Median Income

[sdrealtor]

Did anyone else see the article in today’s UT. I dont have time to delve into it fully but the story suggested that incomes do not follow the typical bell curve in SD. According to the recent survey by the US Census, over 1/3rd of SD Households have a HH income of 75K plus. That seems awful top heavy to me. I take this to mean that there is a very small lower middle class in SD and the graph would look more like an hourglass.

Anyone care to hypothesize how this impacts the market?

[Anonymous]

Like many “statistics” this one is close to meaningless. It simply means 2/3rd of households make less than 75K and really doesn’t imply anything about the shape of the distribution. I doubt that the curve is Gaussian because there are a lot of households making way less than 75K. But I also doubt the distribution looks like an hourglass. It probably looks pretty steep on the right side with a long gradual slope on the left.

The income gradient probably correlates well with distance from the beach. No way 1/3rd of the households in Lemon Grove are $75K or above. I assume high and low income households are stretched to the max. Given that, I’d assume the high incomes probably don’t mean much if you’re thinking they can keep housing afloat. Another observation is that $75K only supports about a $250,000 house under historically normal conditions. Those high incomes don’t seem very high compared to the current price of SD housing.

To have any meaning I’d want to know what the mean HH income is for SD and LA. Then I’d want to know the HH income at 1 standard deviation each way. Better yet, I’d like to see the curve. These lame stories that pick a point on a curve with an undisclosed shape to argue some sort of case are suspect to me. Who knows, maybe 1/2 of SD households make $65K. Or maybe they make $35K. All depends on the shape of the distribution.

I’d be very surprised to see a saddle shaped curve. $75K isn’t all that much for a household with two wage earners.

[Carlsbadliving]

Here's the link. 

I'm sure that a large number of the lower-income people in the County recently stretched to buy that first house.  Obviously they don't have the income to support it. 

 In the past we've talked about not enough high paying jobs in the County, well, it appears there aren't even enough mid-paying jobs. 

 

ljr – check the link, they give a breakdown of income, 24% make between 60k and 100k. 

[Anonymous]

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?”

[sdduuuude]

Two thoughts on this:

Since this is household income, and not individual income, perhaps we are seeing the hourglass effect because in some homes, one person works, and in other homes, two people work.

Secondly, perhaps it is the market which is driving the income, rather than the other way around. If a household stretched to buy a home, you have two people in the house working, if a household rents, they have one income.

Those stuck in the middle – those who are tired of renting but do not make enough buy a home – have left.

[sdduuuude]

ljr said “The “hourglass” effect they are claiming is based on $45k to $49k bin being 4% instead of 5%”

I agree. Not much of an hourglass. I just think home prices have driven more families to double up on wage earners, which boosts the household income, though not the average income per person.

[Author]

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