Monday, November 2, 2015

My City, America (Seattle, WA): Housing Downside Risk is 45+%?

Imagine a world in which housing prices could never form a bubble-->nothing to worry about. 

Homes required a 20% down payment and fully documented, 30-year fixed loans to make sure each new homeowner did not get him or herself into trouble, if at all possible. Mortgage interest rates were not manipulated by government intervention, and remained neat their long-term (~40 year) average of 8.38% (LINK). In this world, it would be very difficult to create a housing bubble.

Imagine an industry in which financial professionals were there to protect you and ensure, to the best of their ability, that you had a solid plan, one you could count on for your future. One that MINIMIZED the risk of financial loss and tragedy... .

"Example A)  My City, America (Seattle, Washington)
Average house price:   $514,900 (LINK
Average household income: $65,677 yr (LINK)
Loan Term:      30 year, 4.00% fixed (LINK)
Downpayment:  $102,980 (20%)
Homeowners Ins: $840
Prop Taxes: $4800
Car Payment:  $380
Credit Cards: $220
Other: $200
Result:  Typical, end-user, shelter buyer can “afford” a $284k house

DOWNSIDE RISK:  = $336k ($515k – $284k), or 45% loss.
Results Bottom line:   This qualified end-user, fundamental, shelter buyer profiled in the data above, can only “afford” a $284,000 house with 20% down and a mortgage loan. Yet, the average house price is $515k.
The difference between the present average price of $515k and $284k, or $336k (45%), is how far house prices can fall if all of the “unorthodox, unfundamental, incremental demand with unorthodox capital” exited the market like it did in 2008-09.  And I went easy on the car (national average $482 LINK), credit card (national avg $15,191 x 2% = 304 LINK) and other debts.

Also, what if interest rates normalized and were 8.38%, the national long term average from May 1976 to 2015 (LINK)?

Why is it, then, that everyone thinks (again) that "it's different this time"? In fact, it's exactly the same, including the fact that everyone is "absolute and resolute" in their belief that house prices always go up and could never experience another 2007-2010 type crash--not ever again[!].
In short, house prices this far above the average buyer’s qualifications is the exception and not a durable phenomenon... ."


No comments:

Post a Comment