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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: MulhollandDrive who wrote (1290)	1/1/2002 3:44:39 PM
From: GraceZ	Read Replies (2) \| Respond to of 306849

We sort of touched on it earlier on the thread but the real problem with using median and average to figure out if housing is "affordable" comes from the way the median and average don't show the distribution of price. What you really need is a scatter or bar graph that charts the distribution of incomes levels to house prices to see if the majority of people living in an area can afford to buy the majority of homes. As I said earlier in the thread Northern California is an example of people using assets other than income stream to buy their homes. In many markets what happens is the middle, where the median price lays is actually quite empty. This is why you can have people complaining that there is no affordable housing for them. They complain of this in Baltimore all the time and this is a city where you can buy an existing single family home for under $50,000 quite easily. What you can't buy is a new single family home for that price or one that is in the more desirable neighborhoods. The builders tend to want to concentrate on the more expensive end of the market because that is where the maximum profit is for them. So what you have is a bunch of people who can't afford the homes that they want and don't want the homes they can afford. This tends to stagnate the prices on the low end and raise the rate of appreciation in the more desirable areas. This skews the median and the average. It also makes it very difficult to jump from a low end home to a high end one without some significant change in your financial situation because you can't build equity in the low end home faster than the high end is appreciating. California is an example of this happening on a wide scale, but even so, there are many areas in California which are actually quite remote and prices are more consistent with the rest of the country. Whenever I have a real estate discussion with several friends of mine who live in Marin County the conversation always winds up being pretty comical (for me). I had many of these conversations primarily because I had several sets of friends who lived there who wanted to buy houses for years who constantly felt as though it was an impossible goal for them because their incomes and assets were more consistent with the rest of the country and not with a wealthy area like Marin. They'd say there was no way they could buy a house. I'd say, of course they could buy a house just not there in Marin. I'd point up where prices were in my area, Northern Baltimore County. They would express surprise and anger at the differences in what $300,000 would buy in the two places. Then they would try to get me to explain why there was such a difference. The conclusion they always seemed to come to was that where I lived wasn't as good as where they wanted to live, that there must be something wrong with it if there was such a difference. At this point I would just smile because its pointless to try to explain that everything comes with a trade-off. I remember one of those friends coming to visit me soon after I bought my current home. We were talking about home prices, he knew what we'd paid. We were sitting out in the yard on a beautiful summer afternoon. He kept looking around and had this uncomfortable look on his face. I asked him what was up and he said, "I keep trying to figure out what's wrong with this place and I can't figure it out." Pricing is a local phenomenon and it can diverge for years from the national average. I used to do a lot of work with a national home builder that does a lot of building in both the Maryland and California markets. You could have essentially the same model (with cosmetic differences) selling for 100's of thousands more in California than here and you couldn't account for all the difference in the land value, labor or costs added by environmental regulations and local fees (which in California can be quite onerous). Unfortunately Maryland, especially where I live, is starting to close that gap. Good news if you already own property, bad news if you are looking to finally buy some.

To: MulhollandDrive who wrote (1290)	1/1/2002 11:53:27 PM
From: endless	Respond to of 306849

One important point to consider in the affordability discussion about averages and economic impact. California is the most populous state in the US. The affordability rate for the areas of LA & Southern California (12 million) are around 33%, San Franciso area affordability is 16%. These are the big cites, who cares if affordability is 50% in Bakersfield or Modesto. Not that many people live there. High fixed cost of housing is going to slow down the consumer and the economy. ..btw, I am very happy for the people in Bakersfield or Modesto..:)