Thanks for the link. I read the article. The “hourglass” effect they are claiming is based on $45k to $49k bin being 4% instead of 5%. Pretty weak evidence. That kind of variation is noise. What’s evident is that the curve is pretty much as I described: fat tail on left and rapid dropoff on right.
Notice that the bins are spaced 5k apart at the low end and become 10k at 50k, 15k at 60k, 25k at 75k, etc. Obviously that 13% of people making 75k to 100k would look a lot different if it were split into 5 bins of $5k like the lower income brackets. In other words, what they are passing off as a distribution would look a lot less steep at the right end if they kept the bin size constant. I understand why they do that but it makes for a distorted chart. Highly misleading.
The 9% making in excess of $150k probably indicates that the bins should extend out to $500k to better capture the range of incomes. It does not mean 9% make between $150k and $190k.
A 500k house at 6.5% with 20% down requires $2500 for interest and principal. Adding taxes, HOA, insurance and Mello Roos easily brings the total to $3500/month. Assuming 1/3 of annual before tax income would require $126k per year. That’s assuming someone has $100k for the down payment.
Only 14% of San Diegans make enough to afford conventional financing on a median priced house and I’m assuming the median has dropped from $550k (2005) to $500k.
Median priced homes in San Diego are not the kind of place someone making $126k would want to live. Those are more like $800k and up.
50% of households make more that $60k. Let’s use that number.
A $60k household income can afford $20k total house payments per year or $1685 per month. Assuming no tax, HOA or insurance would pay on a $266k loan. Adding in the extras for $500 a month (pretty conservative) would mean the payment on P&I would be $1185. That’s a loan of $187k. Add in the 20% down payment and we have a $220k house price. Again, how many households making $60k have $30k for a down payment? Inspected any $220k houses lately? Let me tell you, they have salvage titles. Don your toxic tux before entering!
Houston, we have a problem. When the loan officers get into panic mode we’re going to see housing prices dive off a cliff. They simply must because wage inflation won’t cover the gap between median price and affordability based on income. Wage inflation was possible in an era of strong labor unions and no Chindia but not now. What we have is rising commodity costs – that’s not the kind of inflation that magically reappears in a US worker’s pocket.
In the meantime there’s all this bad debt going POOF! That’s the sound of money being destroyed and it’s called deflation. Bernanke is a one-trick pony. He’ll attempt to drop rates again but the sad fact is that there’s no new bubble to inflate. As we saw in 2000, the money Greenspan spun into the economy did not go back to the stock market.
Bernanke’s in a real pickle. If he raises short term rates the bond market will think he’s serious about inflation and that will have the paradoxical effect of lowering long term rates. He’d like that since it allows at least some buyers with enough equity to refinance out of ARM’s way. Unfortunately the side effect is that it jacks up the current ARM rates for those who can’t refinance and will exacerbate foreclosures.
If he lowers current rates the bond market could easily freak out and jack up long term rates in anticipation of inflation. That will help current ARM holders to a small degree but will make it more difficult to move to a fixed rate loan.
I have sneaking suspicion that Ben’s not the sharpest blade so he could really be a loose cannon.
A lot of foreign money is financing this bubble and it should be very interesting to see how they respond to the sound of POOF!
Bubble money always ends up in real estate. Where else do you have such a large number of “greater fools?”
