Affordability and Responsible Borrowing

posted on March 2nd, 2009 filed under: Real Estate News

Neither a borrower nor a lender be.

The National Association of Home Builders and Wells Fargo maintain a Housing Opportunity Index that ranks 222 metro areas for affordability based on a comparison of median price to median income.  The data go back to the 1990s, before the boom.

The median price in Miami back then was $100,000, and the median income was about $40,000 — a ratio of about 2.5.  At the peak, the median price had risen to about $300,000, while the median income had risen to about $50,000 — a ratio of 6.  If the ratio now is between 4 and 5, that leaves another 30% to 50% before a return to the pre-boom ratio.

Similar problems characterize the New York metro market.  The NAHB/WF HOI data show that the New York metro now ranks as the least affordable in the nation: 222 of 222.  The median price of $500,000 is a gravity-defying 8 times the median income of $63,000.  Pre-boom, median the ratio was about 3.5, based on a median price of $170,000 and a median income of $47,000.  A return to the pre-boom ratio would require a 55% drop in prices.

Yes, rising median incomes may blunt the extent to which prices actually decline.  But just as price gains moved so much faster than incomes to the upside, price declines will be the prime mover to the downside as well.

See for yourself (MS Excel required):

Print Friendly, PDF & Email

posted by // This entry was posted on Monday, March 2nd, 2009 at 10:22 am and is filed under Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed.

Both comments and pings are currently closed.

Comments are closed.