Family incomes and home prices from the 2000 census

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garfangle_IHB

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From my previous post about the OC price premium, some of you are skeptical that home prices will ever fall far enough to make living in Irvine tolerable again. I put together data from the 2000 census (see http://mcdc2.missouri.edu/websas/dp3_2kmenus/us/ZIP_Codes/ZIP926xx.html) comparing the ratio of owner occupied home prices (OOHP) to family incomes (FI) in Irvine. What I found was that as recently as 2000 where we all acknowledge was the start of the real estate bubble the typical family could buy a single family home for about 3.5 times income. The bubble inflated that ratio to 7 according to Money magazine (see http://money.cnn.com/magazines/moneymag/bplive/2007/snapshots/PL0636770.html). The doubling of home prices without a corresponding doubling of incomes in Irvine leads me to believe that home prices must fall sharply to return to the 3.5 ratio.

Not much has changed in seven years from 2000 to 2007 in the economy, environment and culture of Irvine for there to be such a discrepancy whereby median family incomes rise from $87,931 to $101,564, yet median home prices rise from $314,413 to $720,134 (census and Money mag. data, respectively). If we use the OOHP-FI ratio of 3.5, median home prices should be $355,474 in 2007. Therefore, a reduction that normalizes prices again should cut home values in half, leaving many recent buyers massively underwater. Unless the government bails out home owners and their lenders/investors, renters should wait until the 3.5 ratio returns before buying.

Interesting 2000 census data for Irvine (92602, 92604, 92606, 92610, 92612, 92614, 92618, 92620):

The average median OOHP-to-FI ratio was 3.61 (high 4.24 in 92612; low 3.21 in 92610)

The average mean OOHP-to-FI ratio was 3.30 (high 3.81 in 92612; low 2.88 in 92610)

The average median OOHP-to-FI ratio for all of 926xx zip code was 4.04

The average mean OOHP-to-FI ratio for all of 926xx zip code was 3.84

Median Mean

Family Inc. House Val. Ratio Family Inc. House Val. Ratio

92602 $114,632 $377,900 3.30 $133,024 $389,316 2.93

92604 $81,047 $279,300 3.45 $91,539 $300,270 3.28

92606 $85,514 $320,900 3.75 $91,926 $330,581 3.60

92610 $97,660 $313,300 3.21 $110,725 $318,365 2.88

92612 $81,495 $345,400 4.24 $110,313 $419,960 3.81

92614 $86,649 $296,400 3.42 $102,197 $321,809 3.15

92618 $61,500 $237,600 3.86 $79,559 $281,237 3.53

92620 $94,950 $344,500 3.63 $113,193 $369,473 3.26

Ave. $87,931 $314,413 3.61 $104,060 $341,376 3.30

926xx $78,355 $316,200 4.04 $101,679 $389,991 3.84
 
Gar,

If most of the home owners bought in 2000, then the increase in House Values makes no difference. Interest rate dropped at least 25% in 2003, making payments even lower.

I suspect most Irvine home owners are not first time.
 
I’ve been criticized for constantly arguing with everyone. That has some truth to it, but is not meant that way.

As I said, I too, am trying to make sense of the fundamentals.

If I am convinced of where the market will land, I might very well sell – and buy back-in later. Even at a loss, I would still come out ahead. I am not married to any particular outcome.

The census statistics are very interesting. Having said that, I think you can spin statistics anyway you want.

(I have been intrigued by IR’s post about rental valuations – and believe it has some merit.)

In light of that, let’s look at my former neighborhood of Turtle Rock (from the 2000 census):

It said 67.1% of renters paid “$1,000 or more”. (Drop the “more” part, we’ll use $1,000.)

If using a traditional rent multiplier of 160, those homes should have been worth $160,000.

However, we can see that 59.2% of those homes had values “over $300,000”.

All I’m saying is that the 160 multiplier was not in effect even before the latest run-up – at least not there.

You could make the argument that rents, too, are way overpriced. If that’s the case, you will see an equally deep correction of rents.

(By the way, in another post I gave some of my rental experiences - and even though those rents supported psf prices higher than $180, they were no where near what the homes were going for (closer to $444-517 psf). So please don’t misinterpret my comments as justification for those prices.)

If I rented my current home at a bargain price, my rent multiplier would be 220. Using the 160 multiplier would mean a price reduction of 27% in my home. This is not a staggering amount of overvaluation, as I so often hear.
 
price-to-income-ratio.jpg
 
"If I rented my current home at a bargain price, my rent multiplier would be 220. Using the 160 multiplier would mean a price reduction of 27% in my home. This is not a staggering amount of overvaluation, as I so often hear."

The gross rent multipliers I am seeing in the market lately are around 250. They were at or near 300 at the peak. My current rental was for sale when I moved in with a GRM of 314.

Also, a price reduction of 27% means your house is almost 50% overvalued. Percentages are funny that way. A 50% reduction means a house is 100% overvalued.

Of course, if interest rates go up, the GRM number will go down.

ihb-post-interest-rate-table.jpg
 
"You could make the argument that rents, too, are way overpriced. If that’s the case, you will see an equally deep correction of rents."

I don't think this will happen. You have to pay rent out of real income (not the imaginary Alt-A variety), and rents are not subject to exotic financing arrangements. Although, I do think we will see a leveling of rents as more rentals enter the market and peoples income suffer due to the economic upheaval caused by the deflating real estate bubble.
 
Sorry, I was aware it was a 50% overvaluation, just didn't put it that way.

I've heard some people say we were overvalued by 200-300%
 
IR,

Does the median home rent for $2,250? That strikes me low, but I don't doubt it can be had.

Your chart showing the 15% reduction at the 8% rate, is playing out as we speak - I don't think anyone is arguing with it.

Where do you see a gross rent multiplier bottoming out?
 
"Does the median home rent for $2,250? That strikes me low, but I don't doubt it can be had."

I suppose this depends on how you would describe a median property. You can't find much that is detached for that rate, but most of Irvine is attached. You can get a small 3/2 or a large 2/2 for $2,250. It can be argued that the median property rents for a bit higher.

The actual median rent is around $1,700, but this would not represent a median property.

Where do you see a gross rent multiplier bottoming out?

I have been using the 160 number to be conservative. I could easily see this number dropping below 150 or lower if interest rates move much higher. Also, the market may move below the owner/occupant threshold if there are more foreclosures than owner/occupants can absorb.
 
I'm gone for one day and not one IHBer would step in and adjust for inflation?

The HH median income in Irvine in 1999/2000 census info was $72,057. Adjusting for the socal CPI inflation data of 26.7% that income would be worth $91,296 in 2006 but the census 2006 number is $84,270 down -7.7% from the 2000 survey. Taking the socal inflation number to the median home price in 2000 of $316,800 would mean it should be worth $401,400 in 2006. However the median home price in 2006 was more like $715,000 75% more than inflation.

So that is perfectly normal right? Income shrinking while home prices continue to go up makes perfect sense.

If the same inflation rate continues in 2012 the median price should be $486k which would equate to a 32% nominal drop or a 56% real drop.
 
It'd be great if we can get statistics on median income of new home buyers in Irvine by year, and not the overall city. But I have no idea where to go for that information.

Home price from 2000 was at least 50% cheaper than today, and the people who could afford to buy back then didn't need large incomes or liar loans. The demographics of those who bought in 2004-2006 has to be very different from those who bought in 1998-2000.
 
momopi,

I don't know about that.

That would be like saying the demographic in some of the really bad neighborhoods changed because those house were half a million.

I watched flip this/that house the other night someone was trying to flip a 900sqft house in pico rivera (I think). They bought at 365 I or so. It was 2 bedroom and a train track was two houses down and evidently the planes flew right over head.

When they bought the flip, and were finished they were hoping to get in the high 400s or low 500s. Houses in Compton were in the 400-500k range. Santa Ana housing was as high as 700k.

The Condo's my mom ran from 20 years ago because of not so good elements are now selling for 750k. I visited to show my kids where I lived they wanted to roll the windows up and stay in the car.

Although we focus on Irvine it was almost the entire market in California.

The demographics of all of So Cal did not change over the last 6-7 years.

I know quite a few people that bought in Irvine and they don't make 250k a year which would probably put them at at least a 50% DTI.
 
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