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Real Estate in Graphs


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2010 Jun 22, 8:31am   18,286 views  50 comments

by Eman   ➕follow (7)   💰tip   ignore  

I've been doing some readings and found some housing data that I would like to share for those that are interested. Although I'm not very articulate, it's somewhat rewarding if you can understand my points.

The first graph shows the median income multiple since 1950. The second graph shows interest rates for the last 40 years. Let's take a look at the CA housing market in the last 30 years.

1) The first HOUSING BOTTOM was in the mid 1980's when the median income multiple (MIM) of about 3.7 and interest rate (IR) at around 12%
2) The second HOUSING BOTTOM was in the mid 1990's when the MIM of about 4 and IR at around 8%
- (40% increase in buying power comparing to 12% IR)
3) Currently, the MIM is about 5.5 and the IR at around 5%
- (37% increase in buying power comparing to 8% IR). On the surface it appears unaffordable from a 5.5 MIM. However, when you factor in the current interest rate environment, we're pretty close to the bottom of the mid 1990's housing market in terms of affordability. If you get 5.5/4.0 MIM, you get 38% decrease in buying power, but the current IR increases your buying power by 37%. Basically, it's almost a wash.

Therefore, if you think interest rate will go higher in the near future, DON'T BUY. If you think interest rate will go even lower, buying now is not a bad hedge.

If you think interest rate will go HIGHER or LOWER from here, please suppport your argument.


This last graph suggests that we have another 22% drop from here. However, it didn't factor in the current historical low interest rate environment comparing to the past. Are we in for a double dip? How many more percent do you think we're going to drop from here?

#housing

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11   pkowen   2010 Jun 23, 8:42am  

E-man says

tatupu70 says

E-man says

Actually, if you look at the graph above, the 3X income number is quite true for other markets.

Not sure I agree. The average appears to be 3X. But, like you, I think all RE is local. There are probably many markets at more than 3X and many at less than 3X.

You’re correct. I think the 5.5X income number is the AVERAGE for CA. An extreme example, the median income for Los Altos Hills is $175k. The average income for the upper 40% in this area is about $400k. However, the average home price is $2.4 million.
Did I hear 13.7x median income? :o)

Yup, and Atherton is the second highest income zip code in the US and a tiny enclave geographically. Even bears should agree that it does not conform to the back of the napkin calculation that median income and median house costs tend to track each other. There needs to be some critical mass for that to be a reasonable measure statistically. My argument remains that much of CA has been the victim of spurious reasoning: that these exceptions are the rule, and any POS shack within 1 hr of prime locations is a prime location itself, and should therefore be outrageously out of synch with local incomes. To that I say, feh! ;p

12   thomas.wong1986   2010 Jun 23, 4:41pm  

E-man says

I believe we’re bullish on housing for different reasons. I don’t believe in gold, and (leverage) real estate in the SF Bay Area has out-performed other markets for the past 30+ years. I believe owning real estate is a great way to become financial independence.

The boom from 1980-2000 was based on more realistic factors from the SV based tech industry boom. We saw prices increase ahead of incomes but also correct downwards. Over the past 10 years we were in a full blown RE bubble unsupported by our local industries.
Today we are no longer the center of the tech industry. A nice correction back to equal performance to metros will give our industries a benefit and be more competitive.

13   thomas.wong1986   2010 Jun 23, 4:48pm  

pkowen says

Yup, and Atherton is the second highest income zip code in the US and a tiny enclave geographically.

10-12 years ago it was Beverly Hills and other parts of SoCal. Had we not had a "IPO" Tech bubble with all the inflated stock prices, its doubtful you would seen these inflated prices starting back in 1998-2000. Your right when you do the calculations, incomes dont come up the prices.

14   thomas.wong1986   2010 Jun 23, 4:54pm  

MarkInSF says

I really would not put too much weight on the last chart predicting a 22% fall. There is no valid reason I can think of to expect property values to track inflation. Incomes, yes, like your first chart, but inflation no

During the budgeting process for many employers each year we look at forecasted revenues and targeted earnings, general trends in the market and inflation. Salaries changes will often be based on industry compensation studies which also track inflation. So your employers do take in consideration general inflation trends to establish salaries. You can check this by talking to your companies Financial Planning and Analysis group. They will fill you in!

15   thomas.wong1986   2010 Jun 23, 4:58pm  

E-man says

For CA, we haven’t seen this 3X income number since the early to mid 1970’s. For the past 30 years,

Try 1995-1997 when affordility was between 65-75%. That quickly declined to under 6% by 2003-05 for Santa Clara and San Francisco. We sometimes forget how much prices were back before 1998. It was much more balanced back then.

16   SFace   2010 Jun 23, 5:38pm  

thomas.wong1986 says

E-man says

For CA, we haven’t seen this 3X income number since the early to mid 1970’s. For the past 30 years,

Try 1995-1997 when affordility was between 65-75%. That quickly declined to under 6% by 2003-05 for Santa Clara and San Francisco. We sometimes forget how much prices were back before 1998. It was much more balanced back then.

I know you are tying to emphasize a point, but come on, please audit what you are trying to say. San Francisco affordability ranges from around 5 (2005-2006) and around 30 (1995-1997). The HOI index is currently around 25.

The NAHB/Wells Fargo Housing Opportunity Index: Complete History by Metropolitan Area (1991-Current) http://www.nahb.org/reference_list.aspx?sectionID=135

17   TheMightyQuinn   2010 Jun 24, 1:59am  

Great info E-man.

One question: Is the MIM data based on house price or on mortgage amount? To make any connection to interest rates it would have to be the mortgage amount (house price minus down payment.) Is this correct?

18   MarkInSF   2010 Jun 24, 2:24am  

thomas.wong1986 says

During the budgeting process for many employers each year we look at forecasted revenues and targeted earnings, general trends in the market and inflation. Salaries changes will often be based on industry compensation studies which also track inflation

Yes, but median income has been rising faster than inflation over the decades. Real median household income is about **triple** what it was in the mid 40's. (A fair chunk of that is simply more dual income households.) I would expect land housing prices (at least the land component) to roughly track those rising incomes, not inflation... which implies a tripling of land prices after adjusting for inflation, not flat land prices after adjusting for inflation.

That's why I think trying to infer a 22% drop based on some average inflation adjusted price over 120 years is absurd. There is no reason to expect that green line in the 3rd case-shiller based chart to be some mean to which housing prices will revert to.

19   Â¥   2010 Jun 24, 2:38am  

MarkInSF says

There is no reason to expect that green line in the 3rd case-shiller based chart to be some mean to which housing prices will revert to.

especially with 30 year mortgage money available @ 4.7% now. Wow! I was making more than that in 90-day Treasuries 3 years ago.

I agree that past norms do not apply now. Dual-income households, prop 13, the rise of a *serious* investor-predator presence in the SFH market, slow-growth policies, the current super-jumbo $730,000 FHA loan limit . . . will produce different pricing dynamics.

20   tatupu70   2010 Jun 24, 4:25am  

E-man hit upon a couple of things to consider:

1. New home inventory is quite low.
2. Much of that inventory is likely in undersirable areas

These factors probably skew the new home sales a bit. That along with the government 8K expiring, make me treat the latest new home sales numbers with some skepticism. Now, if the existing home sales show the same trend over a few months, then I'll agree with Robert.

21   thomas.wong1986   2010 Jun 24, 4:31am  

First off, dual income families have been around for the past 40 years. This has been especially true in California. When I graduated with my degree we had 50/50 split between the sexes. The Meg Withmens, Carol Bartz and Carly Fiorina have been around for a very long time. None of them are spring chickens who popped out in the past 10 years. So its a useless argument.

The affordability index i am referring to comes from California Association of Realtors which measured median incomes to median prices using fixed rate 40 year loans with 20% down. Your nation wide index is from the national home builders. Big difference!

Lets go back in time.
http://archive.dqnews.com/AA1996BAY12.shtm

A typical salary back then did infact cover at home prices. The myth that home prices were always expensive/unaffordable around here is just that. Even with higher sales, prices did not budge that much.

22   thomas.wong1986   2010 Jun 24, 4:43am  

E-man says

New home sales collapsed in May. This can be viewed as positive or negative, depends on who you talk to. If you look at the graph, the average new home sales should be around 600,000, and we’re currently selling on an average of 285,000 homes. I believe the main reason for the slow in new home sales is PRICE. The price difference between buying a new home and existing home or almost new home is still too far apart.

And as such, without any emotions you cut these prices. We have seen this happen over the past few years now and will it continue. I dont expect construction crews to stop building. I sure dont see any decline or stoppage at near by sites. As with any industry when markets change, you adapt, you improvise, and overcome. So prices will go down further.

23   tatupu70   2010 Jun 24, 4:45am  

thomas.wong1986 says

I sure dont see any decline or stoppage at near by sites

So, you're believing your anecdotal evidence of building at near by sites over the data posted above by Eman that clearly shows building is down significantly?

24   thomas.wong1986   2010 Jun 24, 5:07am  

tatupu70 says

So, you’re believing your anecdotal evidence of building at near by sites over the data posted above by Eman that clearly shows building is down significantly?

Eman's numbers are national numbers.

25   CrazyMan   2010 Jun 24, 9:32am  

And it's gaining momentum.

Low ended *may* have bottomed. Mid-high, not even close.

26   thomas.wong1986   2010 Jun 24, 9:51am  

E-man says

thomas.wong1986 says


tatupu70 says

So, you’re believing your anecdotal evidence of building at near by sites over the data posted above by Eman that clearly shows building is down significantly?


Eman’s numbers are national numbers.

Thomas,
Do you have the number for the SF Bay Area by any chance? Thanks.

DQ Archives.

27   thomas.wong1986   2010 Jun 24, 9:55am  

E-man says

I read through the article. I didn’t see any median income/salary for the mid 1990’s as you mentioned. ANYONE HAS ANY DATA ON THE MEDIAN HOUSEHOLD INCOME FOR THE BAY AREA IN THE MID 1990’s and NOW for comparison purposes

Med HH incomes were around 65-75K.

28   EBGuy   2010 Jun 24, 10:33am  

From HSBC’s A Froth Finding Mission: Detecting US housing bubbles (PDF alert)

Household Median Income (p. 106)
.........................................................................1985..... 1995 ....... Q3 2005
Oakland-Fremont-Hayward (MSAD)..... 35,419 ...49,453 .... 69,572
SF - San Mateo-Redwd City (MSAD)..... 31,065 ...45,828 .... 68,087

29   mthom   2010 Jun 25, 4:19am  

E-man says

I thought some of you might find this short article interesting.
“Economists polled MacroMarkets predict U.S. housing prices will rise by 12% over the next 5 years, based on the S&P Case-Shiller Index.
MacroMarket’s co-founder Robert Shiller did not participate in the survey but called the 12% forecast “a plausible scenario,” The WSJ reports.”
http://blog.seattlepi.com/seattlewaterfronthomes/archives/211912.asp

Are these the same "economists" that had no clue that there was a housing bubble?

30   tatupu70   2010 Jun 25, 6:02am  

Some of the people here crack me up--they are basically the same as the NAR cheerleaders in 2003-2006, except opposite. They can't look at things rationally and let the data talk for itself. Instead everything has to be spun to fit their notion that housing must fall. When someone posts evidence that this might not be the case, they are called names and told they are clueless...

It's OK to have different opinions on where things are heading in the future. I can almost guarantee that none of the bears on here expected housing prices to rise for most of the last year.. So, isn't it possible that you are wrong about the future?

31   CrazyMan   2010 Jun 25, 6:18am  

tatupu70 says

So, isn’t it possible that you are wrong about the future?

Newp :)

Everyone is entitled to their opinion of course, and I certainly appreciate that there are differing views.

But really, we're bordering on the world is round or flat argument here.

32   tatupu70   2010 Jun 25, 7:05am  

CrazyMan says

Also, the economy isn’t currently recovering. I’m not sure how anyone would think that.

Come on. You can question the strength of the recovery, but there's no questioning that it is recovering. You have to have your head in the sand not to see that. Consumer confidence has risen, wages are rising, earnings are up, even jobs are turning. Last survey said something like 75% of fortune 500 CEOs plan on hiring next year.

That fact that you can't see how anyone would think that only strengthens my point that you are refusing to see reality.

33   thomas.wong1986   2010 Jun 25, 7:21am  

E-man says

I disagree with your statement. Apparently I come across as a bull to you and some others. I’m not a flipper. I’m a long-term 100% financing buy and hold investor. So home prices going up are not good for me (or the buy and holder investor). Believe it or not I want everyone to be bearish so I can buy more properties for cheap. Remember the saying “Fortunes are made during recession.” Boys, isn’t it so true? I currently have only six rental units and I would love to buy more, but have been unsuccessful this year on every offer.

Sounds reasonable to me. If buying property to rent out and be financially independent is your goal then it makes sense to do exactly what Eman is saying.

34   gameisrigged   2010 Jun 25, 7:29am  

tatupu70 says

Come on. You can question the strength of the recovery, but there’s no questioning that it is recovering. You have to have your head in the sand not to see that. Consumer confidence has risen, wages are rising, earnings are up, even jobs are turning. Last survey said something like 75% of fortune 500 CEOs plan on hiring next year.
That fact that you can’t see how anyone would think that only strengthens my point that you are refusing to see reality.

Huh? Wages are not rising - where did you hear that? Earnings may be up for the companies that got bailouts (how could they not be?), but small businesses are struggling. Jobs are not "turning" - unemployment is still as high as ever.

35   thomas.wong1986   2010 Jun 25, 7:42am  

tatupu70 says

Come on. You can question the strength of the recovery, but there’s no questioning that it is recovering.

Locally, our last recovery from the dot.com bust as reported by SJMN back in 2005 which state a 4.5% increase in headcount in SV employees. However buried in that article it stated the 4.5% was in other regions outside of the SV. So it turned out to wasted ink and paper.

Before that we had a 91 recession which California was last to the party. It took us additional several years to recover and it was based on private investments to the tune of $150B to make it happen. But that turned out to be rather short lived with too much money chasing too few good ideas.

Overall our recovery will feel sober more like 1993-1997 and not 2011.

36   tatupu70   2010 Jun 25, 9:27am  

gameisrigged says

Huh? Wages are not rising - where did you hear that? Earnings may be up for the companies that got bailouts (how could they not be?), but small businesses are struggling. Jobs are not “turning” - unemployment is still as high as ever.

Let's see. Here's an article I found relatively quickly. Wages have been rising for almost a year now I think.

http://www.marketwatch.com/story/income-growth-outpaces-spending-in-april-2010-05-28?siteid=yhoof

37   pkowen   2010 Jun 25, 11:30am  

Interesting. Scanning these posts it appears it's primarily those invested in rental properties are arguing that housing is on an upswing. Just like some were arguing rents are going up up up right about the time SF rents were being reported as dropping (and as it happens I negotiated a decrease for myself).

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

38   xenogear3   2010 Jun 25, 12:49pm  

pkowen says

t’s primarily those invested in rental properties are arguing that housing is on an upswing.

At least 50% people on this message board are real estate agents or investors :)
All of them live in Bay Area !!!

These people just like the people who owns the internet stocks in 2000. NASDAQ was down ONLY 40%. They were calling bottoms like crazy on the message board.

When the NASDAQ down to 70%, guess what? They were all disappeared from the message board.

The real estate will bottom when no one talks about it.

39   thomas.wong1986   2010 Jun 25, 3:48pm  

xenogear3 says

When the NASDAQ down to 70%, guess what? They were all disappeared from the message board.

They all moved to real estate by 2001, next they will be selling solar panel door to door.

40   Â¥   2010 Jun 25, 6:13pm  

Goddamit, what don't you understand about the TEN TRILLION HOUSEHOLD DEBT bubble that was blown 2001-2008?

Layered on the household debt was a similar debt expansion in corporate and government debt at all levels.

THIS IS A BALANCE SHEET RECESSION.

THERE IS NO EXIT FROM A BALANCE SHEET RECESSION.

This is NOT bullshit internet stocks blowing up and taking out daytraders.

This is an EXTREMELEY pivotal time in the economic history and fate of the nation. Think of what's going to happen if the Senate Majority leader loses his seat to a Christian Reconstructionist Tea Party twit, Boxer gets booted for Fiorina.

Obama will be a lame duck and that's going to be it for Keynesian intervention. We're looking at a replay of the 1930s IF WE'RE LUCKY.

42   tatupu70   2010 Jun 27, 10:14pm  

UnitedSocialistStatesofAmerica says

If you need to know whether you’ll need an umbrella or not before going out, you NEEDN’T consult a graph for it. You simply look out the F’ing window and see for yourself what the weather’s like.

Interesting analogy. So, you never watch a weather report then? When you leave for work, you just look out the window, right?

43   tatupu70   2010 Jun 27, 11:55pm  

Another report from today. For anyone else who thinks wages are not rising...

"Incomes rose for the sixth time in seven months, boosting household finances and potentially providing fuel for greater future spending."

http://finance.yahoo.com/news/Americans-spend-more-in-May-apf-966568080.html?x=0

44   tatupu70   2010 Jun 28, 4:58am  

UnitedSocialistStatesofAmerica says

Isn’t it an AMAZING concept?
And here’s ANOTHER crazy thing I do; instead of consulting a graph in order to determine if I’m HUNGRY or not, I simply rely on my stomach to tell me. Will wonders never cease?

Again--great analogy. I'd say deciding to eat is pretty much the same as deciding to buy a house...

btw--do you get wet on the way home from work a lot?

45   tatupu70   2010 Jun 28, 6:17am  

UnitedSocialistStatesofAmerica says

No, I DON’T because I always look out the window beforehand to see what the weather’s like.

Maybe you live in a different area than me. Where I live there is very little correlation between how the sky looks at 6AM to how it looks at 5pm

46   tatupu70   2010 Jun 28, 7:03am  

UnitedSocialistStatesofAmerica says

Then may I suggest you look out the window AGAIN @ around 12 pm? After all, THAT’S what a professional meteorologist does right before they flip a coin and prepare the weather forecast anyway

The problem is that I've already left the house. The choice about whether or not to bring the umbrella has to be made at 6AM...

47   American in Japan   2010 Jun 29, 10:21pm  

E-man,

I don't comment much here. I like this post of yours and find it very informative. (ignoring much of the bickering and name calling following) Thanks!...from Japan.

48   anonymous   2010 Jul 14, 10:41am  

Not sure what the property tax environment is in your specific area, but i know my local gov is cash strapped, and i would have to think that property taxes are going to rise, and that will dissuade people from wanting to buy a house

people have certainly come to question just how good an investment house debtorship really is. with the jobs situation being the mess it is, i don't see young people jumping into massive debt to own a house, you have to desire to be anchored to one spot for an extended period of time, and i'd guess people are rethinking if they really want to be chained to a house, when there's plenty of comparable places to rent.

in order to get to the peak we recently witnessed, it absolutely required the pyramiding, or upgrading of houses over a long period of time,,,,,,,,starter home, small family home, bigger family home. Those starter home neighborhoods are not as desirable as they once were, and while the boomers are downsizing, there isn't a new base of families looking to upgrade, especially with the direction of house equity people no longer hold.

Let's not forget the ravenous pace that HELOC's and the like allowed for expansion in housing. How many 'infestors' were able to leverage to the moon with the combination of rising equity and rising credit availability.

i admit, i look to reinforce my own (negative) view of house price direction. that's what i want to happen, so that's what i see and that's what i seek. I think the only way we get this truck out the mud and get back to house prices going higher is via gov't induced monetary inflation, whatever their gimmicktry/vehicle may be. I do not see where incomes will drive house prices upwards. not that i haven't been wrong before

49   thomas.wong1986   2010 Jul 14, 2:37pm  

E-man says

Thanks to Troy for over-laying these graphs. As shown on the graph and its trend lines, we’re closer to the bottom than the top of the housing market. If you factor in the current low interest rate environment, home affordability in the U.S. should be at historic high.

Now if you can find charts local for each market, like SF Bay Area, you pretty much wind up with SF Bay Area coming down to mid 300K .. and staying there for a long time. So far we havent hit the perm bottom yet. Otherwise yes, you can more likely find great bargins in Vegas and SoFLA.

50   Â¥   2010 Jul 15, 6:22am  

rmm221 says

f we were at 9% tomorrow no one would be buying a home.

$375,000 @ 4.5% is around a $2200/mo commitment.

At 9%, it's $2800/mo. $2200 mo @ 9% would require around $100,000 off the purchase price.

BR had a good post today about how interest rates simply must stay low to keep the game going.

Now, we can argue that .4 may be too high a bar, that with these low interest rates we can get by with more leverage, but at any rate the sheer overhang of mortgage debt to present valuations is sobering, and in-line with my previous predictions from 2007-2008.

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