Housing To Price Ratio
July 17th 2008 16:24
Nichols & Stone was in business for 157 years and failed last month. Company President and CEO Carlton E. “Tuck” Nichols said in a FURNITURE Today interview that the company has experienced a shift in buying patterns:
I got to thinking about the Nichols & Stone post I wrote and the follow-up Sun In An Empty Room , when I read Urban Survival this morning.
The author, George Ure, writes about the little secret in the housing market that nobody's talking about. The typical housing price to income ratio "of about 2.5 seemed to match up well to people's ability (in mass) to be able to service their mortgages over the long term. That means if you made $30,000, you could comfortably buy a house for $75,000.
In Sun In An Empty Room, I called my real estate broker and asked what kind of income would I need to buy the house across the street that recently went up for sale at $925,000? I was told:
Let's say we did have the $185,000 down, that makes the monthly payment $5,400, add $1,000 a month for property taxes and insurance, and our monthly nut is $6,400 a month. In today's market, the monthly nut is "33% to 45% of gross income". That means annual gross income would be $192,000 to $250,000. Which means the housing to income ratio is 3.7 to 4.8! If we use the price after down payment instead, we get 3.0 to 3.8, still high by historical average.
Ure is suggesting in the article that if we revert to the mean that house could decline up to 40%, before we're back in the 2.5 ratio.
“Young consumers have money, but they don’t see longevity and buying an heirloom the same way,” he said. “They have changing priorities. I think there has been a real dramatic shift there. It is more important to have the big home and the car in the driveway, rather than to focus on the interior.”
“We have undernourished homes in America. They are not fully furnished. In those that are, they have elected to buy a lesser product to get by.”
“We have undernourished homes in America. They are not fully furnished. In those that are, they have elected to buy a lesser product to get by.”
I got to thinking about the Nichols & Stone post I wrote and the follow-up Sun In An Empty Room , when I read Urban Survival this morning.
The author, George Ure, writes about the little secret in the housing market that nobody's talking about. The typical housing price to income ratio "of about 2.5 seemed to match up well to people's ability (in mass) to be able to service their mortgages over the long term. That means if you made $30,000, you could comfortably buy a house for $75,000.
The Ratio of housing prices to income skyrocketed way above trend line to the 4.5x area from about 3.0x in 2000.
Even 3.0x then was on the riskier side of the proper safe leverage ratio and meant that most buyers would be thinly capitalized if hard times hit. 4.5x was/is an unbelievable amount of leverage ... particularly if one is on any sort of ARM where the payments can up UP in ANY WAY (including the loss of builder buy downs)
Even 3.0x then was on the riskier side of the proper safe leverage ratio and meant that most buyers would be thinly capitalized if hard times hit. 4.5x was/is an unbelievable amount of leverage ... particularly if one is on any sort of ARM where the payments can up UP in ANY WAY (including the loss of builder buy downs)
In Sun In An Empty Room, I called my real estate broker and asked what kind of income would I need to buy the house across the street that recently went up for sale at $925,000? I was told:
Typically, in order to qualify for a jumbo mortgage, the buyer would put down 20% or $185,000, and the monthly payment would be about $5400 at this day’s prevailing interest rates. If you had only 10% down, you would need mortgage insurance and the payment would be at least $1000 higher. In neither case does the monthly payment include taxes and insurance.
Let's say we did have the $185,000 down, that makes the monthly payment $5,400, add $1,000 a month for property taxes and insurance, and our monthly nut is $6,400 a month. In today's market, the monthly nut is "33% to 45% of gross income". That means annual gross income would be $192,000 to $250,000. Which means the housing to income ratio is 3.7 to 4.8! If we use the price after down payment instead, we get 3.0 to 3.8, still high by historical average.
Ure is suggesting in the article that if we revert to the mean that house could decline up to 40%, before we're back in the 2.5 ratio.
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