Where Can the Middle Class Buy a Home?

http://blogs.wsj.com/developments/2013/10/10/where-can-the-middle-class-buy-a-home/?mod=trending_now_1

by prostoalex • 13 years ago

32 64 13 years ago

blogs.wsj.com

aliston• 13 years ago

It's interesting that the affordability is calculated relative to median income. If SF is the most expensive, relative to household income, doesn't that imply that either San Franciscans are living above their means, or there are more renters in SF than any other city in the country? Is there another possible explanation?

Shivetya• 13 years ago

nah, just look to laws that are not friendly to building. Most in the name of protecting something or someone popular to disguise the fact those making the laws don't want others there.

dwiel• 13 years ago

It is possible that the homes were bought at lower prices in the past, and are now 'worth' more than the owners could afford to buy with thier current income.

jpitzo• 13 years ago

People who have lived in rent controlled apartments for many years skew the stats, as they're paying much below market rate (not saying this is a bad thing).

akgerber• 13 years ago

It implies that there's a housing shortage, and that housing is purchased by the rich and those willing to live above their means (or willing to skimp in non-housing areas of their budget) bidding up the small quantity of available housing, and everyone else moving away. A similar thing happens in most expensive housing markets, driving the population growth in low-wage, easy-to-build areas of the Sunbelt like Texas, Arizona, and Nevada.

nostrademons• 13 years ago

Or alternatively, that everybody else doubles up and lives the bachelor lifestyle for a long time. Roommates are very common in the Bay Area, as is youth. The large number of 20-somethings just starting out in their careers skews median incomes downwards, and many of them don't have the same housing needs as someone with a family.

jpmattia• 13 years ago

Is there another possible explanation?

Other elements in the cost of living do not scale the same as housing, so you can expend more of your median salary bidding up the real estate.

jlarocco• 13 years ago

Another possibility is that people bought their houses before the prices rose.

As an extreme case of this, my girlfriend's house in Denver could sell for $850-900k. But, it's been in her family for years, and the original price when her grandparents bought it in the 1910s was <$10k.

seanmcdirmid7• 13 years ago

That was $230k in today's dollars. Also, incomes were generally lower then, even accounting for inflation, your girlfriend's grandparents (who must be 60 or 70 to have grandparents from that era) were pretty well off. Her family most also still be well off to pay the property taxes on such an appreciation.

spot• 13 years ago

SF better go high-rise or they will suffocate their economy.

codex2• 13 years ago

The market-god spin is that San Francisco has an advanced economy, with advanced jobs, which is why there are so few poor paying ones.

maxander• 13 years ago

The article is saying housing in San Francisco is unaffordable compared to San Francisco's own median income. I'm not an economist (nor a San Franciscan,) but that sounds unsustainable no matter how you spin it.

buckbova2• 13 years ago

"For those of you in the coastal elite who are reading this post for the perverse pleasure of finding out just how unaffordable your city is . . ."

You caught me.

sscalia• 13 years ago

This is absolutely perverse and unsustainable.

I don't know what "fixes" this - a massive correction in tech wages? Another recession? Not sure.

dasil0034• 13 years ago

I thought this way too, then I moved to London and took around and European real estate, and now I think maybe it's just the future.

toomuchtodo• 13 years ago

Is all European real estate ridiculously expensive?

aray• 13 years ago

This seems to be a WSJ re-spin of some nice original research by Trulia[1]. I'd read it there.

[1] http://trends.truliablog.com/2013/10/middle-class/

smellf• 13 years ago

Awesome, thanks. The whole time I was reading the WSJ piece thinking, "What's 'affordable'?"

JPKab4• 13 years ago

What I would love to see would be an annual rent/house price ratio report.

Anything below 6%, and buying is basically stupid. You are paying more in interest to borrow the money than you are to borrow the house each year. Hence one of the motivations that's making me want to leave the DC metro area. Here you are either stuck renting or having an ultra long commute from one of the shitty exurban communities. The Federal Gov't is a bubble that never really pops.

josephlord3• 13 years ago

From that it seems to assume a four times salary purchase that is largely borrowed. The calculation is based on current borrowing cost and looking at historical interest rates a doubling of the current rate seems plausible in 5 to 10 years potentially putting those buying these currently affordable houses into trouble.

Domenic_S5• 13 years ago

Which is why you get a fixed-rate loan...

runamok3• 13 years ago

I wonder about that too. The thing that seems to remain constant is your monthly payment which is of course influenced by the interest rate. So presumably a high interest rate would make a lot of home prices go down.

xradionut2• 13 years ago

I'm reminded of Brain Burn's "Welcome to Texas": http://www.youtube.com/watch?v=YPQHghD3Ddw

dasil0034• 13 years ago

Why are Texans so sensitive? I would never make fun of a Texan in Texas. I only do that when they're seen skiing in jeans in New Mexico.

xradionut2• 13 years ago

If you're an older native Texan, you might remember the days when the majority of the residents were actually born in the state and also had parents born in the state. Fast forward a couple of score of years and if you're not a farmer and don't live in the sticks, odds are that you are surrounded by people from the surrounding states, from the coasts and around the world.

So culturally and demographically the state has changed tremendously over the last two censuses. The urban sprawl and traffic is starting to remind people of California. And the people from California remind people constantly they are from California. And the neighborhoods could be from California. (Sans the climate since we have earthquakes here now, too...)

Plus the growth is fueled by short-sighted policies of the modern slick version of the good-ole-boy, fake Christian, supposedly conservative state government. (Don't blame me, I didn't vote for them...) In the long run, lack of water resources, too many damn people and a stupid government will crash the state hard. The area around Austin is as flammable as SoCal, the traffic is DFW is becoming a monster and the social net is non-existent except for federal money.

But hey, my house would be worth 9 times as much if it were in San Francisco. :)

batbomb• 13 years ago

Texans love Ruidoso.

aspensmonster• 13 years ago

"...Just don't forget to go back home."

Or at least, if you're staying, I hear Dallas is lovely. Or Fort Worth. Or Houston. Or San Antonio. Or Corpus Christi. Anywhere but Austin really. Austin sucks. Stay far away.

RougeFemme• 13 years ago

Building smaller starter homes, with more "basic" decorator options would help, e.g., does a starter home have to have 2.5 bathrooms? The counter-argument, right or wrong, is that builders say that with the proffers they are required to pay, they can't make a decent profit on smaller, more basic homes and that the buying public doesn't want them.

judk• 13 years ago

No. Homes they are unaffordable are not expensive homes, they are expensive land. Building a mini house is a waste of effort and drives costs up, as it will need to be knocked down or mangled later to support expansion.

seanmcdirmid7• 13 years ago

Mini houses use less land. More likely, they are small apartments, though; single dwelling houses are not very practical where land is expensive, even if Americans tend to pretend so.

prostoalex• 13 years ago

They can - profit per square foot actually goes down as the size of the house increases. Will be interesting to see the demand when this project gets completed http://www.huffingtonpost.com/2012/11/29/san-franciscos-tiny...

lifeisstillgood• 13 years ago

I did a little research in London a while back:

assume that the Rich dad poor dad idea of 2.5x income is the value of an affordable house, and the average median UK income is 25k that leaves houses at ~70k. Do you know how many houses are for sale in London at less than 70k, in this city of 8million? 6. just six.

ridiculous

josephlord3• 13 years ago

Median London salary is probably higher. This[1] says about £35K.

Now it doesn't change the reality that much, prices have been driven ridiculously high by the escalating levels of borrowing. We need a strategy to limit the amount of borrowing taken rather than government encouragement for even bigger mortgages.

[1] http://career-advice.monster.co.uk/salary-benefits/pay-salar...

vinceguidry• 13 years ago

But then you have to live in Ohio.

pdelbarba2• 13 years ago

As someone from Ohio, I can understand why so many others here have felt the need to leave the planet. http://webcache.googleusercontent.com/search?q=cache:gesERte...

dasil0034• 13 years ago

Have some pride in where you're from! http://www.youtube.com/watch?v=bV_E8SPc_jo

pdelbarba2• 13 years ago

This doesn't seem to fill in the gap of where people are living if most of the housing is above median income. They did imply that the median income was calculated per city so that rules out any wealth concentrations. This seems more of a market/response problem than a 1%er debate.

EDIT: Now that I think about it, I would bet that the SF numbers were heavily influenced by the <2000 DOTCOM bubble

freehunter2• 13 years ago

I make almost exactly what is listed as the median household income for my area, and I would never dream of buying a $200k+ house. My price range when I was house hunting was around $120k, which is around 2.5x my salary. I didn't find anything worth buying, so I rented.

Who buys a house that's 4.5x their salary?!

sugerman2• 13 years ago

I agree with the sentiment. I bought at about 2X my salary with plenty of savings in the bank and a combination of bad luck and weather (Sandy) have required over 10% of the house value just in functional repairs in the last 2 years. If I had bought at 4-5X my salary and had the same issues completing the repairs would have been much more stressful or even impossible.

runamok3• 13 years ago

The historical "best practice" max home loan ratio was 3x your gross income. However, that was at a time that interest rates were significantly higher. Therefore the amount you are paying now over the life of the loan is smaller and thus more manageable. This assumes you make a large enough down payment that you don't need private mortgage insurance.

However, this presumes you will have 20-30 years of (more or less) uninterrupted prosperity which I think is unlikely.

People also do things like rent out a room or two to give themselves more of a cushion.

Here are some calculations using this site: http://www.mortgagecalculator.org/

I assumed a loan of 250k, 30 years, with no property tax or PMI since this is just for comparison.

Right now rates are ~3.5% so over 30 years you would pay $404k and $1122/month. Over the past 30 years the average interest rate has been 7.45% so over 30 years at that you would pay $626k and pay $1739/month.

So a very significant difference.

freehunter2• 13 years ago

I guess I'm either making significantly more than people in my area who are my age or I must spend a lot more, but there's no way I could afford a $1122/mo house payment with my student loan bills and a small car payment. I mean, I could afford it, but I would be incredibly uncomfortable every month knowing that one missed week of pay meant a bill that wasn't going to be met that month.

I did at one point rent a room from someone who was making $35k/yr who had just bought a $90k house and couldn't make the payment. It wasn't much cheaper than an apartment and the person made it clear almost every day that I was only welcome in the house because I paid more than half of his mortgage every month. He was an ass and I had no rental contract with him, so I left. His house got foreclosed upon a couple months later; I was going to buy it from the bank but he had trashed the entire inside and ripped out chunks of the exterior wall. Anyway, this was just a long winded story to say yeah, I can see what you're saying about renting a room to pay the mortgage. It would still make more financial sense to just buy a house you know you can afford.

mixmastamyk• 13 years ago

Yep... in LA and just watched a hundred-year-old, boarded up crack-house across the street list and sell for almost $700k.

malandrew• 13 years ago

Interesting topic and relevant to SF for a non-obvious reason. Most people don't know this, but if you earn between 70% and 90% of the SF median income, you are eligible for below market rate housing in the city. This means you can buy a apt in a brand new building for far about 1/3 of market rate. i.e. a $900k 2 bedroom in Hayes Valley would be around $300k BMR. Why do I bring this up? Because if you aren't in that narrow range, then you need to earn like 3-4x or more of the median income in SF to afford a house otherwise. This leaves an entire chunk of the market without any options for purchasing a house. I find it strange that the city feels that a solution like this that favors one small group and ignores everyone else is an acceptable solution to the problem. Programs like BMR need to be replaced in favor of permitting enough housing permits to satisfy demand so that housing is accessible to people earning the median income and above.

Where Can the Middle Class Buy a Home?

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