Seattle Bubble Forum Archive

First, it's not that a HOUSE "should" be 3 x median income, it's the MORTGAGE. I'm not suggesting that everyone brings savings to the table, but it's a reality that as people increase their incomes/family size, they decide to buy a bigger and more expensive house. Commonly, they'll bring along the equity in the previous house.

EXACTLY!

That's been then Achilles heel of the whole median income/median price theory from the beginning: EQUITY.

Desirable areas like Seattle not only have higher wages, but also are drawing a large number of new residents from other high Equity markets, especially California.


Additionally, people who bought into the market early, often with what was then an affordable starter home below the median price, are bringing 100s of thousands of dollars in equity with them when they buy again.

For example, the previous owners of my house bought it for $160K in 97. They sold it for $430K in 2005 and bought a bigger house close by for $550. But I looked up their mortgage, and guess what? They're only paying a mortgage that is $214K! Very affordable for median income folks....and I'm pretty sure they're actually well above median income.

So you can see, the median income/median price theory is totally flawed. There's simply too many people in the market with large amounts of equity. That's why in a market like this you have to work your way up the equity ladder.

In the abstract I agree with you both.

In reality however, people have been pulling equity out of their homes at a massive rate.

Nationally, we have the lowest level of homeowner equity in history.





And this is taking into account that more than a third of those homeowners own their homes free and clear. That means that a vast majority of the remainder must have little or no equity to speak of. When home prices fall an additional 10-30% (or 80% iif Eleua is correct! ), those homeowners, like you and I Mesh, who do have a little equity that hasn't been withdrawn (no HELOCs for you, I assume, right MESH?) will disappear pretty quickly.

Of course I don't have data for the Puget Sound region, so if someone does, give it!

Okay. I agree that making a direct comparison between median income and median home sales price may be an oversimplification with respect to affordability (because of not taking equity from previous home sale into account) and I do understand the equity ladder concept. However, as biliruben mentions, how many homeowners have been using their homes as ATM's? With the national savings rate actually being reported as being negative recently, I have a strong suspicion that many homeowners have no equity at all. This would be an interesting subject to research.

One other point. If everyone is going to be climbing their equity ladder to a million dollar home, what's going to happen when the first time buyer can't buy that starter home because market appreciation has pushed the price up to 10X his/her annual income. Won't the whole scheme get stuck and/or collapse?