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Housing Market Leverage

By Patrick following x   2018 Mar 29, 12:56pm 925 views   1 comments   watch   nsfw   quote     share    


The most important line item for consumer liabilities is home mortgages because it’s the biggest segment. As you can see from the chart below, the home mortgage liabilities as a percentage of disposable income have followed the homeownership rate downwards following the 2008 recession.

This is unusual because recessions are supposed to be when deleveraging events occur, while leveraging usually occurs during expansions. As an aside, deleveraging is why some people call recessions healthy. However, there are two dimensions to every story. When recessions destroy bad debts, with it, the assets of the counterparty experience a similar fate, since every debt is someones asset. It would be great if individuals or companies never obtained bad debt in the first place, but it takes two parties to make the mistake, not just one.

The conclusion some people draw from this improvement in the deleveraging of mortgages as a function of household disposable income for the consumer’s balance sheet is that the expansion is just getting started. They say that the economy has many more years of growth for the liabilities to increase. That’s a misleading narrative because it implies the consumer leverage, when looking at real estate, will get as high as the last peak, which lead to the 2008 financial crisis. The liabilities to disposable income ratio is not likely to reach the previous peak during this business cycle because for most of America the 2008 financial crisis is still a painful memory.
1   AD   ignore (0)   2018 Mar 30, 10:34am   ↑ like (0)   ↓ dislike (0)   quote   flag        


Ultimately, housing (i.e., mortgage+taxes+insurance+hoa fee+maintenance) should not be more than 40% of the household income. I believe that is the standard that most banks apply such as for VA-backed mortgage applications.

There are ways to try to evaluate the affordability like home price to income trends, rent to income trends, etc. One rule of thumb is that the housing price should be no greater than 4 times the household income. Of course, that multiplier is larger than 4 in areas like San Francisco Bay Area, where the job market and desirability to live there are major factors.

For example, Zillow shows the USA median home value around $210,000. The median household income is around $57,000.

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