100k Income in a 800k House

the family economy | Metafilter references an article in the Washington Monthly discussing whether or not we’re in a housing bubble right now.

bq. Truth is, in most of the country there’s no housing bubble. Perhaps the crucial ratio from which economists determine whether housing markets are out of whack is the ratio of home prices to annual income. In most of the country, it is modest, 2.4:1 in Wisconsin, 2.2:1 in Kentucky, 2.9:1 in Illinois. Only in about 20 metro areas, mostly located in eight states, does the relationship of home price to income defy logic. The bad news is that those areas contain roughly half the housing wealth of the country. In California, the price of a home stands at 8.3 times the annual family income of its occupants; in Massachusetts, the ratio is 5.9:1; in Hawaii, a stunning, 10.1:1. To some extent, there are sound and basic economic reasons for this anomaly: supply and demand. Salaries in these areas have been going up faster than in the nation as a whole. The other is supply: These metro areas are “built out,” with zoning ordinances that limit the ability of developers to add new homes. But at some point, incomes simply can’t sustain the prices. That point has now been reached. In California, a middle-class family with two earners each making $50,000 a year now owns, on average, an $830,000 home. In the late 80s, the last time these eight states saw price-to-income ratios this high, the real estate market collapsed.

Being in the process of shopping around and looking at houses, I can say that the housing market is quite a hot place to be. Properties list for weeks, or even days, and each new listing seems to sell for more than the last.

One of the reasons for this upswing may be the increased influence of government backed mortgages, which have lessened the pressure of banks to carefully monitor total housing prices and borrowers likelihood of repayment.

bq. in 1989, Congress instituted some modest-seeming technical changes that made Freddie and Fannie much more attractive to investors, and able to draw much more capital. Under the new rules, for instance, they were allowed to customize securities at different levels of risk and return to meet more precisely the demands of different sectors of the capital market. Then, too, bank regulators let pension funds and mutual funds class Fannie’s debt as low-risk. As a consequence, during the 1990s, investors practically threw money at Fannie Mae and Freddie Mac, which became enormously, steadily profitable. The GSEs used the new capital to buy up every mortgage they could, and banks were only too happy to sell off the mortgage paper. The price cap on the mortgages Fannie and Freddie could insure was raised. As a result of all these changes, Fannie and Freddie went from buying mostly mortgages for low-end homes to those of the middle- and upper-middle class. And the share of the nation’s conventional mortgage debt which they insure has swelled, to more than 70 percent today, double its share in 1990.

Trillion dollar balances held by equity firms always start to make me antsy. Probably because of the governments “too large to fail” ideas, it seems that the larger enterprises get, the more likely they are to experience excessive risk or corruption.

bq. The goal of most of the debate in Congress has so far been how to ensure the GSEs financial viability; there has been very little talk about how to reduce their role in the housing markets. That job fell to Greenspan: Finally, on Feb. 24, testifying before the Senate Banking Committee, he came clean about the risks of the housing market, in a speech reminiscent of his 1996 warning about “irrational exuberance” in the stock market. In his familiar, glum posture, his bald head slouching low over the table, he warned that the GSEs weren’t just unstable, but also posed a “systemic risk” to the economy of the United States. He suggested debt caps, to reduce Fannie and Freddie’s role in the market, and urged stricter regulation. The chairman’s proposals were both brave and right, the best plan for resolving the structural problems with GSEs that’s been put forward yet. But given the political situation, his reforms won’t be enacted anytime soon. The day after his testimony, his suggestions were brushed off by everyone from Fannie and Freddie’s chief executives to Republicans and Democrats on the Hill. Oh, it’s just Greenspan.

Losing stock can shock people’s confidences and destroy their savings. For the most part however, investments represent excess income saved away. If people become overcommited in their home, what then? How much bigger would the shock of large numbers of home foreclosures be on the American economy?

This increasing disparity between home cost and income, combined with an increasing willingness to dip into home equity, and increased likelyhood of family’s now dependent on 2 incomes experiencing the loss (even if temporary) of one of those incomes is a scary trend.