Wednesday, July 25, 2007

Are we on the edge of a Calamitous Housing Bubble?

Boy, am I going to wade into it this time...

I was wandering through the FOXNews Real Estate section, and came across this feature story. Reading this, one would think we were seriously in trouble. "... from San Francisco to San Diego — is predicted to decline 50% in the next five years." The story goes on to say "... that America's top 40 cities are facing a average 47.2% decline: Boston is 49.4%. Miami 44.8%. New York 44.6%. And Chicago is 27.3% overpriced."

I'm wondering about here in Atlanta. I'll be going out to get a look at the book, Sell Now! The End Of The Housing Bubble. There is a list of the top 130 metro areas, and the likely declines. But, back to Atlanta, what is it like here?

The National median home price was $217,000 in March. Here in Atlanta, specifically Gwinnett County, the average home price in June was just shy of $257,000, but I think will calm down to around $250,000 for July. According to Wikipedia, the median income was $60,357. I'm sure that has grown a bit in the last 7 years, too.

Looking at the numbers, there are a couple of things that pop out. Running a few quick calculations we see that 28% of the income is about $1400/month for PITI. If one puts down an average of 10%, we see that the $257,000 home will need about a $232,000 loan. Using 6.5% (the rate on today for a 30 year fixed), I come up with $1466.39 for P & I. That leaves us a little short, since we still need taxes and insurance. When we add in those ($500 for insurance, and $3257 for taxes) we see the PITI come up to almost $1780.

Looks like we need to see a decrease of about 22%, no? Actually, no. Here is why. {Warning, entering an opinion zone}. These are a mix of average and median figures. But, there are a lot more figures that need to go into this. I took 10% down as an average. I know that it is really MUCH higher than that. Move-up buyers moving their equity into a more expensive home, retirees and empty-nesters moving their equity down into a less expensive home, and cash buyers will all have an effect on that "down payment" number. That effect will lower the financed amount. Also, those families at the lower end of the median income scale will likely rent, increasing the median income of actual home buyers. There are also other factors that come into play. Other forms of financing may carry lower rates, as well as the future of rates.

I'll cover what I think will happen to rates in another post.

I'd love to hear what you think. Don't forget to rate the post as well. Thanks, and I look forward to your replies.

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