Posted on 07/23/2007 2:12:49 PM PDT by bruinbirdman
Forget coffee when it's time to sober up. Instead, check out the real estate listings in New York or Los Angeles.
There, buyers pay $1 million for a property that might fetch half that elsewhere. The disparity illustrates how affordability has been spiraling out of control in places on the East and West coasts.
For example, in the first quarter of 2001, 42.3% of homes sold in Los Angeles were available to the median earning household. But in the first quarter of 2007, only 3% of homes sold there were affordable to those households earning the median income. This is based on data from the National Association of Home Builders (NAHB) and Wells Fargo (nyse: WFC) that assumes a 10% down payment, a 6.1% mortgage, and tax and insurance costs calculated by the Federal Housing Finance Board.
In Pictures: Least Affordable U.S. Real Estate Markets
Given those numbers, it's no surprise that Los Angeles tops our list of the nation's least affordable real estate markets. We determined our ranking by combining the NAHB/Wells-Fargo index with our rating of home price to earnings, which measures how many years of gross income it would take to buy a home at the median sales price. The lower the number, the more affordable a house is for the median home buyer.
Ten years ago, San Francisco was the only city above a 4.5. Today, there are 13. The more out of whack prices are with income, the more buyers are forced to rely on credit to make up for the market's unaffordability. That could mean trouble down the line. Look no further than the current tightening of credit standards; it's expected to create problems for markets trying to recover from a slump.
That's because without a strong influx of new buyers it's difficult for a market to grow. Homes sit on the market longer, and prices go down. This should, in turn, make markets more affordable, but that won't do much good if median-income families have too many barriers to getting a loan.
"The credit barrier affects all strata, but it's more critical at the lower end," says Jonathan Miller, president of Miller Samuel, a New York-based real estate appraisal and consultancy firm. He points out that recent bank struggles with subprime lending have resulted in tighter lending standards. "And the success of the market's lower strata is critical to recovery of the whole market."
Regional Restrictions
Also contributing to an area's unaffordability are local policies that jack up the cost of building new homes. This increases price pressure.
"A lot of it has to do with regulations and zoning," says Robert Bruegmann, a history and urban planning professor at the University of Illinois at Chicago. "The higher cost of doing business--and the uncertainly of business--in places like California drives up home prices. The cost of building isn't that different in Houston versus Los Angeles, yet L.A. prices are so much higher. ... One of the few variables you can look at is regulatory burden."
Affordability also has a great deal to do with where a city is in its growth cycle. Five years ago Las Vegas was one of the nation's most affordable cities, thanks to a rash of development. Today, growth has slowed enough that less than 20% of home sales last quarter were available to households at the median income level.
Unaffordability is also relative. Few residents of Sacramento, Calif., and Seattle can afford homes in the areas, but property there is still reasonable by regional standards. Both cities are experiencing strong growth and immigration patterns, in large part due to the fact that they're less costly than West Coast cities like San Francisco, San Diego or Los Angeles.
Nationwide, what's interesting about the fall-off in affordability is that it doesn't directly correlate to home price increases. Since 2000, Boston area home prices have risen 16.7%. Median-income buyers who make up 50% of the buying pool in 2000 now represent only 28% of it. By contrast, in Raleigh, N.C., home prices have grown by 37% in that time period, and the share of median-income earners buying homes has dropped by only 3%.
This explanation is especially pronounced given that seven of the 10 least affordable cities have negative domestic migration, meaning more people are leaving than coming in. Affordability drops, therefore, cannot be attributed to an increase in demand.
Rounding out the top ten least affordable markets are San Diego, Calif.; New York, Miami, Fla.; Sacramento, Calif.; Las Vegas, Nev.; Seattle, Wash.; Boston and Orlando.
In Pictures: Least Affordable U.S. Real Estate Markets
Only 8th? Wow.
“”The higher cost of doing business—and the uncertainly of business—in places like California drives up home prices. The cost of building isn’t that different in Houston versus Los Angeles, yet L.A. prices are so much higher. ... One of the few variables you can look at is regulatory burden.””
“Location, Location, Location.”
bttt
Darned laws of economics. They just keep... working.
Hypocrisy thy name is Liberalism.
The entire housing market is out of control. It blows my mind how much my house is worth after only 5 years. The only thing I have added is a deck and a lawn.
They make sure they can't own their own home. Socialists hate private property. They love renters. Then they can subsidize rent and only have to control landlords. Liberal pols flourish and encourage areas where the rental populations outnumbers ownership populations.
yitbos
It’s because those parts of the country are booming. Salaries are high because many of the residents have unique and highly valued skill sets.
Eh, eh. Didn't see Alaska on the list.
yitbos
All the product of rent control and land use laws.
But how much is it worth in 2002 dollars?
There are so many places you can't build in California because it could endanger the spotted earthworm, that there is an artifical decreased supply. It's not because everyone is trying to move to California anymore
It also creates a dangerous market. You could by a 1200 sqft house for $700,000 in California. At some point if (and this is a big if), the Californians spotted being such chuckleheads then they open supply and prices fall hard.
I live in Houston where you can find many homes between 70-200 sqft depending on how far you live out of town. Even the 200 sqft is darn cheap in comparison to the $500 sqft that is often seen elsewhere.
You would really explode....Have been in our
house for 43 years...in San Diego...how about 40
times original price...JK
The only land available in and around Las Vegas (Clark County) is owned by the Feds. Every year or so, the Feds put up some land for sale for about a million bucks an acre.
The Feds hate to put federal land into private hands even if it means boo coo euros up front and mucho tax pesos every year.
yitbos
I’m an L.A. native and have watched and listened to out-of-staters say “it’s a bubble” ... “the real estate market is going to crash” ... for decades. It hasn’t. Just look at real estate in Manhattan. That is indicative of what land values will be like in major cities ... all of the locations that are off the charts.
Buy, buy, buy! I’m buying my second home in L.A. within the next 12 months.
Our house in Orange County, CA, bought in 1952 for $12000, sold in 1999 for $185K.
The same house was sold 4 years later for $565K.
yitbos
While no one can predict the market — up, down, flat — what’s irrefutable are the numbers, highlighted in the story, indicating that LA housing is LESS affordable, in terms of the income of its residents, than it was in 2001. Personally, I’m hoping for a return to lower prices, as my wife and I would like to move to a larger home in a non-crap neighborhood.
Supply and demand - not all that complicated.
My house in Santa Monica is the best investment I’ve made.
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