Another Housing Crisis?

By
Industry Observer with Right Choice Realty

I became a Realtor in 1985.  Back then the MLS was a DOS based program which looked and operated like nothing any agent today could imagine.  Before that homes were listed in a catalogue.  Many things have changed since then. Some of those changes are good and some, not so much.

Here's a quick example:  In the 1980's we used to quickly qualify someone for the amount of home they should shop for by attaining their annual income and muliplying by 2.5.  Therefore, if someone made $30,000 annually we would look for a $75,000 home at most.  Historically, the average American owed 2.5 x his or her annual income on their personal residence. 

Not long ago I noticed a troubling fact.  In today's America the average homeowner's home is 4.1 times their annual income vs. the age old average of 2.5.    This is troubling mainly because it demonstrates we are more leveraged as a society.   Secondly, this fact occurs when interest rates are at a mere 4% vs. the age old average of 6% - 7%.  

So what's next?

Well, the question clearly becomes, "How do interest rates move up or better yet, how home prices increase in value from here?  Think about it.  If rates go up just 2% from here an individual's payment on principle and interest goes up 50%!  We are already at 4.1 times annual income so the obvious lesson that will be learned is that values cannot continue to rise, but rather, may have to come down to accomodate the return to normalized interest rates.

Posted by

Jack Solloway, President & Founder

Right Choice Realty, LLC

(239) 333-BEST

www.333-BEST.com

Comments (1)

Les & Sarah Oswald
Realty One Group - Eastvale, CA
Broker, Realtor and Investor

Well written blog. Affordability has been the topic of concern in recent news, especially when millennials are concerned.

Jan 22, 2016 12:06 AM