Family incomes and home prices from the 2000 census

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garfangle_IHB

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<p>From my previous post about the OC price premium, some of you are skeptical that home prices will ever fall far enough to make living in Irvine tolerable again. I put together data from the 2000 census (see <a href="http://mcdc2.missouri.edu/websas/dp3_2kmenus/us/ZIP_Codes/ZIP926xx.html">http://mcdc2.missouri.edu/websas/dp3_2kmenus/us/ZIP_Codes/ZIP926xx.html</a>) comparing the ratio of owner occupied home prices (OOHP) to family incomes (FI) in Irvine. What I found was that as recently as 2000 where we all acknowledge was the start of the real estate bubble the typical family could buy a single family home for about 3.5 times income. The bubble inflated that ratio to 7 according to Money magazine (see <a href="http://money.cnn.com/magazines/moneymag/bplive/2007/snapshots/PL0636770.html">http://money.cnn.com/magazines/moneymag/bplive/2007/snapshots/PL0636770.html</a>). The doubling of home prices without a corresponding doubling of incomes in Irvine leads me to believe that home prices must fall sharply to return to the 3.5 ratio.</p>

<p>Not much has changed in seven years from 2000 to 2007 in the economy, environment and culture of Irvine for there to be such a discrepancy whereby median family incomes rise from $87,931 to $101,564, yet median home prices rise from $314,413 to $720,134 (census and Money mag. data, respectively). If we use the OOHP-FI ratio of 3.5, median home prices should be $355,474 in 2007. Therefore, a reduction that normalizes prices again should cut home values in half, leaving many recent buyers massively underwater. Unless the government bails out home owners and their lenders/investors, renters should wait until the 3.5 ratio returns before buying.</p>

<p>Interesting 2000 census data for Irvine (92602, 92604, 92606, 92610, 92612, 92614, 92618, 92620):</p>

<p>The average median OOHP-to-FI ratio was 3.61 (high 4.24 in 92612; low 3.21 in 92610)</p>

<p>The average mean OOHP-to-FI ratio was 3.30 (high 3.81 in 92612; low 2.88 in 92610)</p>

<p>The average median OOHP-to-FI ratio for all of 926xx zip code was 4.04</p>

<p>The average mean OOHP-to-FI ratio for all of 926xx zip code was 3.84</p>

<p> Median Mean


Family Inc. House Val. Ratio Family Inc. House Val. Ratio


92602 $114,632 $377,900 3.30 $133,024 $389,316 2.93


92604 $81,047 $279,300 3.45 $91,539 $300,270 3.28


92606 $85,514 $320,900 3.75 $91,926 $330,581 3.60


92610 $97,660 $313,300 3.21 $110,725 $318,365 2.88


92612 $81,495 $345,400 4.24 $110,313 $419,960 3.81


92614 $86,649 $296,400 3.42 $102,197 $321,809 3.15


92618 $61,500 $237,600 3.86 $79,559 $281,237 3.53


92620 $94,950 $344,500 3.63 $113,193 $369,473 3.26</p>

<p>Ave. $87,931 $314,413 3.61 $104,060 $341,376 3.30</p>

<p>926xx $78,355 $316,200 4.04 $101,679 $389,991 3.84


</p>

<p> </p>
 
<p>Gar,</p>

<p>If most of the home owners bought in 2000, then the increase in House Values makes no difference. Interest rate dropped at least 25% in 2003, making payments even lower. </p>

<p>I suspect most Irvine home owners are not first time.</p>
 
I’ve been criticized for constantly arguing with everyone. That has some truth to it, but is not meant that way.

<p class="MsoNormal">As I said, I too, am trying to make sense of the fundamentals.</p>

<p class="MsoNormal">If I am convinced of where the market will land, I might very well sell – and buy back-in later. Even at a loss, I would still come out ahead. I am not married to any particular outcome.</p>

<p class="MsoNormal">The census statistics are very interesting. Having said that, I think you can spin statistics anyway you want. </p>

<p class="MsoNormal">(I have been intrigued by IR’s post about rental valuations – and believe it has some merit.)</p>

<p class="MsoNormal">In light of that, let’s look at my former neighborhood of Turtle Rock (from the 2000 census):</p>

<p class="MsoNormal">It said 67.1% of renters paid “$1,000 or more”. (Drop the “more” part, we’ll use $1,000.)</p>

<p class="MsoNormal">If using a traditional rent multiplier of 160, those homes should have been worth $160,000.</p>

<p class="MsoNormal">However, we can see that 59.2% of those homes had values “over $300,000”.</p>

<p class="MsoNormal">All I’m saying is that the 160 multiplier was not in effect even before the latest run-up – at least not there.</p>

<p class="MsoNormal">You could make the argument that rents, too, are way overpriced. If that’s the case, you will see an equally deep correction of rents.</p>

<p class="MsoNormal">(By the way, in another post I gave some of my rental experiences - and even though those rents supported psf prices higher than $180, they were no where near what the homes were going for (closer to $444-517 psf). So please don’t misinterpret my comments as justification for those prices.)</p>

<p class="MsoNormal">If I rented my current home at a bargain price, my rent multiplier would be 220. Using the 160 multiplier would mean a price reduction of 27% in my home. This is not a staggering amount of overvaluation, as I so often hear.</p>

<p class="MsoNormal"></p>

<p class="MsoNormal"> </p>
 
<em>"If I rented my current home at a bargain price, my rent multiplier would be 220. Using the 160 multiplier would mean a price reduction of 27% in my home. This is not a staggering amount of overvaluation, as I so often hear."</em>





The gross rent multipliers I am seeing in the market lately are around 250. They were at or near 300 at the peak. My current rental was for sale when I moved in with a GRM of 314.





Also, a price reduction of 27% means your house is almost 50% overvalued. Percentages are funny that way. A 50% reduction means a house is 100% overvalued.





Of course, if interest rates go up, the GRM number will go down.


<img alt="" src="http://www.irvinehousingblog.com/wp-content/uploads/2007/05/ihb-post-interest-rate-table.jpg" />
 
<em>"You could make the argument that rents, too, are way overpriced. If that’s the case, you will see an equally deep correction of rents."</em>





I don't think this will happen. You have to pay rent out of real income (not the imaginary Alt-A variety), and rents are not subject to exotic financing arrangements. Although, I do think we will see a leveling of rents as more rentals enter the market and peoples income suffer due to the economic upheaval caused by the deflating real estate bubble.
 
<p>Sorry, I was aware it was a 50% overvaluation, just didn't put it that way. </p>

<p>I've heard some people say we were overvalued by 200-300%</p>
 
<p>IR,</p>

<p>Does the median home rent for $2,250? That strikes me low, but I don't doubt it can be had.</p>

<p>Your chart showing the 15% reduction at the 8% rate, is playing out as we speak - I don't think anyone is arguing with it.</p>

<p>Where do you see a gross rent multiplier bottoming out?</p>

<p> </p>

<p> </p>
 
Okay per craigslist:


http://orangecounty.craigslist.org/apa/409093384.html


$5000 3/2 on the sand.





http://www.zillow.com/HomeDetails.htm?zprop=25467007


Zillow:$3,057,623


<dl class="infoList"><dt>Sold 08/11/2003: $1,975,000</dt></dl>Puzzle me this transaction?





guess it must be competing with:http://orangecounty.craigslist.org/apa/408374779.html


at $4900 per month with no restrictions on only using in the "winter" also on the same street also on the sand...


Slight difference: This property is a Prop 13 protected owner.
 
<em>"Does the median home rent for $2,250? That strikes me low, but I don't doubt it can be had."</em>





I suppose this depends on how you would describe a median property. You can't find much that is detached for that rate, but most of Irvine is attached. You can get a small 3/2 or a large 2/2 for $2,250. It can be argued that the median property rents for a bit higher.





The actual median rent is around $1,700, but this would not represent a median property.





<em>Where do you see a gross rent multiplier bottoming out?</em>





I have been using the 160 number to be conservative. I could easily see this number dropping below 150 or lower if interest rates move much higher. Also, the market may move below the owner/occupant threshold if there are more foreclosures than owner/occupants can absorb.
 
<p>I'm gone for one day and not one IHBer would step in and adjust for inflation?</p>

<p>The HH median income in Irvine in 1999/2000 census info was $72,057. Adjusting for the socal CPI inflation data of 26.7% that income would be worth $91,296 in 2006 but the census 2006 number is $84,270 down -7.7% from the 2000 survey. Taking the socal inflation number to the median home price in 2000 of $316,800 would mean it should be worth $401,400 in 2006. However the median home price in 2006 was more like $715,000 75% more than inflation. </p>

<p>So that is perfectly normal right? Income shrinking while home prices continue to go up makes perfect sense. </p>

<p>If the same inflation rate continues in 2012 the median price should be $486k which would equate to a 32% nominal drop or a 56% real drop.</p>
 
It'd be great if we can get statistics on median income of new home buyers in Irvine by year, and not the overall city. But I have no idea where to go for that information.





Home price from 2000 was at least 50% cheaper than today, and the people who could afford to buy back then didn't need large incomes or liar loans. The demographics of those who bought in 2004-2006 has to be very different from those who bought in 1998-2000.
 
<p>momopi,</p>

<p>I don't know about that. </p>

<p>That would be like saying the demographic in some of the really bad neighborhoods changed because those house were half a million.</p>

<p>I watched flip this/that house the other night someone was trying to flip a 900sqft house in pico rivera (I think). They bought at 365 I or so. It was 2 bedroom and a train track was two houses down and evidently the planes flew right over head.</p>

<p>When they bought the flip, and were finished they were hoping to get in the high 400s or low 500s. Houses in Compton were in the 400-500k range. Santa Ana housing was as high as 700k. </p>

<p>The Condo's my mom ran from 20 years ago because of not so good elements are now selling for 750k. I visited to show my kids where I lived they wanted to roll the windows up and stay in the car.</p>

<p>Although we focus on Irvine it was almost the entire market in California. </p>

<p>The demographics of all of So Cal did not change over the last 6-7 years. </p>

<p>I know quite a few people that bought in Irvine and they don't make 250k a year which would probably put them at at least a 50% DTI.</p>
 
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