Are Americans paying too much for houses ?

[Wiregrass Willie]

Warning ! This post may be very boring !


This is a few thoughts on a subject that is very important to the American economy and to all of us. It is also a very dull subject !

I believe that all the figures used are correct, but I could have transferred them wrong in error.

My interests in this subject are twofold and I seek to find guidence in answering two questions (1) How can I profit and/or protect myself financially and (2) what can I do to help my country avoid a potential disaster ?

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It is my theory that people today are paying far more for a house -- in relation to their income -- than they have in the past 40 years. When I bought my first house in 1972, the mortgage was just over 2.25 (the ratio) times my annual family income. That was considered a fair and safe amount to pay. The smaller the ratio, the safer the loan and the borrower. Today people are paying a much larger ratio. There are many who think there is real estate bubble over-hanging the U.S. economy with an impending crash.

In order for us all to decide if there is a housing bubble, we must first study median family income, the median cost of houses and the sub prime lending practices.

Below, I have four columns. The first is the year, the second is the median price of an American house in that year. The third is the median income for an American family for that year and the fourth is the ratio of income to the house. In other words how may years income the price of that house represents.

The smaller the ratio figure the more easily a family can make the payments on their mortgage. For the sake of simplicity, let us assume a minimum down payment of 10% or less. Those are the families who are most apt to get into trouble.

I could not find a good source for historical median family incomes prior to 1980. I have used the table on this page and I used "current Dollars" for Median income. I figure the top of the second fifth as being about median. That's not exact but I think it will be close.

http://www.census.gov/hhes/www/income/histinc/f01ar.html

The house prices are from :

http://www.realestateabc.com/graphs/natlmedian.htm

Year -- Price of house -- Family income -- Ratio

1968     $20,100             7,300            2.75
1973     $28,900            10,034            2.88
1978     $48,700            14,800            3.29
1983     $70,300            20,271            3.46
1988     $89,300            26,182            3.41
1993     $103,100           30,000            3.43
1998     $128,400           37,692            3.40
2003     $169,500           42,057            4.03

This is for the past year. This looks like a predators ratio.

2006        $225,300               46,207             4.88

http://realestate.netscape.com/story/2006/05/16/median-price-of-us-home-falls-33-percent/

I think this shows that with the price of houses rising quickly in this decade -- but the family income not rising as quickly -- set the stage for the possibility that a lending institution, using predatory practices, could saddle many American families with a much higher debt that they can comfortably handle.

Now the Federal Government is beginning efforts to bail out the lenders - while the victims will be left to shift for themselves. The rest of us will pay much more in inflation to support the governments efforts.

Here are a couple of thoughts to go with the above facts:

Since 1968, the price of a median house has gone up from $20,100 to $225,300. In that same time the median income has gone from $7,300 to $46,207. That means that the house is 11.2 times what it was in 1968. Income has only risen 6.3 times what it was in 1968.

Let me put this in a different perspective. Had houses advanced in
price the same as income, we would have the median house today priced
at $126,630. That sounds much better than $225,300.

And if people who are contemplating buying a home would realize that the house they
buy is inflated by about 44%, they may do well to stand back and let
the bubble burst. It would be cheaper for a young family to rent
for a while and see what happens.

Somebody is losing. And more people could lose as things worsen.

Thanks for your patience,

Willie