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Home Price to Income Ratio

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Re: Home Price to Income Ratio

#431

Post by dfee »

llbeansandrice wrote: post #372
nly wrote: post #365

Earlier quoted context omitted.

Interest rates are irrelevant when you can only borrow 4.5x income but home prices are at 8-9x Interest rates are irrelevant when you need 20% down and it will take you a decade to save that up while renting, because of said multiple.

Why do people think you need 20% down? You don't need 20% down on a mortgage. There are first-time home buyer loans where you can put down as little as 0% and for conventional loans you just have to buy personal mortgage insurance if you're below 20% down. This is such a weird home buying myth and I don't understand how it sticks around.

Is this true everywhere? Not that I think it’s a great idea to buy in the Bay Area, but a $3M 1800sq foot home for a family of 3 who works from home in a good school district… is that really available with 0% down?

Re: Home Price to Income Ratio

#432

Post by woobar »

somehnacct3757 wrote: post #342
game_the0ry wrote: post #284

A more relevant metric to consider - monthly mortgage payment to monthly income ratio. Average interest rates in 2007 were 6.34% vs ~2.80% today. [1] * 6.34% / $2,000 monthly payment / 20% down (~$65k) >> $328,319 price of home * 2.80% / $2,000 monthly payment / 20% down (~$98k) >> $489,794 price of home Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. When…

If you focus on mortgage payment instead of home price, you also need to take mortgage term length into account for a generational study. 30 year mortgages only came about in the 1950's. Before then the choices were typically 15 and 20 years.

And in Europe they have 100 year mortgages. US still have plenty of options to make monthly payments affordable.

Re: Home Price to Income Ratio

#433

Post by bko »

joppy wrote: post #393
game_the0ry wrote: post #284

A more relevant metric to consider - monthly mortgage payment to monthly income ratio. Average interest rates in 2007 were 6.34% vs ~2.80% today. [1] * 6.34% / $2,000 monthly payment / 20% down (~$65k) >> $328,319 price of home * 2.80% / $2,000 monthly payment / 20% down (~$98k) >> $489,794 price of home Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. When…

Whatever the case, what you end up with is an asset whose actual value is tied to the interest rate (interest goes down, people can afford larger loans with the same repayments, therefore houses are worth more). This is a highly leveraged situation: if you take out a $1m loan and then interest rates go up, you're still liable for the whole $1m even though your actual asset might only be worth $900k now. I think this…

> if you take out a $1m loan and then interest rates go up, you're still liable for the whole $1m even though your actual asset might only be worth $900k now. I think this is one of the big dangers of having an essential need like housing cost such a large multiple of income.

You could always walk away. Better to be under water on a mortgage than own it outright. This is called a strategic default. Lenders know this which is why they require a substantial down payment (typically 20% in the US)

Most people wouldn't do it if they're slightly under water. But eventually many people would consider walking away and taking a hit on their credit score, which get totally wiped out after 7 years anyway.

Re: Home Price to Income Ratio

#434

Post by woofie11 »

joppy wrote: post #393
game_the0ry wrote: post #284

A more relevant metric to consider - monthly mortgage payment to monthly income ratio. Average interest rates in 2007 were 6.34% vs ~2.80% today. [1] * 6.34% / $2,000 monthly payment / 20% down (~$65k) >> $328,319 price of home * 2.80% / $2,000 monthly payment / 20% down (~$98k) >> $489,794 price of home Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. When…

Whatever the case, what you end up with is an asset whose actual value is tied to the interest rate (interest goes down, people can afford larger loans with the same repayments, therefore houses are worth more). This is a highly leveraged situation: if you take out a $1m loan and then interest rates go up, you're still liable for the whole $1m even though your actual asset might only be worth $900k now. I think this…

Kinda. If I buy a 1M home at 2.5% interest, I have a $4,000 monthly payment. If rates go to 6%:

- Housing prices plummet to $600,000, assuming people are willing to spend the same per month.

- My monthly payments are identical to had I bought at $600k at 6%. If I stay there, I'm not much worse off. It's harder to pay off the home quickly.

- If I move out, and I rent out my home, it covers monthly payments approximately exactly.

The only time the owner is in danger is if:

1) They need to move.

2) They can't rent out the original property.

Rent works out since while the home is a liability, with 6% interest rates, the 2.5% loan is an asset.

As a footnote, what I expect is actually happening here is people are anticipating high inflation. If that happens, this isn't a bubble. Real housing prices might be fixed, at least looking out a few years.

Re: Home Price to Income Ratio

#435

Post by jjnoakes »

zepto wrote: post #426
joppy wrote: post #393

Earlier quoted context omitted.

Whatever the case, what you end up with is an asset whose actual value is tied to the interest rate (interest goes down, people can afford larger loans with the same repayments, therefore houses are worth more). This is a highly leveraged situation: if you take out a $1m loan and then interest rates go up, you're still liable for the whole $1m even though your actual asset might only be worth $900k now. I think this…

Not if you get a fixed rate.

I think you misunderstood the parent comment.

Even with a fixed interest rate, you still owe the entirety of your borrowed amount on the $1m purchase to the lender, but your property value may drop if the interest rates go up because, assuming the market value is tied to the interest rate, new buyers won't be able or willing to borrow $1m to buy your place at a rate higher than what you borrowed your $1m at. For the same monthly payment as you have now, a new buyer may only be able to borrow enough to afford a $900k home.

Someone with the same income and monthly expense limit as you wouldn't be able to afford your home, assuming rates went up, which is why the value might drop - fewer buyers.

Re: Home Price to Income Ratio

#436

Post by resonantjacket5 »

giantg2 wrote: post #411
resonantjacket5 wrote: post #373

Earlier quoted context omitted.

> Just allowing more houses to be built doesn't solve it entirely. For example, labor will be more expensive in HCOL areas. Labor increased cost is really nothing compared to the zoning barring new construction. If labor was truly the barrier then when upzoned no construction would take place. Additionally a large reason why labor is so expensive is from the constrained housing in the first place -- again stemming fr…

"Zoning is regulation." Business regulation. "If labor was truly the barrier then when upzoned no construction would take place." Not a barrier, but a factor. You seem to be misunderstanding me. It's not that it can't be done in the populated area, but that it's better done in areas not already in a precarious situation. "Additionally a large reason why labor is so expensive is from the constrained housing in the fir…

"Zoning is regulation." > Business regulation.

Are you really not aware that when people are mentioning Texas' easy regulation many times they are literally often talking about zoning?

> You seem to be misunderstanding me. It's not that it can't be done in the populated area, but that it's better done in areas not already in a precarious situation.

No I completely understand you, and find the "too many dense already" line of logic ludicrous. Most of these American cities have zoned over 80% of their land at one story buildings only. American cities are already at the lowest density compared to European or other countries density. They can accommodate plenty of housing fine.

> So we have circular logic here. If the labor is expensive, you aren't going to make it cheaper (at least short term) by building more houses because the labor cost to build those houses will still be high.

No there is no circular logic here. As I already noted the larger burden of the cost of housing comes from zoning restricting the amount of buildable land. And yes you will need to build lots of housing -- thats what happens one restricts building housing for decades.

Re: Home Price to Income Ratio

#437

Post by eropple »

dfee wrote: post #431
llbeansandrice wrote: post #372

Earlier quoted context omitted.

Why do people think you need 20% down? You don't need 20% down on a mortgage. There are first-time home buyer loans where you can put down as little as 0% and for conventional loans you just have to buy personal mortgage insurance if you're below 20% down. This is such a weird home buying myth and I don't understand how it sticks around.

Is this true everywhere? Not that I think it’s a great idea to buy in the Bay Area, but a $3M 1800sq foot home for a family of 3 who works from home in a good school district… is that really available with 0% down?

Bay Area homes often don't qualify for FHA stuff due to price.

Other major metropolitan areas do OK, though. I put 5% down on my first house just outside of Boston and 10% at my current home (voluntarily, my mortgage broker asked for 6.5%).

Re: Home Price to Income Ratio

#438

Post by RayVR »

bko wrote: post #433
joppy wrote: post #393

Earlier quoted context omitted.

Whatever the case, what you end up with is an asset whose actual value is tied to the interest rate (interest goes down, people can afford larger loans with the same repayments, therefore houses are worth more). This is a highly leveraged situation: if you take out a $1m loan and then interest rates go up, you're still liable for the whole $1m even though your actual asset might only be worth $900k now. I think this…

> if you take out a $1m loan and then interest rates go up, you're still liable for the whole $1m even though your actual asset might only be worth $900k now. I think this is one of the big dangers of having an essential need like housing cost such a large multiple of income. You could always walk away. Better to be under water on a mortgage than own it outright. This is called a strategic default. Lenders know this…

This is only true in states with non-recourse loans. Many states have full recourse home loans that would require the homeowners declare bankruptcy to "walk away"

Re: Home Price to Income Ratio

#439

Post by bink »

hourislate wrote: post #390
heavyset_go wrote: post #371

Earlier quoted context omitted.

If anyone in the US thinks "housing costs can't keep rising, the market will correct itself", then just look at Canada. The average sale price of a home in the US is roughly $375k. In Canada, it is about $700k, and property values continue to rise.

I guarantee that housing in Toronto will continue to climb at 10%-15 % per year. Housing is the only thing keeping the Canadian economy afloat. The BoC has no choice anymore, they will pay your mortgage if necessary. I dare them to raise rates to just 5%, there will be a collapse that will leave half the country in the streets. If you can afford to buy, buy with both hands. You will double your money in the next 5 ye…

I know you weren't saying this at all but that first sentence is dangerously close to "we've reached a permanently high plateau".

https://en.wikipedia.org/wiki/Irving_Fisher

Re: Home Price to Income Ratio

#440

Post by joe_the_user »

quantumBerry wrote: post #412
mikeryan wrote: post #408

Earlier quoted context omitted.

Raw land in most denser US urban areas is not cheap. There’s also huge incentives to build additional units. I’m Berkeley where I live it’s becoming more common to see developers buy a run down single family home and raze it and the city will allow you to build a 3 or 4 unit townhome in the space. Much of this forced by state laws, particularly if a unit or two is reserved for low income families.

The cheapest land on which you could build a yurt or small cabin (illegally) in Berkeley I found on realtor is 60k (it is pending sale). The cheapest house is well north of 200k. You could build your own yurt or cabin for only 10 grand. You're joking yourself if that isn't very cheap by comparison. [1] https://www.realtor.com/realestateandhomes-detail/55-Panoram...

If you are talking of hypotheticals, there are a substantial number of ex-hippies who'd let ten people set up ten yurts in the back/unused parts of their property. Which is to say that you are correct that zoning is a force that keeps the cost of housing high.
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