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Pop becoming Bang

2007-07-25 15:41:51.306134+00 by Dan Lyke 2 comments

Charlene and I were further poking around assorted places yesterday. We popped up the Wikipedia page for Davis, California and saw that as of the 2000 census, the median household income was $42,454. So account for inflation and that's less than $54k now, and yet we pop through to some of the real estate pages and everything in the town is at $500k+.

This morning I read that foreclosures in the Bay Area have hit a 20 year high, and Medley pointed to this blog entry on a conference call with Countrywide Financial Chief Executive Angelo Mozilo.

... Stated that the "definition of prime may not be as high as some people think.

Given current interest rates, a household income of 50k/year should be able to support roughly $150k in mortgage if you use a reasonable number like 25% to 30% of gross income for PITI (Principle, Interest, Taxes and Insurance) on a 30 year fixed. Anything more than 30% and you're starting to play games with buffers, at 50% of gross people aren't likely to have reserves that would let them weather unexpected financial events.

So, yeah, the real estate crash isn't going to be limited to just the "sub prime" markets, there are a lot of people playing the game foolishly.

Speaking of which, Marin Real Estate Bubble pulls up some cute numbers from 1994 and 1995.

[ related topics: Bay Area Economics Real Estate ]

comments in ascending chronological order (reverse):

#Comment Re: made: 2007-07-25 16:34:42.679736+00 by: ebradway

The income vs. mortgage ratio has been my biggest concern with the housing bubble. Payments on really big mortgages are just insane for people making below $250K/year. When I bought my first house, interest rates were a little higher and, through FHA, I was able to qualify at 42% of my income. That meant, making $36K/year, I barely qualified for a $65K mortgage.

So let's double those numbers... Assume I make $72K/year now - I should qualify, barely, for a $130K mortgage. Double it again - and I make $144K/year and should qualify for a $260K mortgage.

In Boulder County, housing prices are a little better than Marin and jobs pay reasonably well. I could easily bring in the $72K figure but would have to make a pact with Satan to swing the $144K figure. Of course, I could swing a middling $100K and have my wife pull in a similar figure. Then, compensating for better interest rates, we'd be able to swing a $250K or so mortgage.

But there ain't much around here for $250K. Most new construction in Boulder County is on the order of $600K.

A telling fact is that the City of Boulder has several programs to help "low and moderate income" households buy homes. They define "low income" as under $47K for a single person and "middle income" as under $72K.

#Comment Re: made: 2007-07-25 20:24:37.754208+00 by: BC

Mozilo was also furiously cashing in stock options prior to the latest earnings release.

"Filings showed that he [Mozilo] typically netted about $4 million a week on his options sales since December. In the two weeks ahead of yesterday's earnings news, Mozilo had cashed in 442,000 options for a profit of $11.09 million, including a $1.7 million gain on 70,000 options he redeemed on the eve of the earnings release.

His windfall exceeds the $72.2 million gain he made on options in the entire year of 2006. The latest proxy in June said Mozilo held about 8.2 million options that he could redeem for as little as $9.60 a share."

Clearly, Mozilo would not be doing this if a turnaround was expected any time soon. We have only seen the beginning of this collapse. 2010 might be a good time to start looking for a fairly priced new home.