly..

With Hayes Valley condos selling for $750,000 and Livermore tract homes fetching $1.3 million, the question is on everyone's lips: Who's paying these stratospheric prices?

The answer, increasingly, is young professionals who are devoting exorbitant portions of their incomes to housing, according to a new study.

"It's painful, more painful than I thought it was going to be," said Kris Crichton, who bought a $640,000 condo in San Francisco's SoMa neighborhood using $50,000 in equity from a home she owned with her former husband and an interest-only loan for part of the mortgage. "I'm eating ramen and PB&J every day, but at least I have a house."

Recent California homebuyers are finding novel ways to stretch into the nation's most expensive real estate market, including taking out riskier adjustable loans, leveraging existing equity, and choosing smaller homes and longer commutes, says a study released today by the Public Policy Institute of California in San Francisco.

...1 out of every 5 recent California homebuyers is spending 50 percent or more of his or her income on housing costs -- twice the national average (the study defines recent home buyers as those who purchased homes in 2002 and 2003). Though 2004 and 2005 data were not available to include in the study, Johnson said the percentage is likely even higher today.

Increasing numbers of both trade-up and first-time buyers in the state are allotting a fat chunk of their incomes to their house payments. Although the U.S. Department of Housing and Urban Development recommends that households pay no more than 30 percent of their incomes on housing costs, 40 percent of all households in California with mortgages and 52 percent of the newest home buyers exceed that threshold. In the Bay Area, 44 percent of recent home buyers dedicated 30 percent or more of their household incomes to homeowner costs, which include mortgage, real estate taxes, insurance, utilities and condo fees, the study said.

Almost 50 percent of home purchases in Californians last year were financed using interest-only loans, up from about 2 percent in 2001. As such, financially stretched buyers could quickly find themselves at the breaking point if home values were to stagnate or interest rates to jump.

In the Bay Area, the percentage of mortgage-paying households that exceeded the recommended housing/income threshold in 2003 was more than 40 percent, an increase from the year 2000.
Be sure to look at the tables of data.

I think that in a few years we will look back at the situation described in this article and just shake our heads in wonder.


Blogger Matt Norris said...

In conjunction with my previous comments about fraud on stated-income mortgage programs:

It should be noted that you can obtain an interest-only payment plan on stated income mortgage programs. I can't believe I didn't mention that. Additionally, you can get a negative amortization plan on a stated-income mortgage, when borrowing 100% of the purchase price.

To summarize, you can get a mortgage that:

1) Doesn't require you to document income, thereby allowing you to lie on the loan application about your income

2) Allows you to borrow all of the money required to purchase the property with no down-payment

3) Allows you to make payments that either won't reduce the principle of your loan, or (in the case of negatively amortized payment plans) will actually cause the balance on your loan to increase to the point that you owe more than the house is worth on the market (and that doesn't even take into account depreciation)

Stupid loan programs + uninformed borrowers = terrible home-buying decisions.

Mar 21, 2006, 2:25:00 PM  
Blogger Marinite said...

Matt -

That, of course, is how many, many people are doing it.

So the real question is: "what else can the industry do to further inflate the bubble?"

I know that 40-year loans are now being offered to squeeze a little more air into the housing bubble (go see the Ben Jones blog as he covered that recently). Maybe these loans will be enough to see us through the Spring selling season which we enter into today. But after that?

Mar 21, 2006, 2:32:00 PM  
Blogger Matt Norris said...

Yeah, the 40-year programs are starting to pop up. Unbelievable. It makes no sense. This is the problem (in my opinion, of course):

A lot of these lenders, especially the larger ones, may have no qualms about offering these loans. Even if the "bubble bursts", there are still going to be individuals buying houses. They'll just be able to get them at a much lower price than before.

That basically means that lenders are still going to be doing mortgages. While they will take a loss from all of the foreclosures, there is still going to be mortgage business to be had. So if the lender is strong enough to stay in business, even after they no longer offer ridiculous programs, they couldn't care less what they are doing to the housing market.

Of course, the smaller lenders who do nothing but offer bad mortgages are going to go out of business if they have not drastically restructured their business model.

The situation seems pretty ridiculous, to me.

Mar 21, 2006, 2:39:00 PM  
Blogger Matt Norris said...

You'll probably have to cut and paste this link into your browser, but this is exactly what I'm talking about. Despite the appearance of this website, everything on there is legitimate, believe it or not:


Mar 21, 2006, 2:46:00 PM  
Blogger Matt Norris said...

Let me try again. You'll have to cut and paste one line after the other into your browser (if I can use forum code on this, I don't know about it, lol!):


Mar 21, 2006, 2:48:00 PM  
Anonymous Anonymous said...

a major way people are affording this is by not having babies. People are postponing parenthood for years-and-years to buy a house or condo. Then they will try to have kids desperately when they are 40 and they will be barren. I live in a similarly expensive area and my kid is in classes with a lot of onlies - and that's the ones who did manage to have kids.

Mar 21, 2006, 2:56:00 PM  
Blogger fredtobik said...

"a major way people are affording this is by not having babies. "

So what is wrong with that? Darwin in action IMO!

I try not to hate.

Mar 21, 2006, 3:19:00 PM  
Blogger Marinite said...

For long links use www.tinyurl.com

Mar 21, 2006, 3:52:00 PM  
Anonymous Anonymous said...


One acronym for you: LMAO


Mar 21, 2006, 4:22:00 PM  
Anonymous Anonymous said...

The money to buy these homes is coming from Asia.

Look, we as a Nation are borrowing something like $1 billion a day from China. That's Mainland China, not Taiwan China.

The same Mainland China that is still technically communist and just 10 years ago was... well... nothing.

Well, they (and other Asian nations) have had a lot of money pent up - and they're spending it all here in the Bay Area.

Mar 22, 2006, 2:13:00 AM  

Post a Comment

<< Home

Terms of Use: The purpose of the Marin Real Estate Bubble weblog (located at URL http://marinrealestatebubble.blogspot.com/ and henceforth referred to as “MREB” or “this site”) is to present and discuss information relating to real estate and the real estate industry in general (locally, state-wide, nationally, and internationally) as it pertains to the thesis that recent real estate related activity is properly characterized as a “speculative mania” or a “bubble”. MREB is a non-profit, community site that depends on community participation and feedback. While MREB administrators do strive to confirm all information presented here and qualify all doubtful items, the information presented at MREB is neither definitive nor should it be construed as professional advice. All information published on MREB is provided “as is” without warranty of any kind and the administrators of this site shall not be liable for any direct or indirect damages arising out of use of this site. This site is moderated by MREB administrators and the MREB administrators reserve the right to edit, remove, or refuse postings that are off-topic, defamatory, libelous, offensive, or otherwise deemed inappropriate by MREB administrators. You should consult a finance professional before making any decisions based on information found on this site.

The contributors to this site may, from time to time, hold short (or long) positions in mentioned and related companies.