“Disposable income has increased at an average of 6.5%...that’s
a close parallel to the average home price increase of 6.47%!”
Relative affordability
Consider the following:
1. Since 1963, home prices have hovered at about 5.44 times the average per capita (individual) income.
2. Since 1963, a loan of 80% of the median home price would result in an average payment of 41.44% of
the per capital income. This is based on a prevailing 30-year, fixed-rate mortgage for each year. At the
end of 2007, this payment was 33% of individual income.
3. The most recent National Median Sales Price figure is $208,600 (May, 2008).
4. The same 80% of value fixed rate loan payment for this price would represent 31.93% of per capita in-
come, which puts housing affordability near one of the best points over the last four and a half decades.
5. Using this historical income to price ratio as our guide, the current supportable median price could be
$256,061. This is $47,461 or more than 22% higher than where prices are currently.
Bank-Owned Perspective
Why then all the problems? The simple answer is that some people bought homes that they shouldn’t have. The
easy availability of “subprime” lending facilitated this and we are all now paying the price. However, this will
work its way through and we will return to a more normal market.
Housing
Yes, foreclosures are up by over 50%. Don’t let those numbers scare you, however. If two homes in you r neigh-
borhood went into foreclosure last year and the bank took back three this year, that’s a 50% increase. Not long
is not an
ago, you’d have little shortage of people bidding on your house within a week of listing it. That makes for very
OPTION
few defaulted loans as anyone suffering a cash crunch could simply sell their home quite quickly. Comparing
that kind of market to the one we have today will always seem dramatic. The U.S. housing market includes 110
By Brian T. Larrabee
million homes. Worst case projections estimate 2 million will be foreclosed on by the end of this slump. That
Cycles Represent Real Opportunity leaves 108 million families in their homes. Proper perspective is the key to understanding the market.
Let’s put the “real estate crisis” in perspective. Yes, there are problem areas in the housing market today. How-
ever, the notions that homes are unaffordable and prices have outpaced income are neither true, nor responsible
Bottom Line Benefits
journalism. Just because some people bought more home than they could afford and are now losing them does
We all have to live somewhere! Since the after tax cash outlay of ownership is often quite the same as what you
not mean that all houses are out of reach. Think of it this way: Food, Shelter, Clothing – these are the basic ne-
pay to rent a comparable home, we should simply be perfectly comfortable knowing that our home provides
cessities of life. Housing is right in the middle. It is the foundation of survival – and prosperity.
shelter. To enhance the benefit, we also receive that other kind of shelter (tax) and – when owned for convention-
al periods of time – appreciation. Given these factors, the inevitable down cycles should be seen as springboards
“The inevitable down cycles should be seen as
of opportunity for those that look at both history and the probable future to make intelligent decisions.
The reality of home ownership is that while it does require monthly cash outlay, ultimately it returns far more
springboards of opportunity.” than it consumes. As most people will own for more than just a short time, the recent drop in values is but a
60
www.coloradohomeownermag.com
small amount in comparison to the total gains realized over typical ownership periods. Continued on page 62
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