Housing Market Interpretations

Not too long ago, my girlfriend and I were in the mist of prepping some paperwork to purchase a $400,000 condo. It was 777 sq. ft., 1 bedroom, 1 bathroom, and one car garage. This gated community locates in the heart of San Ramon where six year-old boys and girls attended Walt Disney Elementary School. It was a perfect setting for my girlfriend and I with one exception. I didn’t have enough money! Both of us were recent graduate from UC Davis with less than 2 years of working experience. Imagine this for a second; a recent graduate from university with limited experience in the “real world” has recently purchased a California dream for $400,000 without down payment. Surely this wasn’t unheard of in 2006 & 2007 where many investors flocked to the real estate market.

We didn’t buy the condo for the simple reason mentioned. I sat back and pondered how it all happened. It took my dad many years of hard earn cash and savings to buy a $250,000 home for our family of 6, and here I am 2 years out of school and setting myself to buy my first property. It is now mid-way into 2008. Bear Stearns went down because of bad bets. Standard Pacific Homes (SPF) is trading little above $3 when compared with $20 just a year ago.

How did this all happen? Many sources I came across reiterated that this is “the” best time to buy a house. I remember hearing this during the real estate boom market as well. I even took up someone advice on CNBC when someone industry analyst said it was a great time to buy Goldman Sachs at $190. It went down to $160 in just days. The biggest lost in my portfolio in the shortest time frame. But the question lingers, is this the best time to buy a house? Prices have fallen in some places by 50%.

My quest for answers begins with a simple research that unraveled some interesting information.
Here are some key findings:

• Per capita personal income rose on average 4.25% since 1985 – 2007 while median home price rose 7.5% in the same period.

• Personal income as a percentage of median home prices has been declining since 1997.

• Personal savings have been in the downward trend since 1990s.

Simple logic I use to interpret this is either you income has to support your purchase, or you use up your saving (from late 80’s to early 90’s) to support your purchase.
The chart below contains all the data I’ve compiled.

Year	Personal Income ($)	Median Home Price ($)	Personal Saving (B of $)	Income / Home Price
1984	15,994	114,260	314.8	14.00%
1985	16,956	119,860	280.0	14.15%
1986	17,668	113,640	268.4	15.55%
1987	18,549	142,060	241.4	13.06%
1988	19,599	168,200	272.9	11.65%
1989	20,585	196,120	287.1	10.50%
1990	21,638	193,770	306.4	11.17%
1991	21,750	200,660	324.1	10.84%
1992	22,492	197,030	344.3	11.42%
1993	22,635	188,240	266.8	12.02%
1994	23,203	185,010	249.5	12.54%
1995	24,161	178,160	251.0	13.56%
1996	25,312	177,270	228.4	14.28%
1997	26,490	186,490	218.3	14.20%
1998	28,374	200,100	276.8	14.18%
1999	29,828	217,510	158.6	13.71%
2000	32,462	241,350	168.5	13.45%
2001	32,883	262,350	132.4	12.53%
2002	32,826	316,130	184.7	10.38%
2003	33,554	371,520	174.9	9.03%
2004	35,440	450,990	181.7	7.86%
2005	37,462	526,010	43.6	7.12%
2006	39,626	560,522	38.8	7.07%
2007	41,571	553,502	47.8	7.51%
2008		421,137

Could it be that we’ve saved so much in the past and now using those savings to purchase our first or second home? It is possible, but my gut feeling tells me these are credit card debt. Income, in my opinion, is the biggest part to purchasing a home, and that has been floating at 13% of the median home price. That figures dipped below 10% in 2003 and continued to decline. In 2007, personal income as a percentage of median home price was 7%.

I can’t predict where and when the market will turn, but until income catches up with home prices or vice versa, I continue to be bearish in the housing market. Although, I am not discouraging anyone from purchasing the American dream because after all, your first home shouldn’t be and isn’t an investment.
I always say to myself, “the best time to buy is the time you can afford it”. Right now, I can’t afford it.
Sources:
http://research.stlouisfed.org/fred2/
http://www.realestateabc.com/graphs/calmedian.htm

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