San Diego Housing Bubble News and Analysis

Maybe you should elaborate, judging by my response of 3 and seeing that someone picked 6 and the choices available including less than 1, perhaps I misinterpreted the question.

I interpreted it as how many times gross annual salary related to total amount borrowed 9not purchase price, for example if you gross 100k a year and you take a 300k mortgage, you have mortgaged 3 times your income. But if you were basing it on monthly gross and montly mortgage expense to include variables such as taxes, hoa, etc, the multiple would be different.

Can you help us out on the particulars?

Sorry for the ambiguity, my intent was to survey the former. 100k x 3 = 300k. 3 was the number I felt most comfortable with, and it seems like that's currently the most common answer, but an article I was reading yesterday (I think on the Union Tribune) said most homeowners in San Diego had a mortgage for 6 to 7 times their gross annual salary and that seemed completely nuts to me.

I had the same question as temeculaguy. The problem with that ratio total mortgage-to-income is that it is interest rate sensitive. Example: A mortgage at 5x one's income in a 5% interest rate environment is more afforadable than a mortage at 3x one's income at a 10% interest rate.

At today's rates (6.5-7.5%), Max loan of 4x my income would work for me. Although 3x is an old rule-of-thumb (and is pretty reasonable when interest rates are in the 8-9% range)

I like the DTI metric (specifically monthly PITI relative to monthly income), and assume that 35-40% of income would be the max I am comfortable with (assuming zero other debt payments).

3x gross = monthly PITI of ~35% of net after-tax income (30 yr. fixed at 6%)

5x gross = 55%

6 to 7 times = only feasible with interest-only ARMs, I don't think that's the case for most homeowners.

Maximum comfortable level depends on the situation. If you're making 200K and you have no kids, 5x gross might be affordable. If you have 3 kids to feed and clothe, it's hard to exceed 3x.

3x gross = monthly PITI of ~35% of net after-tax income (30 yr. fixed at 6%)

The survey was gross income not after-tax income.
Loan Qual DTI's are also based on gross income. My comments were based on gross income.

So, 3X gross = monthly PITI of 26% of gross income.
(mortgage at 6%, prop tax at 1.125%, insurance ~ 200 per month).

4X gross would be monthly PITI of about 35% (6% mortgage, prop tax of 1.125%, insurance ~250 per month).

Now if rates were at 10%.
3X gross results in PITI of about 36% of monthly gross.

I agree that anything above 5X income is not sustainable for any reasonable range of interest rates.

I prefer to use the PITI to income ratio too, but I've always compared PITI to gross income. The ratio I'm most comfortable with is about 28% of gross, give or take 2%. Once you get over 30% I think you're asking for trouble.

PITI might have to be changed to PITHI- Principle, Interest, Taxes, HOA, and Insurance. And of course taxes has to include any Mello-Roos.

So for the original poll, I am most comfortable with 3.5 x gross annual income assuming todays interest rates and no HOA or Mello-Roos. I'll respond 3 to the poll.

With a ratio-based index, you might want to add a .5 and 1.5 option in there. I'm a 1.5 but I checked 2.

Gross is not as interesting. Ratio of PITI to net after-tax income is transparent and easy to understand: how much of your paycheck do you have to spend on housing and how much do you have left for food, gas, savings.

An excellent & free calc site for these types of questions can be found at Jack M. Guttentag’s site from the Wharton school:

http://www.mtgprofessor.com/calculatorsO...

Try calculator numbers 5a, 6a, and 9c; his default is 36 percent max income to mortgage ratio… not that I agree this is right for every individual. Realistically, how many families in San Diego can afford a home with this type of ratio?

But I agree that individual factors come into play as another pointed out. Having three young children vs DINKS can significantly alter this percentage – one does not realize just how much income goes toward children not even counting the three 529 plans.

Affordability????

I've been struggling to understand the recent buying spree even with the lower interest rates and tax credits.

If you look at the calculator posted above (link has been updated to: http://www.mtgprofessor.com/A%20-%20Purc...) it kind of surprises me as to who I see doing the purchasing now.

Note: I know the link notes old / higher interest rates in the chart, but you can use the calculator to adjust. If you consider average household income is not all that high (Sandag estimated 66k in 2008) and that trying o find a house in a decent area under 400k is quite challenging, I don't understand the folks that I see rushing to buy SFH's. They are fist-timers who are not in occupations that would take them above the average household income and the ones I've talked to seem to think 20% is way too much to put down.

I know these topics have been discussed ad nauseum, but I just can't seem to get my head around this.

I am well above the average household income, no kids and I still can't find anything that is even semi decent that I can afford. And I am not as smart as many on this board who are ultra conservative with how much they would spend on a home purchase. I just use the standard calcs.

I won't die if I don't buy. It just does not feel like we are close to affordability? I must be missing something pretty basic or way too involved in my own personal situation. :)

The standard calculator is good but the problem is median to median analysis. sandag's median income is taken from all workers, not all home buyers, since just over half the population buys homes it is a skewed stat, even more skewed since many people who are part of the half that own homes, have owned them for many years. What you need to find (and no I have no idea where to find it) is the median income for homebuyers this year. Rich has posted a graph over and over that compares median income to median home price to determine affordability and righ now it is in line with historical standards, at just under 8x median income

http://piggington.com/shambling_towards_...

This doesn't mean that the average homebuyer is buying a home for 8x his income, it's just a historical perspective, comparing apples to apples over time, using two available statistics. Most of the people answering this poll felt borrowing 3x to 4x your gross was safe. If you are single person trying to buy an sfr, that is above the norm so your income will need to be above the norm as well as most buy condos. I'd say 100k for a single, 150k for a couple, is the starting point where home shoppers are today.

Thanks for that. I think you helped me find my major glitch. I can not seem to understand how 8x income is affordable?? When I use the standard calcs, it certainly does not show that I can safely afford 8x. Maybe I am more conservative than I think?

The folks I see that are chasing SFH's are not at 100k. Of course, what I see is not likely to be statistically significant. Just makes me wonder what they are thinking??

While interest rates make the payments manageable, extending the multiplier quickly makes the overall cost unmanageable long term. Any hiccup, such as the last two years, and you see the problem. People go upside down and have no ability to cover the gap if they want or need to move.

No one, with the possible exception of billionares with high cash flow, can really afford 8X income. What those stats mean is that only the highest income earners in SD ever buy houses. A SFR may be 3X Family A's income, but 8X MEDIAN income. WHY? Because they make way more than median income. My guess is that most non-ghetto house buyers are starting about double median income, ~120k. Those making less than that are buying townhouses/condos, or just renting as usual.

I totally agree. I know way too many people who are trying to buy a house right now that cant really afford it when staying 'safe' (3X income.) Buddy of mine just closed on a house in National City, at ~4X income. He is single, has a bunch of debt, shitty credit, and put down nothing. His RE agent had to pay some of the closing costs to get the deal done, cause he has NO, and I mean NO, savings. He doesnt even contribute to his 401k, cause he needs very red cent of his paycheck to stay afloat.
But he had a VA loan, and it was a bank repo, and no one but us tax payers looses if/when he cant afford it.

The charts you're referencing were using per capita income as opposed to household income. Needless to say, household income is significantly higher than per capita income (think household is somewhere around 1.7x per capita income), since per capita income averages are dragged down by young adults living at home and non-working spouses, and the ratios are substantially lower because of that.

I did some spot checking of household incomes for a number of the years, and came up with a ratio of somewhere between 3.75x and 4.5x household income being pretty normal for San Diego.

I've seen the same thing as JC and DWCAP... People in a rush to buy houses at 450k-600k with household incomes well under $100k. And the people I see are not putting more than 5% down and need help with closing costs.

I saw the same thing when I was fresh out of college in the mid-80's. (Yeah, I'm old!) Friends in a rush to buy houses... but back then you had to have at least 10% down - preferably 20% down... and even though prices were lower - so were salaries. I left town at the time because I didn't think I could afford my home town. It took buying in a more affordable area (WA state) then taking that equity to another spot (metro Philly) plus a lot of years of saving - to get to where I felt I could afford San Diego.

Some of the people I know who bought way back - struggled - but then the bubble happened and they were able to refi lots of dollars out. Now they're struggling again.

It comes down to how much debt you're comfortable with. I'm chicken when it comes to debt.

We're one of those couples itching to jump off the fence, and we can "afford" (separate prequals) well beyond what I'm comfortable with. My stubbornness is really starting to frustrate our agent. My own frustration is based on my perception that these supposedly tighter lending standards aren't as tight as we've been led to believe.

Edit to add: There was a story in the LA Times recently about state workers struggling thanks to furloughs. One couple -- both state employees, with a combined income identical to ours -- were able to pay their $3200 mortgage before furloughs made that impossible. I about dropped out of my chair. Here I am, trying to find a house that would carry a PITI equal to but preferably below my 2K rent (after taxes), and this couple somehow could pay $3200? Craziness. Maybe it's having kids, but there are times that I feel house-poor.

http://www.latimes.com/news/local/la-me-...

It MUST be a mistake, typo or whatever. With 70K total HH income you CANNOT afford 3200/mo mortgage. Maybe it was $170K income or 70K EACH - or 2200/mo or something like that which would make more sense.
You are doing the right thing, if your total income is under 100K, you should look at PITI no more than 2000. And yeah, having kids IS expensive.

Maybe, but I doubt two state employees in their positions could earn that much; without looking at the article again, I think they were 30somethings. I e-mailed the writer. He didn't make any corrections in his reply, just a simple "thanks for reading."

UCGAL and DWCAP - thanks for confirming you've seen the odd behavior that I have seen. I know the realtors on this board are great and that they have seen the other extreme -- big dp, Cash, higher incomes, etc., but the people I am seeing are not in that category. My friends and colleagues that are very well off are either renting and not looking or bought long ago and are not looking.

UCGAL -- I think maybe I am chicken too, but thinking that is a good thing. Of course, I will be consistently out bid by the "brave", but.... :)