As I was watching CNBC this morning, Charles Biderman was discussing how stock prices have gone up dramatically while wage growth has only gone up 3% a year. That got me to thinking that if real estate prices are rising 15-20% in some areas, an wages are only rising 3%, we are going to have an issue with affordability.
In some of the larger urban areas, like San Francisco and San Jose, CA., salary and net worth are substantially higher. I suspect they will be able to maintain the apprecation of values. However, in some of the smaller rural areas, this is going to be an issue.
In Ukiah, CA (Mendocino County, CA. ) there are very few industries and certainly no technology companies where wages tend to be highter due to the salary's of software engineers. The median income of Mendocino County, is in the $55,000 range. Home values have increased so dramatically that it is very hard to find anything less than $300,000 that doesnt needs some sort of work. Assuming a purchase price of $300,000, a 10% down payment and a interest rate of 4.375%, total payment with tax/insurance/MI is $1852 per month. That means that the borrowers proposed housing expense is 40% of their gross income. Maximum debt to income ratio on a Q.M. loan is 43%. (Though I have seen many a FNMA automated approval at 45/46%) If the borrower has any other debt, (how many of us do not carry some sort of credit card balance or a car payment) we are surely going to be over the maximum debt to income ratio.
So what does this mean? I believe home price appreciation will have to slow down (already is) and I also see that our robust housing market is going to need to take a breather and let wages catch up!
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