[photopress:bank.jpg,full,alignright] The photo is of the Bank I worked in for twenty years. Lots of memories in there and lots of pranks pulled up on that balcony 🙂
I was perusing The Tim’s blog while writing something on my blog earlier today, and ran into the comments regarding King County median income and median home prices, again. I never seem to draw the same conclusions as other people. So I tested my thinking on the subject. From my way of thinking, at least SOME of the people have SOME money to put down when they purchase a house. So the median income is relative to the median mortgage used in the purchase, not the sale price. Isn’t it? So I calculated some random stats you might find interesting to prove that the Banks and Mortgage Companies don’t TOTALLY finance EVERY home purchase.
First I went to the high end and found that Seattle high end homes were financed at only 36% of value. That includes 40% of the randomly chosen properties sold in the last 3 or 4 months that were bought with cash and no mortgage at all. Mercer Island and high end Eastside, like Clyde Hill and Medina, financed at a higher rate of 49.5%. Both represented about $28 million dollars worth of homes purchased. Seattle financed $9,750,000 of their $28,000,000 purchase prices while Mercer Island, Clyde Hill and Medina financed $13,500,000 of their $28,000,000. Still plenty of equity though, so NO, the banks do not own the McMansions 🙂
One thing I found that was surprising to me up in the high end is that one of the most expensive homes sold was sold all cash…not surprising. The occupant at the time of sale was a tenant! That cracked me up. Why would someone rent a Six Million Dollar house? Oh, well…just a random observation.
Then a went down to the $475,000 to $500,000 price range, more in the median range and pulled through separate market segments. South Seattle was 90% financed. North Seattle was 85% financed and Eastside was only 70% financed. Why would the Eastside have more people with more money to put down on their homes? Easy. Cheap condos. The condo market was really cheap two to three years ago, and is still relatively cheap by Seattle standards. So people who bought those instead of renting 3 to 5 years ago had built up enough equity to put an average of 30% down on their single family home purchases.
Just random stats that I found interesting. The banks own 90% of South Seattle, 85% of North Seattle, 70% of Eastside and only 35%-50% of the most expensive homes. At least the ones that everyone who is reading King County median income/median home price stats are talking about, those bought recently.
I’m not surprised at all by these statistics. The last five years have been spectacular to the “investor class”, but not nearly as good for the average wage earner. So everyone’s bought a home, but only the rich have done so with cash.
In fact, that’s largely a pattern for the last 30 years, although I’d say it’s accelerated in the last 5 years. Increased consumption has been driven not by an increase in real wages, but in income created by more women working (two people working = greater income, not necessarily greater wages per person).
Simply put, even though all the economic “indicators” look great, people feel uneasy, and the “average person” (who buy all those homes that are mostly financed) isn’t well enough off to plunk down huge chunks of cash to buy a home. In fact, most American’s are experiencing greater swings in income (volatility) and are more dependent on loans and financing (housing, college funding, credit card debt) than ever.
The best commentary I’ve read on this subject is a book called “The Great Risk Shift” by Jacob Hacker.
To me this, not a housing or credit bubble (or whether banks “own” Seattle or not) is what’s at issue. If we can’t figure out a way, as a society, for the masses to gain economic stability from the country’s economic growth, we’re definitely doomed in the long run.
All that said, at a 6% FRM (before tax benefit), using the banks’ willingness to loan you all that money is pretty smart, assuming you can afford the monthly payment.
As for who would rent a $6M home and then buy it in cash … well, I could imagine a professional athlete waiting to get a long-term contract in Seattle before he bought.
On the financing scale, I’m probably going to be near 100% finance as a buyer and not because I couldn’t save some money. I’m using the savings to pay off credit cards because the real b**ch in buying a place is your debt ratio, especially as a single person.
Rich,
Good observation. It could have been on market so he could match or beat the highest offer. It’s an easy way to insure that he was paying a fair price, that someone else was willing to pay.
As to the ratios and debt issue, I’ve always wanted to teach basic debt ratios to high school kids. I think it’s sad that the first time young people hear about these things is when they are ready to buy a house. Did anyone learn this in high school? It’s so basic, you’d think schools would spend a little time teaching basic life math.
Well, I gotta say, I think the ratio is 40%. Which means I have to sell my car. I really don’t get it. What do bankers think a sane middle-class person does with 60% of his income? Seriously, that’s a lot for gas, power and food.
Don’t mind me, I’m just irritated.
Rich,
It’s pretty much a one size fits all ratio, which doesn’t make sense for a single person vs. a family with two cars and 3 children. It’s OK to be irritated…and don’t sell your car 🙂 Is it a really nice car with a huge payment? What percentage of your income is the car?
I thought the “affordability” statistics about what % of an area’s population could “afford” a median-priced home were based on their ability to pay a 30-year mortgage with 20% down. On that basis, the concern about considering mortgage amounts instead of sale prices would have already been considered. That doesn’t mean that there aren’t other problems with these types of statistics, but this issue seems to have been taken into acount, at least in a general sort of way.
Thanks for the sympathy, Ardell. I’ll avoid boring everyone else with details, but yes, I have a pretty nice car with a pretty nice $600 a month payment. The ironic thing is that I can sell the car, buy a house, then turn around and get another car once I get past the mortgage man. I’ll just be driving my beater car for six months or so.
Rotted Oak,
Thanks for adding your perspective. Averaging everyone to 20% down doesn’t fit reality though. In fact in pulling random recent sales, almost none of them were 20% down. The half a million dollar purchases were mostly less than 20% down. The high end homes were almost all more than 20% down.
Somewhere along the time line, everyone was encouraged to buy at max affordability. They get a letter from a lender that says they can afford to purchase at $350,000. Then they go out and see what they can buy for $350,000.
If their long term goal is to buy a single family home at $550,000, it would make more sense to go out and buy an “ugly” condo at $200,000. Improve the value by adding new carpet and kitchen and bath improvements, doing as much work themselves as they can to build up some sweat equity. Save the difference between what the payment would be at their max affordability level of $350,000 and their actual payment on the $200,000 purchase.
By doing that they will more likely have 20% down when they start having a family, and are looking for their first single family home. Rarely do I see someone with a lender letter at $350,000 wanting to see property for less than the max affordability lender letter indicates is their “purchase price”.
Rich,
I do remember many years ago a client selling their car to a family member, and then buying it back. If you feel confident that you can afford the housing payment and the car payment, making the lender calculation wrong in your case, there are ways as you say, to get around it.
Why not try putting away the difference between your rent payment and eventual house payment, while still owning your car, for three or four months? Test your theory that you can do both before jumping in and buying a property. If you can consistently set aside the difference, you will be less likely to bite off more than you can chew.
Try to have three housing payments in savings before moving forward on a home purchase, it’s a great comfort buffer.
Ardell,
I know this doesn’t go along with what you are posting, but I have a question for you and can’t (quickly) find a more appropriate place for it.
Why is the Seattle King County Assoc. of Realtors symbol an owl thinking about money? Seems to me like the wrong message to send to consumers…
http://www.nwrealtor.com/displaycommon.cfm?an=2
I am not a member currently of SKCAR, but I went to their main site and couldn’t find the owl. Where do you see it so I can comment in context of where it is being shown?
I linked it in my message. At the bottom, click the link.
Here it is again : http://www.nwrealtor.com/displaycommon.cfm?an=2
Got it. Juggling a lot of balls this morning and your comment seemed to suggest it was a publicly available logo, like the 3 trees of NWMLS.
That owl is not on a consumer page, it is on a Realtor page adverstising a Realtor course being offered to Realtors. If the public happens there, then they see it, yes. But not sure the public is in anyway involved in the message, as the page you linked to is trying to encourage agents to take a class.
The owl with the dollars over his head suggests that Realtors who take lots of classes on lots of topics will be smarter, better to serve their clients, and hence richer. A logical progession for an ad, I’d say. Agent take class, agent be smarter, agent have more value to add to the equation equals agent makes more money.
I don’t find it misleading. May be misleading to agents who take the course and don’t make more money as a result. But not misleading to the public in any way, since it is not an ad aimed at the public.
Ardell,
You expressed an interest in my blog. It’s not as developed as I would like (I have another life), but there might be things that might interest you.
If you have a sense of humor, try
http://clearcutbainbridge.blogspot.com/2006/04/math-for-real-estate-professionals.html
All the best,
Eleua
Very funny indeed! I posted a comment there.
just want to comment on the housing and lending problem (and we might as well scratch the “investor class” since they’re not having problems here). Buying a house certainly has been an important issue nowadays, since the housing industry is falling little by littl. And while there indicators that it will rise in the near future, I’m stil not sure about that.
I would have suggested to Rich to get a loan but I came across a blog a while ago that there are dangers in that, too. There are lenders out there who would issue payment plus interest that is way much more than you could ever pay back.
Really, I don’t know what this world is coming into.