| > | | | | still doesn't quite explain the extremes. How, even with |
| How did home prices get so high? There are several | | | | a decent income of $60,000 per year, does one |
| factors... | | | | afford a $600,000 house? |
| It seems that the real estate bubble has burst, but how | | | | Expectations Changed |
| did home prices get so high anyhow? | | | | The real estate bubble seemed to cause people to |
| While visiting San Francisco and the surrounding areas | | | | think home prices could rise faster than inflation |
| recently (2008), my wife and I were amazed at the | | | | forever - something a mathematician could refute in |
| prices of houses. A two bedroom home which might | | | | two minutes. They were convinced that homes were |
| sell for $100,000 where we come from in Colorado | | | | a great investment at any price. So while devoting no |
| was sometimes $600,000 or more in San Francisco, | | | | more than 30% of your income to a house made |
| Monterey, or Santa Cruz or San Jose. And these high | | | | sense before, buyers started to spend up to half of |
| prices were after the real estate bubble burst. At least | | | | their paycheck on a mortgage loan payment. |
| that's what we thought. But apparently parts of the | | | | There was a frenzy to get in on the "game" while |
| San Francisco Bay area were still seeing rising home | | | | home prices were rising so fast. A couple might not |
| prices. | | | | actually be able to afford a house, but they could buy it |
| Other areas of California have been hard hit of course. | | | | with easy credit terms, drain their savings to make the |
| Some towns have seen prices drop in half in a matter | | | | payments for a couple years, and then sell for a profit |
| of a couple years - not surprising to the rest of the | | | | before they ran out of money. Speculation like this |
| country, where we all wondered how such prices | | | | became especially common in California and Florida. |
| could be sustained. Still, how did they get so high in the | | | | The result? Some made money doing this. But with |
| first place? Homes that average a half million dollars or | | | | prices falling, there are record rates of foreclosure, and |
| more for a whole population? Some of those buyers | | | | the game is over for now. |
| must work at regular jobs, making only $30,000 to | | | | High Home Prices - Other Factors |
| $40,000 annually. It didn't make sense. Or did it? | | | | Easy credit allows more people to buy. That helped |
| Several factors lead to high prices. Some of them are | | | | increase demand, and pushed prices higher. In the past, |
| still in place, which could mean that prices might not fall | | | | even those with a decent income had to save for a |
| much more. Or it could mean that if and when those | | | | down payment, but no-money-down mortgage loans |
| factors change, further big declines are on the way. | | | | changed that. Interest-only loans - half the loans made |
| High Home Prices Come From Low Interest Rates | | | | in California at the height of the bubble - kept monthly |
| Take out an amortization book or find one of those | | | | payments down. The $2,292 mentioned earlier pays |
| payment calculators online, and see what the payment | | | | for a $500,000 loan if you need only pay interest. |
| would be for your home if you had a 13.5% interest | | | | There's another factor we discovered while in San |
| rate. People were paying this much in the early 80s. | | | | Francisco. We were told more than once that people |
| For example, a 30-year loan of $200,000 would cost | | | | are sharing houses everywhere. A NASA engineer |
| you $2,292 for principle and interest each month. | | | | said that when he lived in San Jose, most of the |
| Using that payment, see how much you can borrow at | | | | homes in his suburban neighborhood had four families |
| a 5.5% interest rate - as low as my old amortization | | | | living in them. There might be six or more incomes |
| book goes. Paying the same each month, you could | | | | helping to make the payments on the house. |
| borrow $404,000. If you are following the math here, | | | | The latter factor is a cultural phenomenon (most were |
| you can see that the sales price could be twice as | | | | Asian or Hispanic). Many people born here don't like the |
| high, and yet you would pay about the same each | | | | idea of living with other families, or living several to a |
| month. Obviously low interest rates allow people to | | | | room. Still, those who are willing to do so have found a |
| pay a higher price. There is more to it than that, of | | | | way to afford a $600,000 home. These buyers and |
| course, since prices certainly more than doubled in | | | | the additional demand they create may contribute to |
| most areas since the 1980s. | | | | the high home prices in some areas. |
| Income Went Up | | | | Finally a big part of the answer to how people can |
| People are obviously able to pay more for housing as | | | | afford high home prices is that they can't really. We're |
| their income rises. Those who rent might be interested | | | | seeing record after record being set for foreclosures |
| in owning a house when they start making more, | | | | across the country, and if we see interest rates rise in |
| driving demand, and therefore prices higher. Average | | | | addition, we'll see those prices drop even more. |
| income in this country was rising for a while. But that | | | | |