San Diego Housing Market News and Analysis
Income to Mortgage Ratios in the new Banking System???
User Forum Topic
Submitted by DoJC on February 25, 2008 - 9:04am
I was recently reading that in CA the ratio of household income to mortgage loan was at 12:1 for a while until the tires came off, and they've lowered to 11.1:1 recently. (That's to say that banks would loan a person with $100k in income $1.2M before, and $1.11M recently) These figures leave me with some pretty serious questions:
1. What has been the ratio of any loans you've heard about in the last two months? Any first, second, or third hand accounts of income to loan ratios?
2. What is the ratio banks will allow from now on?
I ask as all this relates to buying a home in CA, how far the prices fall, and when is a good time to buy. For example: if the new ratio is closer to as low as 4:1, or even 6:1, I see some REALLY serious problems coming down the pike for CA. I've printed, and am reading through, the California Budget Project report titled: Locked Out 2008: The Housing Boom and Beyond. In it we find that in Orange County the median income is $70,232, while the median home price is 625k. That comes out to be nearly a 9:1 ratio. San Diego County is also pretty bad off, but slightly better than OC. There we find a median household income of $59,591, and a median home price of $470k. That is a slightly more manageable 8:1 ratio.
So, what does this mean to us? Here’s my take on some potential outcomes:
1. People are going to have to come up with some serious down payments that are large enough to reduce the loan to the proper ratio, or they won’t be able to buy a home.
2. Home prices will have to drop considerably more than they already have. Talks of 25% are a good start, but with a 6:1 ratio any of the more exclusive and/or expensive neighborhoods are suddenly going to go from stagnant in the sales department to something even more glacier/ice age-like
3. Banks, while taking MASSIVE losses due to other bad loans and recent past mistakes, are going to have to take another set of massive risks and start giving loans at much riskier ratios of 10:1, or even 11:1. Not likely due to a certain instinct for self-preservation that will, in a Pavlovian way, cause them to shrink back from risk like a child who just stuck a needle into an electrical socket.
4. Some combination of #1 & #3 – banks will increase their ratios in CA once the home prices stabilize some, and will require at least 10% on all loans with a high ratio, with a push for closer to 20% whenever possible.
Any thoughts on this? Please post general information on ratios if you're uncomfortable using real figures. It would greatly help the flow of info and ideas.
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