Return to "sound mortgage standards"

Education & Training with Chuck Miller Education Services LLC

As a Builder, I am extremely interested in the current debate about the home building and mortgage finance industry.  One comment I have heard repeatedly over the past several weeks is the need to return to "sound mortgage standards" based on home values of 2.5 to 3 times income, 30 year fixed rate mortgages at 80% loan-to-value and a 20% down payment.  But just how realistic is this?

According to the U. S. Department of Housing and Urban Development, the median household income in the U.S. in 2007 was $59,000. If we return to sound mortgage standards, median home values would have to be $147,500 (2.5x) to $177,000 (3x).

So under "sound mortgage standards," a household earning the median income would have to save $29,500 (2.5x) to $35,400 (3x) - 50% to 58.5% of their annual household income - for their down payment before they could purchase a home. Is this realistic? I did an informal poll of mortgage lenders and found that, home buyers with down payments of 20% or more accounted for approximately 30% of the purchase transactions over the past 12 months and approximately 70% of home buyers purchased their homes with less than 20% down.

According to the U.S. Census Bureau, the median home price in the U.S. is $231,000, so median home prices would have to drop 37% to 48%. Is this realistic? Even those homeowners who purchased their homes using "sound mortgage standards" would owe more than their home is worth.

According to the NAHB / Wells Fargo Housing Opportunity Index, which tracks the sale prices of homes sold in 223 metropolitan statistical areas, there were actually 77 markets in the U.S. where the median home price is less than $147,500 and 107 markets where the median house price is less than $177,000 in the 1st Quarter of 2008. Those include 23 MSA's in Texas, 13 in Ohio, 12 in Michigan, 11 in Florida, 10 in New York, 7 in Illinois, 7 Pennsylvania, 5 in North Carolina, 4 in South Carolina, 4 in Indiana, 4 in Tennessee, 3 in Georgia, 3 in Arizona, 3 in Oklahoma, 3 in Massachusetts, 2 in Maryland, 1 in West Virginia, 1 in Colorado, 1 in Kansas, 1 in Montana, 1 in Wisconsin, 1 in Washington, 1 in New Jersey, and 1 in Minnesota. And if you want to stay in Idaho, you can move to Pocatello. Of course, there's no guarantee that the median home price in these markets won't rise as more people move there in search of homes with sales prices low enough to allow them to qualify for mortgage under sound mortgage standards.  

The Housing Opportunity Index is based on the sales prices of all homes sold in the MSA which includes both existing and new homes.  Considering the data on existing and new home sales in the U.S. in the 1st Quarter of 2008, it is probably safe to assume that most of the homes sold were existing homes.

As a Builder, I would love to be able to build and sell new homes for under $148,000.  But is that realistic?

According to the National Association of Home Builders Economics Department Construction Cost Survey, the average new home built in the U.S. in 2007 was 3,340 sq.ft, was built on an 11,968 sq.ft. lot, and had a total sales price of $454,906. At 11,968 sq.ft., that equals a finished lot cost of $9.31 per sq.ft. The finished lot cost was $111,452 and accounted for 24.50% of the Sales Price. The cost of the raw land accounted for 40.8% of the finished lot cost and the development cost accounted for the other 59.2%. 

Construction cost was $$218,810 or $65.50 per square foot and accounted for 48.1% of the Sales Price. Labor cost is typically about 20% of the Sales Price or 40% of the Construction Cost so in the average home, the labor cost would be approximately $90,981 which is actually 41.6% of the Construction Cost. According to the U.S. Department of Labor Bureau of Labor Statistics May 2007 National Occupational Employment and Wage Estimates, the median hourly wage for construction occupations was $17.57 plus 21% for payroll taxes and insurance equals $21.25 per hour. So dividing the labor cost by the hourly cost, the number of man hours required to build the average house was approximately 4,000.

The cost of construction financing marketing (2.4%), sales commissions and marketing costs (6.8%), overhead and general expenses (7%), and the builder's profit (11.2%) account for the remaining 27.4%. 

According to the U. S. Department of Housing and Urban Development, the median household income in Idaho in 2007 was $51,500. If we return to sound mortgage standards, median home values would have to be $128,750 (2.5x) to $154,500 (3x). If I use the same percentages as the average new home built in the U.S. in 2007 for finished lot cost, I would need to be able to purchase the finished lots for $31,544. The raw land cost at 40.8% would be $12,870 per lot. Assuming a density of 4 dwelling units per acre, the raw land cost would need to be around $51,500 per acre.  Is that realistic? Possibly.

In the Boise City - Nampa MSA, finished lot costs start at about $6.50 per sq.ft.  Using this cost per sq.ft., the lot size would be approximately 4,850 sq.ft. Is this realistic? There are developments in the area with 4,500 - 5,000 sq.ft. lots, but these will need to become the norm.  

However, there are other factors that need to be considered.  The cost of materials used in land development, like steel, concrete, pvc pipe, and asphalt continues to increase. As fuel costs continue to increase, so does the cost to operate the equipment used in the construction. Fees also continue to increase as does the time required to obtain the necessary approvals.  This added time equates to additional costs. So as development cost increase, something else will have to decrease in order to maintain a finished lot cost of $31,544.  Is this realistic? Will land owners be willing to accept less per acre for their raw land? Can the lot size be decreased even more and the density increased?

If I use the same percentages as the average new home built in the U.S. in 2007 for construction cost, my construction cost at 48.1% of the Sales Price would need to be $61,929 and 41.6% of the construction cost or $25,750 would be labor cost. According to the Idaho Department of Labor 2007 Occupational Employment and Wage Report, the median hourly wage for construction trades workers in the Boise City - Nampa MSA $13.85 plus 21% for payroll taxes and insurance equals $16.75 per hour. So dividing the labor cost by the hourly cost, I would have to build the house in 1,010 man hours. Is that realistic? Not very.

Let's look at it another way. Idaho's hourly labor cost at $16.75 per hour is $4.50 or 21% less than the national cost of $21.25.  We'll assume material costs are about the same. Adjusting the average per square foot construction cost figure for the difference in the labor cost would give us a per square foot cost of $59.78 ($65.50 x 41.6% x 21% = $5.72 / $65.50 - $5.72 = $59.78). Dividing the construction cost of $61,929 by $59.78 per square foot, the homes I build would be just over 1,036 sq.ft.  Is this realistic? How many households do you know who would want to live in a 1,036 sq.ft. home?

In conclusion, how realistic would it be to return to "sound mortgage standards" based on home values of 2.5 to 3 times income, 30 year fixed rate mortgages at 80% loan-to-value and a 20% down payment? Not very. Doing so would certainly change the home building industry which historically accounts for 10% to 15% of the gross domestic product of the U.S.  We would build fewer new homes and the ones we do build would be much smaller homes on much smaller lots.  And home buyers would certainly have to adjust their expectations.

Maybe I should start building apartments

Chuck Miller GMB   CGB   MIRM   CMP   MCSP   CSP

President / Builder - Chuck Miller Construction Inc.

(208) 229-2553



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Mike D

I'm surprised there even is a building industry anymore considering the number of distressed properties out there. Who does the industry expect to be buying new homes? Investors? Nope they are looking for the bargains for a quick turn around. First Timers? Obviously not considering that the point of the article is to lament the implementation of traditional lending standards and most first timers wouldn't get anywhere without the FHA and other facilitators. Move up Buyers? Maybe but they have to sell their house in the same distressed market first.

Who else is left?

May 21, 2010 03:07 AM #15

"In conclusion, how realistic would it be to return to "sound mortgage standards" based on home values of 2.5 to 3 times income, 30 year fixed rate mortgages at 80% loan-to-value and a 20% down payment? Not very. Doing so would certainly change the home building industry which historically accounts for 10% to 15% of the gross domestic product of the U.S.  We would build fewer new homes and the ones we do build would be much smaller homes on much smaller lots.  And home buyers would certainly have to adjust their expectations."

And there is something wrong with this?    What's wrong with people owning a bigger stakes in their investments?  Or them living within their means?  What's wrong with a healthier focus in this country other than house-lust?   

What's wrong with lowering the disgusting consumption levels of this cournty?  Oh, silly me I forgot - your profits need all the above in overdrive so your construction company profits are maintained.  

This is so unbelievably self serving and self centered I had to read it a few times.  And then you to tell us all this misdirected irresponsibility is good for the USA.  

But what can anyone expect... you will never convince someone of something when their salary depends on them NOT believing it.  

May 21, 2010 03:12 AM #16

Chuck -
Your sense of entitlement is amazing.  I especially love how you repeatedly and pompously quoted "sound mortgage standards" like some kind of arrogant Charlatan trying to mock it even though it has worked perfectly for decades prior to the housing bubble.
You should be grateful that we are not going back to the days of 50% down payments and 5 year mortgages - boy would that cramp your style if the idea of a 20% down payment sends you into a state of shock.
You will just have to find a way to "build a house" for cheaper.  One common pattern I always see among house builders is that they all love to obfuscate the real costs involved.  They never want to tell us how much it really costs to build a specific house.  I can only interpret this as they don't want buyers to know how badly they are being overcharged.
You had better come up with a plan because "sound mortgage standards" are on their way back.

May 21, 2010 03:12 AM #17

Many good comments have been made, pointing out that sound mortgage practices and reasonably priced housing are needed, and are intelligent, sustainable goals.  The housing bubble was artificially created by the housing and mortgage industry, to generate bigger commissions, bigger profits. 

All you ever heard in mainstream media was the industry hype, so most people--who get their info from the TV sadly--fell for it.  Many buyers were really flippers, but of course people buying a place to live also got caught up in it.  They thought a house was an investment or an ATM because that's what the industry told them, and the government blessed this fantasy.  Toxic loan products were pushed on the public.  Appraisers were pressured to inflate prices to meet the number.  Prices were raised just because it could be done, not because of any real force behind it.  People were told housing only goes up.  Factual past housing crash/fluctuation data was denied or ignored.  New houses got bigger and fancier, but the actual construction got shoddier and shoddier.  Warranties on new homes were illusory, and disputes were forced into private, industry-run arbitration, where arbitrators did repeat business for the industry as long as they favored the industry in decisions.  The results were largely hidden so consumers kept lining up to buy overpriced junk with toxic loans.

The toxic loans were then sold and resold, repackaged and bundled into investments that were toxic, but that the ratings agencies rated highly.  Investors who ignored what they should've seen going on, bought and sold these mortgage backed securities.  They gambled with the money of people who had no knowledge or control over what was being done with their money, their retirement funds in some cases.  People borrowed on their houses thinking they'd never end up upside down in their loans, too.

The duped public, and the dishonest industry, took out the economy.  There were many early warnings that were ignored by anyone in a position to do anything about it.  The FBI knew it was a problem as early as 2002 and so did everyone from consumer groups, economists, lawyers, and bloggers.  But they were ignored.  When the FBI warned that mortgage fraud was rampant, done mostly by the industry, and could take out the economy, it was denied the funding to fight it.  This was by about 2004-2005.  IMO that was too late to close the barn door--the horse had already escaped. 

The obscenity of this mess increased in 2008 when the first 750 billion was given no strings attached to the banks who helped create the problem in the first place.  That insanity continues.  If you can't sell a house and make a profit for realistic prices then you are in the wrong business and should get out.  Decades ago, houses were much more affordable, with people well able to buy a decent house with 2 to 3 times their salary, with a conventional loan.  Houses were typically better built though not as big or fancy.  Go back to that or get out.

May 21, 2010 04:08 AM #18



There appear to be a few gaping holes in your analysis. Some of which were eloquently depicted by evildoc and supercommuter. However, it's interesting to me no one has yet broached that one of  the most significant limiting factors  to folks being able to afford housing is the real cost of the loan, ie- interest calculation and application.

With that in mind, go look at a standard 30 yr, fixed note, monthly mortgage statement ( what % is pure interest versus principal)  and  the associated amortization schedule- and things certainly come into focus. If mortgage loans were simple interest, well then things would be quite different indeed with regard to housing affordability.

It's rapacious greed on behalf of the banks, gee where have we seen that before? I mean come on, when someone borrows $300K for a house but it costs them $800K or so to pay off said house over 30 years....there's your housing affordability problem!





May 21, 2010 05:59 AM #19

Funny how people are always telling me I'm throwing away my money by renting and then go on to telling me how much they 'paid' for their house, leaving out that tiny detail about interest, repairs and taxes. You're exactly right Nixon1 and ditto to evildoc.


May 21, 2010 07:35 AM #20

Your analysis assumes that housing prices are fixed. . . that may not be the case.  If sound lending practices were reintroduced demand would fall and home prices would find a new equalibrium . . . . much lower then today

May 21, 2010 09:40 AM #21

Chuck - Yes, you should go and build some apartments.


Yes, we should also return to 'sound mortgage standards' !

Unless you think the alternative 'Lax mortgage Standards' resulting in 'foreclosures' resulting in 'depression/recession' is, in some crazy world a better deal.

May 21, 2010 11:52 AM #22

a home is an expense people, not an investment. even if you reap the elusive 3% per year gain, you are still paying maintenance,property taxes,upgrades and heating,coolin,phone,cable. Live within your means. I worked 80+ hour weeks, no joke, as an auto mechanic to get my 20% down and closing costs on my first home. IT was 87,200. It sold for 144,000 eleven years later. I paid about 4400  a year in taxes(NY). I put close to 40,000 in repairs and upgrades over those eleven years.

Thats a net loss even though i sold for more than i paid. One major repair, like a roof, is enuf to make your investment a net loss.Roof,siding,upgrade a bath,add a fence....makes it more comfortable while you live there, but is no investment.Am i the only one who has actually lived in a house and not flipped it? Anyone who has owned a home and lived in it should know this.

May 22, 2010 01:02 AM #23
Hugh Pavletich

The reality is that housing should not cost anymore than three times annual incomes as the Annual Demographia International Housing Affordability Surveys illustrate (refer

To ensure that housing stays at or below three times annual household incomes - new starter housing stock must be supplied at around 2.5 times the median household income of specific urban markets. The fringe is the inflation vent. The critically important Development Ratios on the fringe should be 17 - 23% servioed lot cost, the balance the actual house construction.

Texas is an excellent illustration of where housing stayed affordable at around 2.5 times annual household incomes, while too many other coastal areas within North America experienced huge housing bubbles.

The question that needs to be asked is - what can be learnt from Texas?

It should be abundantly clear to property industry commentators and economists that Texas has it about right - with its sound land use and mortgage laws.

I look forward to Chuck Miller explaining to readers how they are getting fringe new starter housing of around 2500 square feet including double garage, four bedroom, master with ensuite and ducted air condition for $150,000. This comprises $30,000 for the serviced lot, $120,000 for the actual house construction.

Go check out the Demographia website and the Performance Urban Planning to see the latest Demographia Survey and how affordable your city is.

Hugh Pavletich

Co author - Annual Demographia International Housing Affordability Survey

Performance Urban Planning

Christchurch, New Zealand

May 22, 2010 01:07 AM #24


Thank you for excellent post, and thanks for the calculations.   Very well stated.   But I disagree.


The premise of the article seems to be: the only way we can make housing work is with unsound loans, so we have no choice.   I disagree.

First, look at the 1950's: In US houses cost 2 to 2.5X median wages, but somehow builder could afford to build houses.   Construction productivity per worker is much higher today - what changed?!   I know new houses have central AC etc, but the fact is that in a free market economy people should buy what they can afford.

1. House Size: You have the right to buy any size house, but if you can't afford it with a sound mortgage, then tough.  In 1950's families were bigger and houses were 1,400 SQFT typical.  

2. Land Prices: By dumping huge amounts of money into unsound mortgages, land prices were bid out of site.   Unsound mortgages do NOT necessarily make house more affordable, they bid up the price.   In parts of CA the feds insure loans to 750k$, this is silly, the median income is about 60K.    

3. Used Houses: There are plenty (too many!) houses already built, many neighborhoods are empty.   With sound mortgages many older houses in older cities would get used.   There would be plenty of used houses out there for 100k or less.

4. Amazing when oil goes up it is bad, but when housing goes up it is good.   Cheap housing is a good thing.



To Chuck Miller let me ask you this: 

I assume you work very hard as a builder - this is tough business.   You work hard and save for 20 years for retirement and for you kids.    My question is this: would you loan it to a person to buy a house with 3% down, if his income was 50k and he wanted to buy a house for 400k?   Remember if he walks you have limited recourse, and you the legal fees, cost of maintaining empty home would be huge, and the house could be damaged, and the "owner" would live at least a year without paying loan.

Of course not.    This would be a stupid financial decision.

But somehow taxpayers are supposed to do this?  This is the central problem behind the huge taxpayer hit for Fannie Mae, and central problem behind the bubble.   With sound lending bubbles can get that big.

As a *BUILDER" if this customer comes to you, you *would* want this loan approved and backed by taxpayers.  You take the money for the house and have no further responsibility.   As a *TAXPAYER* I don't want this - and it will be bad for my kids and grandkids who would be on the hook.


May 22, 2010 05:51 AM #25
Jake Koplen

Dear Chuck:  Good article on sound lending standards.  You hit the  nail on the head when you finished by saying "I should start building apartments".  Well, I have thought the same thing.  Calaveras County has a big push on developing low income housing.  As you may know, the agriculture department of the Federal Government was giving out small business loans at low interest rates some years ago.  You could get a construction loan for the project and when completed, the feds would give you the take out loan.  There are a couple of large parcels in town that a project like this would fit on and keep the price down to the numbers you mentioned above.  Of course, no unit would be bigger than 1050 sq. ft. 

I think this market has somemore down side before we are back to normal.  Normal being in the neigborhood of 95 prices.  You did bring up a good point on how are we going to keep the pricing down on labor and materials and still squeeze out a profit. I don't see that happening.  With the cost of permits and the county's crying poor, lower fees will be hard to come by.

Keep on keeping on.  Thanks for the insight.  Jake Koplen.

May 22, 2010 08:12 AM #26

Hi Chuck!

I guess that your opposition to returning to traditional lending standards (80:20) would certainly put a crimp in your style so-to-speak:

Building 1300-1500 square footers would mean that, golly, you wouldn't have that beloved Cash-Flo Positive comin' in to support your $5.5M mansion, no?....because after all, think of all that pure-profit mark-up for "added value" custom options such as granite counter tops and Pergo (TM) flooring!....

....and your wife would have to ladder-down from Louboutins to (gasp!) Stuart Weitzman stillettos..."OMG! How would I look in front of all the girls at the charity events!"...and.... 

....WOW!! -  all that cash income positive ~profit~ from hiring illegals and green-carders instead of domestic workers (you know, the builders were the principle hiring employers for illegals in the South West U.S., but My God(!), don't let *that* upset lips are sealed!

And after all, bowing down to the god of greed makes the world go 'round, no?

PS: Don't forget to double your daily dose of prozac...helps to sleep at nite, certainly!

S/Misstrial (yeah, courts and stuff!)


May 22, 2010 03:36 PM #27
Seattle Investor
There are lots of inflated costs through the whole chain which must come down. They are as high as they are due to the easy money (loans). It's just like inflation in a financial system, and the entire housing industry and it's food chain now has to deflate back to normal. The cost cuts will not be in just one place, but throughout.
May 22, 2010 05:34 PM #28
Seattle Investor
There are lots of inflated costs through the whole chain which must come down. They are as high as they are due to the easy money (loans). It's just like inflation in a financial system, and the entire housing industry and it's food chain now has to deflate back to normal. The cost cuts will not be in just one place, but throughout.
May 22, 2010 05:34 PM #29

Homebuilder, what a joke. They are houses, not homes. Looking forward to you and your mccrapshack-building cronies to wither and die. But hey, there's still some prime productive farmland left in Delaware you greedheads can blade off, pave over, and cover with vinyl-and-chinese drywall sh*tboxes! Choke on it pal :)

May 23, 2010 04:13 AM #30

I am not going to waste time trying to repeat what Evildoc expressed so well. Just wanted to echo his sentiments. The author is unrealistic and probably supports government fighting reality at all costs. Wrong. As Mr. Denninger says "the math never lies". May you live forever on a diet of Ramen.

May 23, 2010 09:31 AM #31

"We would build fewer new homes and the ones we do build would be much smaller homes on much smaller lots. "

You're absolutely right about that.  And that is the direction your inescapable conclusion leads us to, if we as a nation are to return to sound financing for our homes.  Smaller homes, smaller lots, and living within our means.

May 23, 2010 08:35 PM #32

> median home prices would have to drop 37% to 48%. Is this realistic?

Such a drop would merely place housing prices back to 1998 levels, the prices that existed immediately before the bubble.  Yes, it is realistic.  You may not want to go back to < 90% return on investments, but the market will force you to.

You argue that either house prices must be absurdly high with ridiculous mortgages that are prone to default, or houses must become tiny shacks that still cost 3x median income.  This whole argument is ridiculous.

We have been building houses for over 12 thousand years.  What the hell has happened in the past 10 years to cause the real cost of erecting a house to increase 500%?  Nothing.  If anything, the real cost of erecting houses decreases with time as technology advances and makes the job easier to do.  And the median income has actually decreased over the past 10 years, even in nominal terms.

If builders don't wake up and realize that the past 10 years have been an orgy of greed which created this whole financial mess the world is in now, then those builders will go out of business as more efficient enterprises take over the market and change the entire industry.  The more absurd the prices for new houses are, the more motivation there is to stop buying from builders and start buying from and investing in pre-fabricated housing.  And one that barn door opens, there will be no going back to the traditional builder model.

May 26, 2010 10:31 AM #33



I appreciate your thoughtful analysis, but I agree with those who challenge your notion of 'realistic' (love the Princess Bride quote!).

If it is "not realistic" to have sound lending standards, then what are we left with?  Those sound lending standards are designed to recognize the level of debt that a person can handle with a reasonable likelihood of a stable financial future. 

I appreciate your points that there is a minimum cost per square foot of a standard house, and a high cost of land (especially in certain areas, as others have posted).  So, we have the options:

1.  Change how we build and find materials or methods which are lower in cost.  (I don't know if this is possible...but it is a logical option to evaluate)

2.  Reduce our expectations.  3,000,  5,000, or 10,000 square foot houses are a luxury, not a necessity.

3.  Reduce the cost of land.  Of course, no individual can do this, but if noone can afford to buy at a given price...the price will HAVE TO DROP.  It may take a long time, but it would have to happen.

4.  Continue as we are, and have the majority of people struggling to pay for their house.  Oops--we see construction as helping to drive the economy, but if our homes eat up all of our money, the rest of the economy will collapse!


As for lowering zoning standards so that developers can pack more houses in--please don't!  There are cases where this may be needed, but I have seen unzoned areas, and they are the nastiest of places!  If anything, I would like to see tighter requirements to build more concentrated business and homes with larger buffer areas of open space.  If I were a liberal, I would think that government should force everyone to live a certain way.  As a conservative, I hate that idea...but I think that wanton development makes life miserable for everyone but the handful of people who make their fortune.  But that's another topic.


Thanks for the great post.





May 27, 2010 01:41 AM #34
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