Sunday, October 29, 2006

Housing affordability

I found this (old) link while perusing the net. Whatever you do, make sure you look at the figure on slide 14 (Figure 7).

www.demographia.com/dhi-ix2005q3.pdf


Ok, its a pdf (you've been warned). What it does is rack and stack local home affordability to the median income. I *strongly* believe that long term home prices are driven by the median income. What this pdf notes is that Los Angeles has the highest multiple in the world for a large city!

Homes in Los Angles are selling for 11.2 times the median income. This puts it as the poster child of unaffordable locations. Forget having businesses locate here... you won't be able to afford the salaries.

Is Los Angeles becoming a 2nd home destination market. Ok, I would ask why? Its not Florida with Northeastern folk swarming down to avoid the winter. We're not Hawaii with year round perfect surfing. Heck, half of my SCUBA friends have stopped diving California waters as its too cold; they only dive on vacation. I cannot imagine the baby boomers excited about our cold waters... Hmmm...

Now what does slide 14, Figure 7 say? Simple, this market isn't sustainable. If that isn't scary, I don't know what is. No amount of cheerleading is going to sustain... that! Severly unaffordable is a 5.1 multiple or greater, seriously unaffordable is 4.1 to 5.0. Moderately unaffordable is 3.1 to 4.0. Affordable is 3.0 times median wage or less. So we currently have 2/3rds of the markets that are unaffordable about to become affordable. (It was ~55 of 65 markets in 1995 versus 20 of 65 today.)

I've noted before that whenever LA broke through 8.0 times median salary it drops to 6.0. What will be the bottom this time? I'm betting LA will drop down to seriously unaffordable before returning to its normal premium. But how long? How much of that will be wage inflation? How much dropping home prices? We won't know until 2008. Whatever you do, don't buy a home in California, Hawaii, or Florida today!

Neil

4 comments:

Robert said...

Very well written statement. Let see what the furture holds......

Anonymous said...

Excellent work...never see this come out of the NAR..

Melody said...

Thanks for telling me about your blog.

I will be back.

wannabuy said...

Wow, comments! ;)

Seriously, this was a find that rocked my world a bit. I never though LA was the least affordable in the world... it appears we simply don't have the income to justify our prices.

Neil