Baltimore income vs. housing costs
In the ongoing debate about housing affordability, people argue about whether prices are out of whack and what normal would look like. It's important to buyers, who want a good deal, and sellers, who would like to sell before the first of never rolls around -- not to mention all the people whose livelihoods depend on real estate, the banks with problem mortgages, the taxpayers bailing out those banks, the folks living next to foreclosed homes ...
Pretty much everyone in the country at this point, eh?
The barometer tracks home prices, median household income and mortgage rates in metro areas. If a metro gets a zero on the barometer, it's the least expensive time to buy in that area since 1981. A 10 on the barometer says it's the most expensive time. This is measuring a community against its own history rather than comparing it to other parts of the country.
The Baltimore metro area, which hit 10 in the aftermath of the bubble, is now a 5.9. (It was zero at the end of the '90s, right before the run-up in prices. And, as you can imagine, it was awfully high in the early '80s thanks to double-digit mortgage rates.)
John Burns Real Estate Consulting considers anything between 5 and 7.5 on the barometer to be an area of "affordability concern," and Baltimore is one of nine metros that fall in that range.
But here's something that puts Baltimore's barometer figure into context: Buyers who get a median-priced home and earn the median household income would spend 29.5 percent of their paychecks on mortgage costs. That's only a bit higher than the 28.1 percent historical average for the Baltimore metro area, and a lot lower than the nearly 43 percent required at the beginning of 2006, according to the firm.
(Wonkish aside: The firm assumes a 20 percent down payment but includes one-seventh of that payment as part of the annual housing cost for each of the first seven years. Why? Because the company wants to account for the outlay, and people often remain in a house for seven years.)
I asked the company why the barometer is a 5.9 if housing cost vs. income is very close to average for the Baltimore area. The answer: Because the area's housing-to-income ratio was pretty stable for a long stretch, so small swings make a difference.
What would bring the Baltimore area's barometer down to zero, making it the most affordable time to buy since '81? If that median-income, median-home buyer could spend less than 20 percent of his or her paycheck on the mortgage.
A lot of metro areas are at zero now, including Minneapolis, Reno and Atlanta. The Washington area comes in near zero -- 0.6 -- with median-income, median-home buyers putting 25 percent of their paychecks toward housing.
Here's what the company says in its April newsletter about the national picture:
The monthly cost of homeownership has fallen 43% from the peak in this cycle, with more than half of that due to the decline in price, and the remainder due to the decline in mortgage rates and increase in incomes. The median-income household, which earns $52,800 per year, only needs 25% of their income to buy the median-priced single-family home of $164,600. In July 2006, that ratio was 44%.So: Our area's housing cost vs. income has dropped, but not to the extent that it has elsewhere in the country -- which of course many of you already knew. As Steve Dutra of John Burns Real Estate Consulting notes, "Home prices have not dropped on a percentage basis in this MSA as much as they have in other MSAs." (MSA: metropolitan statistical area.)
Thoughts? Buyers, what percentage of your income do you want to spend on mortgage costs -- or mortgage costs plus property taxes and anything else you think ought to be calculated upfront?