Median Home Price, Meet Median Buyer
A very long time ago I saw an email address that read 'averageandhappy@...' and I thought, "Wow, here I've been my whole life trying not to be mediocre and then someone just goes and finds happiness in all of it." I wasn't sure if I should be resentful or relieved...
Years have passed and I've had the opportunity to observe the real estate market in my corner of the universe, namely the San Francisco Bay Area, which includes Marin County, the city of SF, Oakland/East Bay and the Silicon Valley. Few would consider this an "average" market for a number of reasons, but our high prices stand out as the most obvious one.
Here in the summer of 2021, Marin County's median (half above/half below) home price is hovering right about $1.7MM. And I think the knee-jerk reaction for most of the rest of the country, and much of our own county, is that this level of home price appreciation cannot possibly continue. Yet in a conversation I had recently with a local real estate agent, he echoed a sentiment that runs counter to the popular wisdom and really seems to be very much in line with what I see. "Rob," he said, "I've been doing this for 20 years and for all of them people have been saying that they just can't see how prices move any higher."
So instead of viewing our market as exceptional, I started to think about it in more common terms. How affordable or unaffordable is this "median" home? Who's an "average buyer?" Are all of these price chasers in the herd going to end up in foreclosure? You know what I'm talking about. How do we counter the narrative that this is just a giant bubble ready to burst?
The housing payment math is a great place to start. But before we bust out our calculators, let's first admit that in a home purchase situation, coming up with the down payment has always been, still is and will be tomorrow, the top challenge for a buyer. And if we use our median home price of $1.7MM, this means our typical buyers need to pony up $340K just to get in. Can they do it? Surely they have found a way up to now. Some will achieve down payment nirvana through savings, some through generous family members, some through the proceeds of a sale of another piece of real estate. But regardless of the steep price of entry, buyers in our neck of the woods find a way. "Same as it ever was," to quote a Talking Head.
Now let's examine qualifying housing payments in a lender's eyes. To do this we use a ratio known as "debt-to-income" or "DTI." Take the borrower's debt and divide his income into it. If you have $4000 per month outgoing and you make $10K per month, you have a 40% DTI. Not to beat a run-of-the-mill horse, but it's not uncommon to see a married couple in the Bay Area grossing between $250K and $350K annually --- especially with both spouses working, as is common. Granted, we accept that that the actual median household income in Marin County is just shy of $130K per year and that few will break out the small violins for someone making twice that or more. But to get back to our analysis, a $300K annual income provides a monthly income of $25K so let's jot that down for later use.
On a purchase price of $1.7MM, with a down payment of $340K, we have a new mortgage of $1.36MM. Let's assume these buyers take advantage of the exceptionally low rates we're seeing these days and they are able to get a 30-year fixed loan at 3.000%. This would have a principal and interest (P&I) payment of $5734. Their property taxes, which are roughly 1.25% in this area of California, would equate to another $1771 per month. Let's round out with a homeowner's insurance premium of $200 per month too, bringing us to a total monthly housing payment (PITI) of $7705. If we divide our income into our PITI, we have a housing debt ratio of 31% --- WELL below the qualifying threshold of 43% to 45%. Yes, these borrowers may have other monthly obligations as well; student loans, auto payments, credit cards, etc. I get it. But when the housing ratio is this low, these borrowers are generally looking pretty solid to a lender on an affordability basis.
The moral of the story here is that while the top-line numbers may not allow a median household income to afford a median-priced home, the limited supply of housing is still within the reach of the largest segment of earners here, which even pre-pandemic was the subset with household incomes above $200K. Let's also not forget that not everybody is financing 80% of the purchase price and less debt allows a lower income to qualify. It may be an unpopular thing to say and it may be a sentiment that comes across the wrong way, but the reality I see is that these high-priced markets still have room to run if we are looking at not only the exceptional buyers, but also those who are "average," and maybe even happy. Yes, I respect that we do not have an especially equitable housing market here and no, I am not making a social commentary about where home prices ought to be and how policy might better provide opportunities for those on the lower end of the spectrum. But to counter the doomsday narrative that this train is about to run out of track? That seems exceptionally unlikely to me.
Clowns to the left of me, jokers to the right,
Vice President of Mortgage Lending
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
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