There seems to be a mentality that, while there is a decrease in home prices happening elsewhere in our Golden State, Livermore "is different" (sound familiar?). We are the 31st most desirable place to live in the nation, according to a recent survey. Our residents have a higher income, and so these housing prices are supported. We "aren't making anymore land" because we've shot down proposals to build outside our urban growth boundary which was created to stop urban sprawl. And we've got great schools, and vineyards with wineries, and a renovated downtown, and a new performing arts center, and a new movie theater, and a National Lab with tons of PhDs, and...the list goes on.
Well, I hate to burst your bubble (haha) people, but the problem is just as real in Livermore as it is over the hill in Mountain House. It may not have manifested quite as dramatically (yet), but even in our fair city there is a disconnect from fundamentals with regard to housing prices which cannot be maintained.
Let's look at the most recent census bureau data and estimates (source was census.gov) for this town I love, shall we? This data applies only to Livermore.
The nice thing about these data sets is that they break things down beyond just the median. From all the great tables available, it is possible to figure out approximately what percentage of households make more or less than a certain amount, or what percentage of homes are valued at above or below a certain amount. This is useful, because we can go beyond the median/median comparison, and really look at who can afford what.
I will look at three years here: 2000 (bubble in its infancy), 2005 (what most people are calling the peak), and 2006 (the most recent data).
Some assumptions were made, and so I state these:
- Affordability calculations assume a 20% down payment is made (so old fashioned!) This leads to affordability being a bit liberal, since most people don't have 20% hanging around.
- Interest rates were pulled from mortgage-x.com from December of the appropriate year using historical stats at mortgage-x.com
- "Affordable" means that the total Principle, Interest, Tax, and Insurance payment is less than or equal to 33% of a household's gross income (FHA maximum)
- Linearity is assumed between data points for the purposes of income and value of homes gleaned from charts. Thus, if a chart indicates that 30% of the homes are between $300,000 and $400,000, an even distribution of homes in that range is assumed.
If you really want to see the excel worksheets, I can send them to you. The analysis yields some interesting numbers:
Year 2000, Livermore, CA
# of Households: 26149
# of housing units: 26550
Owner occupied units: 17759
% of Households owning: 68%
Median Household Income: $75,322
Median Housing Price: $314,600
Median Price/Income ratio: 4.2
Assumed interest rate: 7.5%
Required income to "afford" median home: $78,875
% of households able to afford median home: 47%
Home price affordable by median household: $299,622
% of homes affordable by median household: 46%
House payment on median home: $2,169
Median rent: $1,035
OK, things weren't too bad in 2000. But rents were a relative bargain as well. I remember a few news stories around that time talking about renting sometimes being better financially than buying. Still, the median family could almost afford the median home, and still have a life. And the range of home values matched up with the range of home salaries, evidenced by the fact that median household incomes could afford 46% of the homes out there, and that the median home was affordable for 47% of households.
In 2000, the whole of California had a $46,816 median income and a $241,350 median home price, for a ratio of 5.2. So Livermore actually was a little better off than the rest of the state.
Let's fast forward 5 years to the thick of the bubble!
Year 2005, Livermore, CA# of Households: 29250
# of housing units: 30612
Owner occupied units: 20582
% of Households owning: 70%
Median Household Income: $96,632
Median Housing Price: $504,199
Median Price/Income ratio: 5.2
Assumed interest rate: 6.3%
Required income to afford median home: $112,087
% of households able to afford median home: 43%
Home price affordable by median household: $431,944
% of homes affordable by median household: 33%
House payment on median home: $2,657
Median rent: $1,314
So, things got worse, for certain. Those making the median income found that they had significantly fewer homes to choose from due to rising prices. Of course, this didn't really stop them, since they turned to exotic mortgage products and short term fixes applied by unethical real estate agents and mortgage brokers, but the truth of the matter was that most folks buying homes really couldn't afford them. But could it get worse?
One year later in 2006 (note that there are some discrepancies between the 2005 and 2006 data, but when the error ranges are taken into account, they are not too far out of whack. Since we are dealing with a lot of percentages, I think the calculations are still valid).
Year 2006, Livermore, CA
# of Households: 27287
# of housing units: 28651
Owner occupied units: 19227
% of Households owning: 70%
Median Household Income: $87,321
Median Housing Price: $661,700
Median Price/Income ratio: 7.6
Assumed interest rate: 6.4%
Required income to afford median home: $147,034
% of households able to afford median home: 23%
Home price affordable by median household: $384,995
% of homes affordable by median household: 9%
House payment on median home: $4,043
Median rent: $1,154
Yes indeed, it could. About half of the people who could afford to buy a median home in 2000 no longer could. And, only 9% of the homes out there could be afforded by the median household.
Yes, median prices were driven up by the non-stop building of larger homes, but still...9%! And that assumes a 20% down payment! If we drop that down payment to 5% (still a bit optimistic for 2006 when the Stated Income no-doc loan was king), then we see the percent of households able to afford the median home drop to 12% (from 23%) and the percent of homes which are affordable for the median falls to 6%. Basically, if a family in Livermore purchased a home in 2006 and was making the median income, if they bought anything more than a 2 bedroom/1 bath condo, they were purchasing something they couldn't really afford. But they did so anyway, because real estate always goes up...it is an investment...they were going to be able to sell it in a couple of years for huge gains...and the list goes on.
Yes, we are talking about statistics, and statistics can be manipulated. But it is pretty clear that the affordability of Livermore is much worse than it once was.
Now, comparatively speaking, Livermore is in better shape than the rest of the state. The whole of the state currently has a median home price to median income ratio of more than 10. It makes Livermore's 7.6 look like a good deal...but it really isn't. We've simply got a lot of folks in this town who make a lot of money. And yet, most of them don't really make enough money to afford this market.
The truth is, Livermore is no different than the rest of the state, all told, and we, too, will have to pay the piper when he comes to collect. We, too, will be forced to realize that a house is not so much an investment as it is a place to sleep and put our stuff. And our real estate curve, too, must join the curve that says, historically and over the long term, housing does just a little better than inflation. I can't say whether it will be prices coming down, or prices flattening out and incomes catching up. I think it will be a mixture of the two. But I can say that, even in Livermore, the real estate party is over - the parents came home early, and those who stayed too late are going to wind up paying the price.
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