Here is something I have been working on for the last month. As it happens, last week Kevin Drum posted some aspects of the same data.
House prices have exceeded by a substantial margin median household income:
But the monthly mortgage payments have not:
This is because, while the prices of houses have increased, mortgage interest rates have decreased over the same period.
So, saving for the down payment is considerably more difficult (unless, e.g., parents are helping out), but once the house is bought, the monthly carrying cost for living in the house really hasn’t gone up at all.
What’s missing in this discussion is comparing both household income and mortgage payments to the alternative (leaving aside living in mom and dad’s house) of paying rent.
I still have some number crunching to do, but once the three way comparison is finished, it will be a really illuminating look into how much the alternatives for shelter really cost. Stay tuned.
Throw on AirBnB and similar services and paying the mortgage becomes more affordable. Also, this year California relaxed some rules on putting up auxiliary dwelling units on one’s property. Of course, local jurisdictions are still free to restrict AirBnB and auxiliary dwelling units. The end result will be that areas which restrict such practices will have less congested and more desirable housing, and thus lower prices. (Full disclosure… we have applied for a permit to build in an auxiliary dwelling unit, and we already make use of AirBnB.)
“more desirable housing, and thus lower prices. ”
heh
Emicheal I ditto your “huh”?
I’m looking forward to your further analysis. Your remark about alternatives to shelter reminds me of the old burger joint ad, “Our burgers are cheaper than food.” What are the alternatives for shelter?
I think a big chunk of the housing crisis is our inability to fund transportation infrastructure. There were the railroads and streetcars around 1900, then the highways around 1950, but nothing new around 2000. Some of this is voter resistance to upzoning and higher tax rates, but there is likely more to it.
When you analyze the down payment problem, you should consider that from a lender’s viewpoint, the ability to save for a down payment is a proxy for a borrower’s ability to weather a financial setback. If someone can save enough to provide a down payment commensurate with a full year’s salary, odds are that even a mid-scale financial shock will not prevent him from making mortgage payments.
Kaleburg,
The “weathering” ability is the interest rate charged… it’s combined lender’s risk + cost of capital. You’ll note that it’s also tied to term of loan, since an increase in time (term) increases lender’s risks of adverse changes in inflation. An applicant for a loan is either within the bounds of acceptable risk of repayment category (principle and interest)or they’re not. If not you can’t get a loan, period.
The down payment is the lender’s hedge on downward changes in value the value of the asset (collateral) of which they’re temporarily taking legal title. The 20% level is a rough estimate of normal downward shifts in property value due to wear & tear, features becoming outdated, and downward shifts in demand for properties in the neighborhood (desirability) or region. These values changes are not in control of the purchaser over time so the lender simply takes this out of the then present value as “down payment” which has no effect on anything unless the loan purchaser defaults and the lender takes permanent possession of title of the asset..
The alternatives to purchasing shelter (besides living with man and dad):
1. Marrying somebody who already owns their shelter
2 Living in your car, boat, “recreational vehicle”, or house trailer
3. Homelessness (living in transient hobo-camps, under bridges, in protected alleys, etc.)
4 Living in hotel rooms
5. Renting shelter
Renting shelter may consist of:
1 Renting a room in somebody else’s home (with bathroom and limited kitchen privileges),
2. Renting a small shelter at somebody else’s residence — add-on rooms,, garage converted to living quarters, or small “nanny” house (aka in-law quarters).
3. Renting a commercially owned apartment
4. Renting a single family dwelling
Aside from renting a room in somebody else’s home, the other renting alternatives have a common base price:
The base price is the sum of:
a) cost of property tax (depending on the assessed value),
b) cost of insurance,
c) costs of maintenance, repairs, & replacements (amortized over time)
d) costs of managing the property, including re-renting on vacancy, evictions, etc.
The sum of the above is lumped into a thing called “Base Expense”
If the landlord owns the property outright, no mortgage, no other loans to own or maintain the property AND has already recovered the total costs of interest on the loans or mortgage and recovered the original principle on the loan,then the only other adder to rental price is the landlord’s subjective opinion of what they want to charge.. from $1/month or any value they chose and for any reason.
However, most landlords have a mortgage or still amortizing the costs of the mortgage to recover interest paid (in excess of that which was recovered by tax advantages).
And since the landlord will, if unrestricted by law, charge an adder equal to what the traffic will bear, then the adder is determined by the competitive market.
The competitive market price is a function of supply, demand, and costs of purchase for equivalent shelter (location, size, amenities), including mortgage repayment plus the Base Expense.
For equivalent shelter, the Base Adder = Market Price / Square foot x square feet less Base Expense.
If demand far outweighs supply in a given location and neighborhood, then increasing supply by adding a few nanny units in back yards or add-ons has no effect on the market price per square foot for units of similar size / amenities.and thus only affects the landlords “profit” or “loss” depending on the landlord’s Base Expense..
If in a given location, there are 20k existing residences, and demand is 10k, then increasing the number of residence by 1000 units won’t reduce market prices by 5% (1/20) prices and in fact may increase them slightly since adding new residences costs new owners / landlords higher mortgage costs, taxes and insurance than the then average same costs for the existing 20k units.
I can attest to rental prices in my town v costs of ownership being pegged to one another within a tiny variance and this has been the case for the last two decades. Prior to that demand was far lower and prices for rentals were considerably less than the cost of equivalent purchase costs.
Whenever my rental property has become vacant (4 times in 35 years), to establish my rental price I have to find the equivalent homes then presently asking rental prices in price/square foot, and make some subjective judgments about neighborhood desirability factors to arrive at my tentative new rental price.
Then I have to find the equivalent costs of purchase including the then going mortgagee interests rates and price/ square foot for various square footages… which establishes the then relation of price / squar foot v square footage.
From that, and the variance of the relation I have to adjust my new tentative rental price up or down to stay near the lower side of the price/square foot variance (e.g. below the mean) since the cost of turnover is an added expense over time and thus it has to figure in the rental price.
When there have been few equivalent rentals available I can adjust my new rental price higher by X, and when there are many rentals available I have to reduce my rental price by X.
For the 4 turnover’s I’ve had I have had multiple serious and highly qualified applicants within the 1st hour of placing an add on Craigslist, and so over the course of a few days (< 5 in all cases) I've been able to be highly selective to whom I decide to rent… my selection basis is who is the most economically qualified, solid jobs with reasonably long durations, clear history of bank statements showing increasing or steady annual income with NO monthly negative monthly balances, clear credit scores but not necessarily near the top. (they're renting after-all for a reason).
It's easy to separate the wheat from the chaff and find serious potential qualified renters simply by telling them up-front on viewing the rental (and in advertising) that I require X upfront security + 1st months with a one year lease. I have no racial or sexual preferences and have rented to gay couples, Blacks, Hispanics and mixed white/other even though the neighborhood is nearly pure Lilly white with average time of ownership of residents in the 20 year range… though that's begun to drop more recently. Neighbors of the rental have loved all my renters, hate to see them leave, and have told me how happy they've been with my selection criteria over time. Likewise my renters have loved the neighborhood and their neighbors.
The net is that you'll find there's almost no difference in rental and housing purchase costs / square foot of ownership.