Here is an interesting graph, that plots median home prices over time in inflation adjusted dollars, from 1890 to the present. It would be useful to add a plot of inflation adjusted median incomes, but I would bet there is a widening gap between incomes and home prices since WWII.
Wow! I don’t see “mortgage” among the interest-paying goods. That’s truly an amazing amount of interest.
Count me in as one of the head scratchers.
Combined gross income of myself and wife is about $120K. I’m thinking we are both very lucky to be making that much.
My mortgage is $150K on a house valued at $220K. Built in 79’ it sits in your typical 70’s neighborhood surrounded by typical split level homes. Being from the 70s all the homes are aging and needing things like roofs, furnaces, driveways, siding, interior updating, etc. so they are anything but McMansions.
I drive a 97 Corolla and we splurged on a RAV4 ($20K loan) for my wife so we could haul bigger items and take trips out of state to our parents with our son.
Our income covers what we have and allows a tad to cover bigger purchases but we do have to plan ahead and budget for it.
So I’m feeling pretty lucky to have what we have.
Then I see these neighborhoods popping up with one house after another after another after another all priced at around $400K. And in the driveways sit Ford Expeditions, Lexus’, Infinitys, top dollar extended cab 4x4 pickups, both his & hers.
Then I just sit and scratch my head and ask 2 questions:
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What kind of incomes do these people have to afford that stuff?
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Where did I go wrong in my choice of career that I don’t have that income?
Low interest rates and aggressive banks help. I don’t know what the interest rates were in 1945, but they’ve been close to historic lows for quite a while now. When we bought our house, we were looking for something in a very specific and modest price range. The bank kind of laughed at us after looking at our finances, and said they’d pony up mortgage money that would let us buy a house three times the cost we were considering. They figured we were a good risk. We stuck to our original price range, but some people follow orders when the bank tells them to go for it.
There’s nothing a bank likes more than to get solid, dependable, hard-working people to borrow money.
Throughout your lifetime it is important to continually trade up if you expect to increase your wealth significantly. Cash flow and wealth are not the same thing.
Buy a starter home, cash in your equity after it appreciates and trade up. Buy a mid-level fixer-upper, put in a new kitchen and master bath, sell it at a profit and trade up again.
You get the idea.
The worst thing you can do, in terms of building wealth over your lifetime, is to buy a place and stay put. You don’t need to move every year, but every 6-10 years is a good amount of time to build equity and then sell. With the market in the current doldrums, this is a particularly good time to trade up.
People don’t buy things based only on how much they cost/are worth. Lots of people buy things based on monthly payments. They’re not buying $300k homes they’re getting a $2000/mo mortgage.
I’ve heard tell that a lot of the bigger homes in our area are empty - people get huge houses and can’t afford much in the way of furnishings. They deal with it now and then move on to something cheaper when they run out of dough.
I agree about inheritance and lack of retirement savings, too. I have a couple friends who make more than me combined (they’re married) and while they don’t live the jet-setting lifestyle they have waaaaaay more disposable income than I could ever wish to have because of a nice little trust fund.
A 200k house in FL is actually pretty nice because you can get an 1800 sq ft new home with a lanai pool.
Just for kicks and grins try looking at what 200k gets in the MD/DC/VA area. You cant’t even get a 750 sq ft ,1 bedroom condo ***without roaches * ** for that much.
I disagree. This it seems assumes that residential real estate is the best investment for wealth creation. However, while residential real estate has indeed done very, very well recently, this isn’t necessarily the case.
The reason is that, in looking at the value of residential real estate, one must look not only at the percentage increase of the value of the house and tax treatment, but also at the very real and considerable costs associated with such an investment - namely, the larger the house, the more costs one must pay, each and every year: property tax, repairs, furnishings, heating, cooling, not to mention mortgage payments … the list goes on.
Living in a mansion can be a cash hole as well as a cash cow. Certainly, a real estate component may be a good part of a well-balanced portfolio - after all, you gotta live somewhere. But it is not a one-size-fits-all solution.
I was so wondering about this that I became quite determined to find out what was up. I found a probable answer…but you’re not going to like it.
When I moved into my current neighborhood, my wife and I were in our mid-30’s…we had scrimped and saved for a long time. We owned a condo that had appreciated some but was a burden for awhile. We managed (barely) to have the 20% downpayment and no debts (including cars). We had a little money in the bank but we lived frugally to save for retirement and our lifestyle. The house we bought was worth roughly $300,000 at the time and was new construction. So, we all in the neighborhood moved in roughly the same time.
When we got to know some neighbors:
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One was a guy, mid 30’s…wife was stay at home mom. They had 3 kids…2 SUV’s and a boat. He worked for Pepsi driving truck which (I know someone working there) makes at most $40K a year. $40K a year cannot afford a $300K house plus all his other expenses…something is amiss…
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A young couple, just out of college and just married. She didn’t work and was pregnant. They drove 2 NEW cars (not hugely expensive…but not cheap either). He was looking for a job, found one as (I think) and archetictual (spelling?) assistant…which probably paid less than $30K and definitely less than $40K. Something was amiss…
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Couple in their 40’s with 2 kids. HE worked full time and she worked part time at Home Depot…on the floor. Not crappy jobs, but not high paying either. They had 2 SUV’s, brand new.
Over the course of a couple years I got their stories.
The Pepsi guy? his wife’s GRANDMOTHER left them her house when she died, which they sold for $400K ish. They bought their house (competely, no mortgage, plus their 2 SUV’s)
The young couple out of college? Their house was completely paid for by her parents…as a wedding present. No mortgage.
Couple in their 40’s? Not as well off, but had been left a couple hundred thousand dollar inheritance a few years ago.
This was discouraging. I knew these things happened. As someone who paid their way through college and has never been given a red cent of help…and will most likely inherit little or nothing…I was irritated.
It is a small sample size…but my conclusion was that a LARGE number of people out there are given significant amounts of money by relatives.
I don’t know that it’s that big of a difference. It can be a benefit if each move is to a hot market, but if you’re not getting lucky picking the good places to live, it doesn’t help. In fact, it might make you come out behind.
(grossly simplified numbers to follow. Assuming about 3% annual appreciation in all markets. I will make the assumption that this property ladder is designed to keep the house payment at the same per-month cost since we’re trying to increase wealth without increasing cash flow. I’m ignoring the costs of buying and selling houses [commissions, closing costs, inspections, etc], which will really ruin the return)
You buy house A for $100,000.
Option 1: you hold the house for 30 years and at the end of 30 years you have a house worth $230,000, from a $100,000 investment and no mortgage payments.
Option 2: You sell 10 years later for $130,000. You trade up to a $150,000 house. You’ve now increased your base investment to $120K, but since you only owed $80K on your first house, you get a new 30-year mortgage for $100,000 and you keep making the same payment you’re used to.
-You sell another 10 years later for $200,000. You’ve paid the mortgage down to $80K again so you buy a $220,000 house to keep that same house payment you are used to. You’ve now invested $140,000.
-You sell another 10 years later for $290,000. Once again, you’ve paid the mortgage down to $80K, so you buy a $310,000 house to keep that same mortgage payment. You’ve now invested $160,000
At the end of 30 years, option 1 leaves you with assets of $230,000 and no liabilities. Your $100K investment is now worth 230% its original value.
At the end of 30 years, option 2 leaves you with assets of $310,000. Your $160K invested has increased to only 194% of its original value. In addition, you have a $100,000 liability, so your net worth is only $210,000 and you still have to make mortgage payments. But you do have a bigger, nicer house.
It’s even worse in the UK. Average house price is over £210,000. The latest figures I could find for average income per person (after tax, NI etc) was £13,300 per head.
I know people whose mortgage payments take up two-thirds of their income. It’s clearly not sustainable. I rent at the moment and wouldn’t buy at the moment even if I could afford to.
People mentioning " fancy $400k houses" depresses me, because it’s a lot of money but in my area that would buy you, well something like this. (£199,950 = $407,440). And that isn’t even in a particulary desirable town.
Oh, and back to the OP: Homes are more expensive today partly because land and lumber costs have increased more than wages, but also because houses today are much larger and nicer than in 1945. Your average 3 bedroom home in 1945 is less than 1000 square feet, has one bathroom and a one car garage, and plumbing and electrical that may be suspect by today’s standards. Today’s average 3 bedroom home is probably 2000 square feet, 2.5 baths, 2 car garage, electrical designed to handle today’s electronics, multiple rooms wired for cable, telephone, etc, with upgraded floors and countertops.
It’s similar to when someone says “The average car in 1975 only cost $4,000! (or whatever)” Yes, but the average car then got bad gas mileage, lacked A/C, radio, ABS, air bags, power steering, etc. If the same car where on the lot in brand new condition today, you wouldn’t want it at the inflation adjusted price.
I’m sure I don’t get the idea.
What you’re saying is entirely predicated on housing appreciation outpacing the stock market (the money you could be investing when you “trade up”). For the 100+ years or so that we’ve been keeping track, housing hasn’t come CLOSE to the returns of the stock market, and if you’ve purchased a home over the last 5 years, chances are, you’re going to do worse in housing than the historical rates would indicate.
When interest rates dropped, I switched to a 15 year mortgage. I’m going to have it paid off when I’m about 44. That gives me 20 years of investing before retirement without a mortgage payment.
You’d recommend getting into a larger house and taking on another mortgage. It’s crazy on so many levels.
Put your numbers into a spreadsheet. Take the money you’re earning, and look at what happens to your money if you keep investing it or keep leveraging yourself more and more. It’s not even close.
You do not build wealth through trading up on houses.
Anyway – to the rest of the thread. If you ever have seen what I’ve written mostly in IMHO, I’m pretty bearish on housing right now, and have been for a while.
You really need to grasp the implications of the graph that Fear Itself posted.
Keep in mind the savings rate as a whole in the US is now negative.
What’s this all say: people are in DEBT. You’re not looking at wealth. You’re looking at debt. And debt is unsustainable.
I know – you’ve looked at this rosy portrait of houses and vehicles for years, and it looks like it will never end, but it will. People will eventually run out of the ability to service their debt.
Some people believe a mortgage isn’t debt, or that a mortgage plus a HELOC isn’t debt.
It is. It’s just better than credit card debt.
Somewhat OT: Here’s a $400K/£200K house near me. In the 1950s Shaker Heights was the wealthiest city in the country, and it’s still one of the more prestigious addresses in the United States.
Personally, in a way I feel like I’m missing out on the boom. Home prices on my street range between $130K and $160K. There’s a vacant house at the greensward, thanks to a foreclosure, and no doubt more are on the way. Because housing in the Cleveland area is so affordable, people who really shouldn’t be able to afford a house period got risky adjustable rate mortgages, and bought houses in pleasant but older inner ring suburbs. They can barely afford $700 or $800 monthly mortgage payments – which will rise far above $1000 when their rate adjusts – and they have absolutely no financial management skills to boot. I want my new neighbors to make it, but I don’t think many will.
That house on the greensward: there was a HUGE pile of trash in front of it last week, as it was cleared out for auction. Rummaging through, I found photo albums picturing a once-happy family. Clothes, photos, kid’s games - so much left behind. Such a sad sight.
Trade-up to what?
If you bought a house for $170K but wish you could have bought the one for $250K you don’t simply wait till you house appreciates to $250K and then “trade-up”. While your house may have appreciated to $250K the one you really wanted has appreciated at the same time to $350K. It’s all relative.
Around here I couldn’t afford a shack for 2.5 times my annual income. My current house is worth 6 times my annual income. With the equity from the sale of my old house though it’s not like I’m financing the whole thing. My old house was bought in 1993 and I’m selling it for about twice what I paid for it.
When it’s all said and done I’ll be paying about 43% of my income for my house. And that’s ok with me, I’ve got no other debt whatsoever. I know I’ll need to get a car sooner or later but I’ll get a $12K used one rather than a $24K new.
I think this is most of the answer. We really need to control for size (pretty easy, just measure $/square foot) and quality (not so easy, you would have to have some kind of multiplier, like the average house today is 1.3 times nicer, PER SQUARE FOOT, than it was in 1957)
I have to laugh at what some of you guys consider expensive housing. In Santa Clara County, where I live in CA, the median price for a home is $700k. That includes Condos, btw. So figure that median home is probably a 3 BR/2BA starter home of about 1300 sq ft., maybe a little larger, in an “OK” neighborhood. If you want to live in one of the nicer towns in the West Valley (Palo Alto, Los Altos, Saratoga, Los Gatos), you can pretty much forget buying a house for less than $1M. The rest of the 9 counties in the San Francisco Bay area (about 8M people) aren’t much different-- the median across all nine counties is $620K.
Well, sure, if you can afford to pay $100,000 cash; most people can’t. You buy a house for $100,000 and 30 years later, (at 6% interest), you have paid $215,838, including interest. If you sell that house for $230,000, you clear $15,000, or 106.9% of your original investment. At least you didn’t lose money, assuming you didn’t have to sell in a slump, in which case all bets are off, and you could end up with less money than you paid in.
John Mace brings up a good point. Shouldn’t adjustment also be made for area?
Median income by state (2004 statistics) varied from $32,589 to $57,352. I had a bit of trouble searching for ‘median home price by state’. The closest thing I found had a range of $59,000 to $720,000.