The California Association of Realtors (CAR) has released their 2006 State of the Housing Market Report. Much of it reads like old news. "sales are down," "affordability is low," "price appreciation slows." I feel like I have been reading this online and in the papers since last summer. But this is a report on the 2006 summary, and comparing the numbers to 2005 and years prior. At the bottom they provide a litany of numbers that I thought was fascinating.
Some of the most interesting stats were:
- The proportion of first-time buyers who purchased a single-family home increased slightly from 61 percent in 2005 to 65 percent in 2006, but still remained significantly below the 72 percent recorded in 2004.
- The median down payment declined 8.8 percent from $80,000 in 2005 to $73,000 in 2006, despite an increase in the median home price. This was the first time since 1995 that the median down payment dropped.
- The median down payment for first-time buyers decreased from $25,000 in 2005 to $10,000 in 2006, while the median down payment for repeat buyers decreased from $119,000 to $100,000.
- The median loan amount for first mortgages continued to increase in 2006 along with rising home prices, climbing 8.2 percent from $384,000 to $415,500 among all buyers.
- The median first mortgage amount for first-time buyers increased 6.8 percent from $347,800 to $371,600, while the median first mortgage amount for repeat buyers increased 8.1 percent from $400,000 to $432,500.
- The typical first-time buyer had a median age of 35, earned an annual household income of $80,000, and purchased a home with a historically high median price of $450,000.
- The typical repeat buyer had a median age of 45, earned an annual household income of $120,000, and purchased a home with a historically high median price of $618,000.
Let me break down those numbers into more real life type of examples.
Let's examine the median first time buyer. Let's call him Robert First.
Robert is 35, married, with a household income of $80,000. By most standards, he's doing pretty well. In 2006, he decided that it is time to buy a house. Recognizing that the condo and townhouse market has been flooded with new developments, Robert makes a wise decision to buy a single-family house.
Feeling fortunate that he is not in Los Angeles or San Francisco, Robert finds an average single family house in his neighborhood for $450,000. As Robert get together some funds for his down payment, he finds that he has about $10,000 that he is comfortable putting down. "Oh, you're going to put a down payment?" his surprised realtor asks, accustomed to many of his first time buyers (40.9% of them to be precise) buying with zero money down.
We're not sure how Robert got to 35 with an income of $80,000 and only has $10,000 available for his down payment. But, hey, the cost of living in California is high, right?
He takes out a first mortgage for $371,600. A year ago he would have taken out an Adjustable Rate Mortgage, but he kept hearing about the Fed raising rates seventeen times, so he wisely took out a 30 year fixed mortgage. This means that he has to take out a Home Equity Loan (2nd mortgage) in order to come up with the remaining $68,400. What does his budget look like?
The first mortgage is a 30 year fixed with a rate of 5.75%. His principal and interest payments will be $2,168.56. His second mortgage will be a 15 year fixed at 8.00%. His principal and interest payments will be $653.67.
Well, with Robert's household income of $80,000, he makes a monthly gross of $6,666.67. Sounds like he can afford, right? Well, let's see. $2,168.56+$653.67 = $2,822.23 in monthly mortgage payments. Remember this does not include taxes, insurance and maintenance. The Financial Planning Boards standards say that housing costs should be kept within 28% of gross income. What is Robert's ratio, you ask? It's 42.33%. And again, this does not include property taxes, insurance and maintenance. Throw those in, and Robert's family is easily spending more than 50% of their gross income on housing costs.
Remember, Robert is an example taken from the MEDIAN numbers. This means that half of first time home buyers are better off, and half are worse off.
Now, let's look at the repeat buyers. We'll call the median repeat buyer Joe and Judy Rerun.
Joe and Judy are 45, married, and make a household income of $120,000. With their kids getting older, they decided that it is time for more space. They buy a house for $618,000. Partially from the sale of their prior house, and partially from savings, the Reruns are able to put a down payment of $100,000. They take out a 30 year fixed first mortgage for $432,500 at 5.75%. They take out a 15 year fixed second for the balance of $85,500 at 8%.
The principal and interest payment on his first is $2,523.95, and the P&I for his second is $817.08. Total P&I equal $3,341.03, 33% of Joe and Judy's gross monthly income. They're an awful lot closer to the 28% standard set by the Financial Planning Board, but again, this does not include property taxes, insurance and maintenance.
My conclusion: Repeat buyers with equity from the sale of their prior home are in a position to acquire a reasonably nice home without having to stretch their budget too far. Although, many are extending beyond the "reasonably nice" and stretching their budget anyway. First time buyers without substantial savings to use as a down payment are stretching themselves way too far. If Robert is the median, and he's already stretched way too far, then how about the 50% of buyers who are stretched even further?
Scary stats...people are move leveraged than ever right now. Foreclosures could go through the roof with any slight downturn in the labor market. Let's pray things stay steady.
Posted by: Mission Debt Freedom | February 08, 2007 at 07:33 PM
Great post, LA!
I truly think that many people are willing to make the deal based on the fact that with the previous track record of the house market over the past 5 years, they truly believe they will be priced out in another year or two if the trend continues.
This thought, I believe, is more nerve-racking then leveraging their financial future, and hence allows them to go ahead a make the decision to buy.
-Medicated
Posted by: Medicated Money | February 11, 2007 at 11:51 AM
I think it's crazy to buy a home being that stretched. We put down 30% when I was 25 on our first home. Fifteen years ago really wasn't that long ago, but most people put down money on a home. I believe if you can't at least put down 20% or in extreme cases 10% your better off not getting it. Your just not ready for it. Don't get anything your just not ready for. I am enjoying my home. Look I was only 25 when I first got a home. I was consumed to get a home the moment I could think of. When I was 16 my parents threw me out on the streets. I think that made me obsessed with graduating high school and getting a home. It was hard trying to do all of that, but I did it. Sure I had to work very hard and save up for years...but it was worth it. I prayed to Jesus to help me and yes, I was able to put down 30% on a home that is beautiful. It's not a dump, it's in Broward County, Florida and it's a house that many people down here dream of.
I would never of bought a home if I couldn't afford it though. I was creative and did take in a roomate for many years to pay 80% of the mortgage. I thought a house was considered an investment anyway and not a liability. I work out of my own home (2 businesses) and I used to have a roomate for many years. A home is a place that should make you money...not stress you out!
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