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April 21, 2009

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?

So I figured you'd all be interested in some newly updated measures from John Burns Real Estate Consulting, a real estate consulting firm whose "housing cycle barometer" I wrote about a while back.

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?

Posted by Jamie Smith Hopkins at 6:48 AM | | Comments (7)
Categories: Housing stats


Thanks Jamie for a good article. The catch here of course is 20% down payment. Overall debt load in this country is similar to the period right before the great depression. Having 20% savings is a bottle neck for a lot of people. Given that the prices are still going down, even if you did put 20% down, there is the risk of losing the equity. Realtors will tell you that buy and hold, you're definitely going to come out positive. But I don't believe that at all. Timing is everything actually. It's true in stocks (ask Buffet), and it's true in real estate. In fact, real estate moves so slowly, timing is actually possible.

I appreciate this article too. But when I see cities like San Fran have a better percentage than Baltimore, it just doesn't make sense. Like the poster above noted, almost nobody has 20% to put down on a first house, especially with prices like 500-800k in SF. Baltimore has houses on the lower end (200k) in decent neighborhoods, but with the opportunity to make DC wages- which is our situation. Cities like SF and Seattle just don't have that scenario.

Having lived in SF from 1994-2003, I can tell you how inflated prices results. Medium income has little correlation with medium housing costs, it has to do with the distribution of income, or the percentage of high earners. In SF and NY, there are the normal people, and then there are the super wealthy. Added to that is the real estate industrial complex, and the concept that the asking price must be correct, everyone suddenly starts to believe that the asking prices are real, even though they hardly can afford it. The current correction in SF fully reflect this mass psychology.

In the Baltimore-DC area, I've not seen the obscenely rich types. That's enough to make the expectations of the average crowd more reasonable. Still, the income in Baltimore is hardly DC-like. Currently, if you account for the tax difference between DC and Baltimore, the housing price is actually pretty much the same.

We still feel priced out of the market and have been looking to buy a home in the $320K range. I think that this article reflects our house hunting experience, which is that we are experiences an affordability issue in upgrading to our second home.

Our goal of a lateral move in house but an upward move in neighborhood has been elusive if not impossible to find, and part of our problem is that our wealth and money to afford a home is income driven.

By DC wages I meant commute to DC but live in Baltimore.
I think you're dead on about the price inflation in SF and other cities. But parts of Baltimore, like Smithbaltimore noted, are weirdly priced. In places like Patterson Park and Fells Point, the prices still seem to be artificially high.

The 20% down is a necessary litmus test to assure that the buyer is creditworthy and truly vested. Prices need to go back to 1997 nominal levels to shake out those who have been "swimming naked".

Here's hoping this happens by 2012!

One of the points is the calculation of assuming a 20% down, etc scenario is to put all time periods on the same plane. Pay less attention to the 20% and who can put that down. If you used a 0%, 3%-5% scenario, etc across the same history the general outcome is the same. The housing costs ratios would be higher but ranking them over the past 25+ years would be the same and the 0-10 scale would be the same.

The point. Affordability in Balt MSA has gotten better but still needs to improve to match other similar MSA’s. Does that mean Balt is late to the party on rapid home price drops? Possible. No area across the country seems to be impure to this collapse.

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
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