17 Comments on “RMLS July Part 3- Affordability”

1. NAR Afforability Index Formula.

   The index takes snapshots of the Federal Housing Finance Board’s monthly releases of interest rates. Their rates are as follows:

   June 25th: 6.36%
   July 25th: 6.59%

   August Numbers should be out today I believe. These numbers reflect the “typical” interest rates obtained during the previous month.

   I have always questioned HUD’s methodology for obtaining median salary. As with most statistics where you get your numbers can influence many things. I prefer the BLS for salary surveys.

2. I have always questioned HUD’s methodology for obtaining median salary.

   Ralph: yes, it seems that I more often hear about median income in PDX being in the low 50K range. However, is that $68K the median household income, vs $51K being the median salary?

   At any rate, this is interesting data. It confirms what many of us have been thinking: housing prices in PDX have gotten out of sync with incomes in recent years (as has been the case in many areas of the US). Now that the eazzzzy credit is gone, income is a much more important component in being able to get at loan (and save up for an actual downpayment which is now a requirement). Given the disconnect between incomes and home prices either incomes must rise while home prices stagnate for several years or home prices need to fall as incomes continue to stagnate.

   I doubt we’re going to see real incomes rise significantly anytime soon: Outside of the housing sector (which obviously can’t be outsourced) there are too many jobs which are outsource-able and thus US workers are competing with large pools of cheap labor in other areas of the world like China and India. This has kept incomes from rising much over the last 10 years or so and it will continue to do so for the forseeable future. Take away MEW (Mortgage Equity Withdrawl) and people will begin to feel less wealthy – MEW allowed people to think that their standard of living was rising, when in fact it wasn’t. Housing prices will need to decline in order to match the real standard of living (as opposed to the imaginary standard of living that was bolstered by eazzzzy credit, MEW and other forms of debt).

   However, I don’t think we’re seeing deflation across the board. We’re seeing deflation in an asset for which only people inside the US compete: houses. While at the same time we’ll continue to see inflation for commodities since we are facing increased competition for these limited resources from other areas of the world: oil is a great example. More ability to pay for oil in China, for example, is helping push up prices here.

3. TiP said…

   However, is that $68K the median household income, vs $51K being the median salary?

   Point well taken. According to the 2000 Census, 1-person households make up %27.3 of the owner-occupied households in Portland, with 2-person household grabing %36.5. (3-person: %17.6 4-person: %18.6) I have no idea how that breaks down. (of course HUD numbers included “surrounding communities” not just Portland)

   Even if we take HUD’s numbers as being correct, Median Family Income has dropped %6.2 in the past 3 years. ($67,900 (RMLS 2004/07) $63,800 (RMLS 2007/07)). Affordability will continue to drop if median prices keep going up, salaries keep dropping, and interest rates keep rising.

   I need to add the NAR Afforability formula to my spreadsheet so I can compute the index in the August and September RMLS numbers. (RMLS only issues the Affordability Index every 3 months).

4. It seems that I more often hear about median income in PDX being in the low 50K range…

   Sperling’s lists the median income even lower ($47,759), which I’ve referenced a number of times in different posts. Their data is current as of 1/07. Quite a disparity in the numbers though.

5. It seems that I more often hear about median income in PDX being in the low 50K range…

   Sperling’s lists the median income even lower ($47,759), which I’ve referenced a number of times in different posts. Their data is current as of 1/07. Quite a disparity in the numbers though.

6. Ah yes, the endgame of capitalism is upon us. Low salaries and thus un-purchased commodities. A potent combination.

   The coming downturn could be the catalyst for all sorts of political changes and civil unrest. Fat, lazy, ignorant Americans (which describes 90% of them) won’t take kindly to the economic pain they’re about to receive.

   If I was a republican I’d get a really good security system.

7. Personally, I’m salivating at the prospect of short-sales on the prayer-flag festooned option-ARM time bombs owned by alterna-leftist types. Its the tree-hugging hipsters who are the first to bite the dust in a downturn. Economic darwinism at its best.

8. Ah yes, the endgame of capitalism is upon us. Low salaries and thus un-purchased commodities.

   Actually, Naysayer, the commodoties like oil are not going unpurchased, they’re in more demand now since there are more demanders with cash in the world now.

   Houses aren’t a commodity as far as I understand the term.

   PDX_Flipper: just make sure you don’t buy those short sales too early, otherwise you’ll also be a victim of “Economic darwinism”.

9. “Houses aren’t a commodity…”

   Houses (and other real properties) are a commodity, but not a homogenous one.

   “Left-handed, power-hitting third basemen are a rare commodity in the big leagues” (Steve Guiremand).

10. There is a difference between median household income and median family income. The HUD data reported in this post ($63,800 for 2007) is an estimate of median family income for a family of four.

    Across all households, Portland MSA median household income for 2006 according to the Census Bureau’s American Community Survey (ACS) was $52,480. Data has not been released for 2007.

11. Chris: Yes, I think the affordability graph above represents the best-case scenario. Likely it’s actually much worse than that.

12. Excellent and concise article on why falling home prices actually help more people than they hurt.

13. I like the way the article ends:

    People want the government to do something, and presidential candidates are beavering away at plans. But any plan that would prevent home prices from declining would be foolishness squared. Genuine tragedy deserves sympathy and help, even if it is the result of your own foolishness. But when we do not even guarantee basic health care, it would be nuts to think about making protection against real estate losses part of the social safety net.

14. BRAVO CHARLES! I take back all the bad things I said about you in the past.

    But don’t be too sympathetic to fools who took on homes they couldn’t afford. I read in the New Yorker a ways back that the number of people never paying a payment before defaulting had quadrupled. That means they took out loans never intending to pay but merely to flip.

    Those are the people I would not only not help, I would send to debtor’s prison.

15. The principal issue resulting from from government intervention (bail out), be it in the credit markets or at the consumer level is Moral Hazard.

16. I crunched the NAR Afforability Index going back to January 2003.

    This includes the real July 2007 Affordability Index of .85. FHFB determined the interest rate for July to be %6.74.

    Note, this chart removes the sliding numbers that RMLS uses for determining interest rates. For example, the July 2007 RMLS Afforability index uses interest rates from loans closed in June 2007 not July 2007.

    I found some interesting things out. Using the NAR formula, you would need to have a median family income of $74,641.94 to reach 1.0 on the NAR Afforability index for July. Portland needs a %17 raise if we use the HUD data for median family income.

17. Ralph-Nice work!