Housing bubble

April 25, 2004

I’ve been bitching about housing prices in the Bay Area, but it irks me to read pieces that make things out to be even worse than they are. A recent article in Washington Monthly — a periodical I’d never heard of until they got Calpundit to blog for them — particularly raised my suspicions. It claimed that the average ratio of home prices to annual income in California has risen to a whopping 8.3. The money quote was: “In California, a middle-class family with two earners each making $50,000 a year now owns, on average, an $830,000 home.” The author of the article makes no statements about where he got these numbers, nor does he use his terms particularly carefully. So I set out to fact-check his astonishing claim.

California absolutely does suffer from a housing affordability crisis. The California Association of Realtors keeps tabs on the percentage of households that enjoy an income high enough to purchase a median-priced home, and that number is now at only 24% statewide. However, note that this crisis is not about spendthrifty Californians wildly outspending their means to live in McMansions — it’s about middle-class purchasers being entirely priced out of the market. The CAR money quote: “The minimum household income needed to purchase a median-priced home at $394,300 in California in February was $91,690”. Since the statewide median income for a 4-person family is now $63,761 (according to the Census Bureau), that yields a ratio of 6.2 statewide for a median home — pretty awful, but still not 8.3 times income.

If you look at the numbers from Santa Clara county, the heart of Silicon Valley, you see again that this 8.3 ratio is unlikely to be the average even here in the epicenter of the bubble. The county’s annual youth-issues report from 2003 [PDF], which somewhat unaccountably uses statistics from 1999, gives the median household income as $81,717. HUD’s Median Income Survey, which is widely used by government and nonprofit agencies, gives a figure of $105,500. The Santa Clara County Real Estate Report’s annual report claims that the median price of a single-family home in 2003 was $550K (that’s leaving out condo sales, for which the median was $350K). That gives us a house price to income ratio of 5.2 for a median-income family buying a median-priced single-family home. And believe me, there are lots of people making $105,500 in the Bay Area who aren’t even THINKING about buying a house much less overspending wildly on one — in fact, California has one of the lowest home-ownership percentages in the country.

So there you go — the real facts, live from the epicenter of the housing bubble. Yes, housing prices are out of pocket in the Bay Area. Yes, it sucks to be poor or even middle-class here. Yes, I even know at least one person who did buy a house for something like 8.3 times annual income. But is the housing bubble going to suddenly burst and take down the entire national economy with it? Even Calpundit pointed out recently that housing bubbles are usually not that disastrous. So maybe we could lose the FUD disguised as concern, Washington Monthly — there’s plenty of stuff going wrong with the world today without making any up.

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