Tracking code caldwell guardian

Wednesday, December 1, 2010

How Much House Could People Actually Afford Before Bubble Broke

THE GURADIAN is constantly searching for answers and we ran across this very concise defintion of just how much house people could afford.  It seems this approach has been around for a long long time but people got greedy along with their mortgage lenders, ever eager to stretch the credit line to the max:

"A standard measure of housing affordability is the median home price divided by median family income. At a price-to-income ratio of 3, a median family could pay off a mortgage on a median home in about 15 years. At a ratio of 4, it would take more than 30 years. At a ratio of 5 or higher, it becomes almost impossible. As of 2006, the average price-to-income ratios in Hawaii and California were more than 8. Ratios in most other states with strict planning laws were between 4 and 5. Meanwhile, ratios in Georgia, North Carolina, and Texas remain between 2 and 3."

from article by Randall O'Toole

The median income of a family of four in Caldwell is around $40k depending on where you look and how current the data is.  The median prices in Caldwell for a home got to be around $160k before the bubble broke.  The ratio rounded down would have been a ration of 4.  Not over the top expensive by California and Hawaii standards but near the reasonable limits people's ability to pay off a 30 year mortgage.

What some folks were willing to pay for a home was predicated on the false belief there would be no end to increased value in homes and if they didn't buy now they might never afford a home.  It sure appears to be a buyers market at the moment and nobody is sure we are bottomed out on housing prices.  The latest Case-Shiller housing index numbers are down for yet another month.

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