Blogging has been very light (well, non-existent) because I’m putting the finishing touches on the July Red Dot on MLS of Choice, and… as I’m sure you’ve noticed, a site redesign! So due apologies to everyone.
Then again, there hasn’t been a whole lot of news worth discussing either… until now.
According to a new report from Department of Housing and Urban Development, making $117,400 a year qualifies you for low-income housing in San Francisco. The story from Fortune, and the key graf:
In San Francisco, a family earning just under $120,000 a year is considered “low income.”
That’s according to a new report from the Department of Housing and Urban Development, which calculated that figure according to the median price for a single-family home in the Bay Area, which is now at $947,500.
Further down, the story notes that only 15% of San Francisco county residents could afford a median-priced home.
Thing is, I was recently on a conference call with prospective clients who are a major national real estate company. One of the executives asked a question I wasn’t expecting: “How does this concept work when the market turns?” Even though I had written a lengthy post about the market turning, I wasn’t expecting the question because I didn’t think senior executives at major real estate companies had that issue on their minds. Apparently, they (you all) do.
So let’s chat about this briefly. Where is the peak? What does that actually look like?
Not a Bubble, Y’all!
In that previous post, I wrote:
But, we’re not in a bubble! Or so every economist related to real estate says, according to KCM Blog.
So fine, let’s say we’re not in a housing bubble. It’s all just supply-and-demand, no matter that the average worker can’t afford a median-priced house in 304 of the 404 counties (68% of the housing market) according to Attom Data Solutions.
What I’m curious about is this: What does it look like when the market finally shifts?
My new question is related, but slightly different.
If we’re not in a housing bubble, and it’s all just supply-and-demand, where is the peak?
Only 15% of San Francisco residents can afford the median-priced house. If that’s not a housing bubble, what is? When only 10% can afford the median-priced house? 5%? 1%?
For reference, here’s a table of housing affordability for North America from Numbeo:
Top 20 Markets Housing Affordability
|Rank||City||Price To Income Ratio||Price To Rent Ratio City Centre||Price To Rent Ratio Outside Of City Centre||Mortgage As A Percentage Of Income|
|2||New York, NY, United States||12.34||19.03||16.90||88.57|
|3||San Francisco, CA, United States||12.30||16.03||14.72||88.87|
|5||Boston, MA, United States||10.33||18.63||11.74||75.06|
|6||Honolulu, HI, United States||8.99||18.49||15.82||64.92|
|7||Oakland, CA, United States||8.52||13.89||11.06||60.79|
|8||Los Angeles, CA, United States||8.42||16.09||12.84||61.15|
|10||Fremont, CA, United States||7.33||15.19||14.19||50.81|
|13||Irvine, CA, United States||5.81||13.57||12.39||41.71|
|14||Miami, FL, United States||5.76||11.55||7.41||42.64|
|15||Jersey City, NJ, United States||5.59||13.23||7.86||39.95|
|16||Washington, DC, United States||5.44||12.95||8.09||38.37|
|17||San Diego, CA, United States||5.22||13.17||11.00||38.02|
|19||Portland, OR, United States||5.06||12.14||11.25||37.06|
I strongly suspect that the data source is old and outdated, since Denver and Seattle have moved way up in unaffordability, and anyone who thinks Austin is at a 4.0 PTI is cray-cray. But still… there are some numbers to look at here.
But the Mortgage as a Percentage of Income stat is interesting to think about as well. If a family has to spend 75% of their household income on a mortgage, as they would in Boston, that’s not anywhere close to affordable.
The economists behind the Demographia Housing Affordability Survey use this definition of affordability:
- Affordable (3.0 & Under)
- Moderately Unaffordable (3.1-4.0)
- Seriously Unaffordable (4.1-5.0)
- Severely Unaffordable (5.1 & Over)
They have Q3/2017 data, and show that the following US cities are Severely Unaffordable:
- San Jose, 10.3
- Los Angeles, 9.4
- Honolulu, 9.2
- San Francisco, 9.1
- San Diego, 8.4
- Miami, 6.5
- Seattle, 5.9
- Denver, 5.7
- New York, 5.7
- Riverside-San Bernardino, 5.7
- Boston, 5.5
- Portland, 5.5
But, we’re not in a bubble — it’s all a function of supply and demand. Fine.
The Psychology of the Peak
In conversation with my very smart and very knowledgeable real estate broker wife, it turns out that this issue of “the peak” is highly psychological. She called it a “gut feeling” that experienced real estate professionals get about the top of the market.
Because it’s not about the median family buying the median house. It’s usually a specific buyer client who has specific financial means, looking to buy a specific house. A client could be making $200K a year, but have huge student loans, medical expenses, and whatnot, and it would be a stretch to afford a $4,000/mo house payment. That’s not a “market peak” as much as it is a “you shouldn’t buy that house” situation.
Nonetheless, real estate agents work in a market, with buyers and sellers all the time. They develop (or ought to) a sense of when things are heading up or down.
So here’s what I’d like to ask my readers to do.
First, think about that gut feeling, your intuition, your sense of when things are heading up or down. What sorts of things do you look at to feel out what’s going on with the market?
Second, based on those things you look at, where do you feel the real estate market is in your local area? Is it still on the upslope towards the peak? Is it at the peak now? Or is it on the downslope past the peak?
Third, what would convince you beyond the shadow of doubt that your market has hit the top?
Once you’ve thought about those things, maybe you can go back and re-read the piece linked to above about what a market shift could look like, and tell us how you see things progressing.