July 07, 2007

Housing and the age of Affluence: Transforming the Definition of Income and Wealth

Most people consider families with 6-figure incomes to be financially secure. Some would even venture to say that this is the upper-middle class. Yet very few housing articles look at income in relation to housing prices if you have noticed. It is almost a foregone conclusion that people earn enough to support Wonderland prices. So how does income distribution really look like in the United States? Looking over data from the Census Bureau, you will be surprised to see how various quintiles breakdown. Considering that a median home in Southern California is over $500,000+, a family earning $100,000 a year is still paying 5 times their annual gross income for a home. Keep in mind a half-million dollar home in California is not what you would see displayed on Lifestyles of the Rich and Famous. You are more likely to find a Real Home of Genius in this price range. I’ve observed housing bulls arguing that housing is being supported by radically high incomes and unbelievable job growth. Do we really have that many people making $100,000 a year to support $500,000 homes? Let us take a look.

The Number Breakdown

F. Scott Fitzgerald once said that the rich are different from us. To which Hemingway responded, “Yes. They have more money.” There is a fascination in this culture with the uber-wealthy. Take a look at shows like Cribs where opulent wealth is showcased. Tabloid magazines make their money from this cultural fascination. What do the rich eat? Do they shop where I shop? What do they do for fun? Where do they live? If you really examine what it means to be rich, you will find some surprising answers. But first, how many rich people are in this country?:

Household income (overall percent of US households over):

Income Percent of Households over:

$65,000 34.72%

$80,000 25.6%

$91,705 20.0%

$100,000 17.8%

$118,200 10%

$166,200 5%

$200,000 2.67%

$250,000 1.5%

$1,600,000 0.12%

Some of you may be surprised to see this data. If anything, it should point out to you that there is not nearly enough of an income base to support the $500,000 median home prices in Southern California or any overpriced metro area in the country. Even a household with dual income earners making $100,000 a year, after taxes they are pulling in a monthly nut of approximately $5,900 without contributing to a 401(k). And what is the monthly mortgage payment on a $500,000 home with 5% down ($25,000) at 6.5% over 30 years? The principle, interest, and taxes will cost you approximately $3,600. After taxes you are paying 61% of your income toward your home. Moreover, this is for families that fall in the top 17% of income earners. Last time I checked, we have a national homeownership rate of 70% and in California, a homeownership rate of approximately 57%. Since we realize that income isn’t the main protagonist of amazingly high home prices, then what is it? Surely there must be an explanation for the radical jump in home prices over the past decade.

Risky Loans and Easy Credit

How can a family earning $65,000 a year, jump into a $500,000 home? Easy. We can lock them into the world of subprime loans. Only a few years ago, it was incredibly easy for a family to go stated income and jump into a 2-year teaser rate mortgage with a 1.25% rate. The rate would adjust but by that time, you could flip your home and make a nice little return. Don’t know how? Just watch the show Flip this House. I remember a mortgage broker telling me, “it is easy to get anyone into any home. All they need is the willingness to find a place and sign.” He even told me about his ability to squeeze in families with $50,000 incomes into $500,000 homes and got joy how he was churning $10,000 a month in commissions. That was 2005. Fast forward to 2007. He is no longer working at the company since it imploded early this year. When I last talked with him, I asked him what his plans are now that he is unemployed. “I’ll go work for another lender but one that focuses on foreclosures. That’s the next big market.” Didn’t want to burst his bubble but in a bear housing market, sales drop massively therefore cutting into the churning of transactions. Therefore, his $10,000 a month will only be seen again if he has some advanced college degree or sells crack on the streets. Ironically, this person has nothing saved up after 3 years of being in the business and making $100,000+ each year. The product of conspicuous consumption and financial irresponsibility – easy come easy go.

This is only one case of many. The person above is young. But so many people got caught up in this housing frenzy and believed it was a ticket for easy street. They under funded their retirement accounts in belief that Social Security will be there for them. But think about the culture of credit that they blossomed in to. They entered the workforce with a national negative savings rate, credit cards being given out like candy at colleges, and cash becoming almost a thing of the past. People even pay for $1 cheeseburgers at McDonalds with a credit card! So is it any wonder that they have no fear issuing out or taking on absurd mortgages? Credit will always be there for them. It was there in the past, why not in the future?

Age and Culture Conflict

I have a colleague telling me how buying a home is always expensive. He tells me about earning only $30,000 a year and buying a home that cost $110,000 back in 1988. He is also proud that he would not be able to afford his current home if he bought it at today’s market value. It is a sense of pride that he can’t afford his own home, “if I were in the market today, I wouldn’t be able to afford my own home!” This from a baby boomer nearing retirement with a locked in pension. Looking deeper into the income stats, we realize that the top earning households are those headed by working baby boomers. The exact range of top earners is 45 – 54. The conflicts of managing a high cost of living seems to be disconnected from those from the 25 – 39 age group. For one, we do not have the luxury of having a Social Security safety net, therefore many of us actually have to over fund our 401(K) if we do not want to live off government cheese. Yet we pay 15% of our income into a fund we will not see. Not only that, but many companies are now eliminating defined pensions and passing on the cost of health insurance to the young working class. The cost of living is much higher even though incomes on the surface may seem high for young working professionals.

In addition, housing has never been this expensive in relation to income. Even though buying a home may stretch a family’s budget, anyone buying a home in today’s market would need the flexibility of Gumby to purchase a starter home. There is a generational divide in our culture. Many young folks feel they are getting advice from a person that has a locked in retirement, years of Social Security, and locked into affordable housing – things that are not in our lexicon. These items are remote to any young professional. So the “live and spend” culture of today has some direct correlation to the psychology of both generations. Even though I disagree with this mentality, I can understand where it comes from.

Yet this housing market also affects baby boomers. Many are counting on their equity in their home for retirement. I’ve talked with many people telling me that in 5 years when they retire, their home will be worth $1 million and they’ll use the equity to downsize. When I ask them how they know 10% annual appreciation will occur from 2007 to 2012, they reply, “real estate always goes up.” So not only does this housing market hurt families looking for a starter home, it also hurts those nearing retirement with an inflated few of their home and a perceived idea that a built in safety net will always be there for them. In general, the young overestimate the difficulty in paying back large amounts of credit (i.e., buying a $50,000 car) and the older generation underestimate the need for a larger retirement nest egg (i.e., American’s nearing retirement have an average nest egg of $50,000).

In the end, looking at income numbers, home prices do not justify their current market rates. These rates are inflated on bubble psychology and easy credit that is slowly evaporating. The market will contract and a major shift in cultural psychology will occur.

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Anonymous said...

Great article, Doctor.

You wrote:
The exact range of top earners is 45 – 54. The conflicts of managing a high cost of living seems to be disconnected from those from the 25 – 39 age group.

I'm in the lost generation at the age of 41. I've always felt this way. However, it's nice to see I'm in the top 10% of earners at $170K/year, with $0.5M in 401K and $0.45M in savings and investments. Ironically, $500K for a dumpy home seems like too much for me. How people can sign the mortgage loan paperwork when they earn half or less than half of me is beyond comprehension. I'll continue to rent, thank you.

steve said...

excellent post. the relationship between housing prices and actual income is just ridiculous. i suspect that the percentage of households earning over $100K is probably a little higher than 18% for the city of los angeles (or at least in certain municipalities like west la or pasadena) but still nowhere near in line with median house prices (which are also higher in those areas). it seems like a house priced 10 times your yearly (gross) income has become the new standard when people consider affordability. i'd really like to see breakdowns of median prices (and 25th & 75th percentile while we're at it) vs. income quintiles for each region city-wide, or even by zip code. does anyone know where that data can be found? i always find it a bit difficult to get hard numbers on a specific are, for example burbank where i live.

Anonymous said...

Sir, right on. I live in Bozeman Montana. The economy of this area is allmost totaly dependent house building. I have been told by realtors and contractors that it will continue because of rich Californans moving here. They don't know or don't want to know the true state of the market in California. Or its effect on our local market.

Anonymous said...

'They don't know or don't want to know the true state of the market in California. Or its effect on our local market.'

I am not an advocate of the equity locusts' behavior, but the MT builders better be right or else they will go bellyup. From what I understand, once housing in California reverts back to affordable levels, the transplants to MT,ID,NV,AZ,etc. will head back to CA as they think that the rest of the country is Forrest Gump to their slice of nirvana in the golden state.

Anonymous said...

My wife and I make a combined income of 300K per year and it will probably be about 350,000 in about 5 years. I had no idea it was that high in terms of percentage of Americans who earn more. I certainly don't feel rich with household expenses (rent, air conditioning bill, child care, etc) in So. Cal. But I don't fall asleep at night worrying much about money or the future either...

I don't feel like I can afford a 500K house myself. A HALF MILLION DOLLARS FOR A HOUSE??? Who are we kidding? If I can't afford it, most people can't afford it. And thus I think Dr. HB, yet again, is right on target.

It is amazing to me how many people I know think I and people like me are going to fund their retirements. Folks, it just ain't gonna happen. I'm sitting this one out until you sellers get a clue and drop your prices substantially. Don't worry... I'll wait.

BeverlyM said...

The relationship between housing prices and actual income is even more ridiculous if you're an African-American Baby Boomer still playing the "catch up the your salary" game.

Derek (Orlando) said...

Who the hell makes $350,000 a year in combined income?! How many doctors, lawyers, and drug dealers live in California. I feel poor and I only make over $100,000! Fuck you!!!!!

By the way, great post Dr, there will be a depression coming anyways.

baddriver said...

Is it just me or did those percentages you quoted add up to 115%?

Marty Van Diest said...

Just stopping by to read your post for Carnival of Real Estate.

I agree that housing prices should generally reflect the income of the community.

Therefore it is obvious that house prices in some areas are higher than they should be. Some more popular areas can support a higher ratio than others. For example, people might be willing to pay a higher level of their income to live in Southern California than in North Dakota.

But that difference still does not seem to me to support the prices in Southern California.

Vera said...

You made so many great points - and I started feeling this way some years ago. I put myself on a "debt diet" and refused to be a prisoner to banks (credit cards) any longer. I got a roommate - part of me felt like I'd look like a loser getting a roommate - a professional adult turning 40? But then I thought - I won't be a prisoner to my bills. I'll sock away 15% in my 401k (I also have a pension from a previous career in screenwriting), and I'll pay off every dime of debt.

I feel like I did it in the nick of time, considering the mess our economy is in now - having no debt gives you much more "freedom" than having the best car, biggest house, coolest this or that. I still spend money - but money I have, not money that's making the credit card companies rich.

Five years later I am debt-free and marvel at how great it feels to have "money in the bank" and never thinking oh oh, I've stretched myself too far!

I read your blog every day because it reminds me that this is REALITY - I'm now living the way the previous generation lived (spend only what I earn after putting away for savings). Sometimes it is disheartening to be in that top 15% of earners and not be able to afford to buy a house - but I really believe living within your means pays off. When the housing crash bottoms out some time in the next decade I'll be a position to buy a house WITHOUT being a slave to the bills it incurs. As you know, in Los Angeles, you can rent a NICE house for about a third or fourth of the mortgage cost. I love where I live, and it doesn't suffocate me. I live in a much nicer home than friends I have who own their home!

Thank goodness for bloggers like you who bring people back to reality!

Anonymous said...

..My wife and I make a combined income of 300K... If you make this amount of money and you cannot afford a 500k house (not that I say you should) then there is something wrong with your math or spending habit, even in Southern Cali..

speedingpullet said...

I think the point he's making is that he doesn't want to pay half a million for a house - no matter what his combined income is.

None of us do, no matter how much we make. No one should have to - its an insane amount of money however you look at it.

Anonymous said...

DR. HB. Your argumet might hold water if everyone in the housing market was a fist time buyer. I sell properties in an area of median homes over $1 million. Not one sale is to a buyer borrowing 80% of the purcahse. Most have sold another property and are bringing 50, 60, 70%, down and often all cash to the purchase. They got there by getting in to the housing market, purcahsing their 1st property at a price point they could afford. They then kept rolling their equity into higher priced properties as their equity grew. That's how high priced homes are purchased, by people who have accumulated equity over time. So their total mortgage debt on a million dollar home is oftem less that a first time buyer acquiring a $300,000 home. That's how real estate wealth is built in America. Ask your parents. And the trend today looks more promising than ever with slow growth politics and material cost increasing, a 7% annual appreciation rate is completely plausable. In 10 years at 7.2% appreciation per year, your property will double in value. And at that point in ownership with a 30 year conventional mortgage paid into for 10 years, and your doubled home value, you will have approximately 75% equity in your home. Then when you sell you now have a very strong cash position with which to purchase your next poperty. And, if married, up to $500K is tax FREE!!That's how the system works. That's how prices increase and that's why there is no bubble. Wake up and smell the coffee. We didn't get here by accident. A 2 to 3% inflation rate and the naturally designed gradual devaluation of the dollar virtually guarantee, over the long run that housing purchases are the most solid investment in America. Not to mention the tremensous tax incentives of interest write off and even more so the $500,000 exemption of appreciation value.

And the subprime hype is a very small segment of the mortgage market. Remember not everyone who owns a home gets factored into the totals of mortgages initiated in the last 2 or 3 years. Take the percentage of subprime mortgages against the total number of existing homes and you get a clear picture of reality, not a statistically massaged fire alarm.

Anonymous said...

I don't feel like I can afford a 500K house myself..
If I can't afford it, most people can't afford it...

Thats his statement and I think it's wrong. Do you know the incredible amount of taxes he pays on a $300,000 income with no write off, not only to the IRS but to the robber politician government in CA? and you encourage that? Come on.. Doesn't make sense to me at all.. even if he saves the max on his 401k.. but hey it takes all kind of people..

Anonymous said...

Whew! Anon at 11:17AM wrote that the bubble is a statistically massaged fire alarm. I feel better now.

Would somebody please go fix the "statistically massaged" foreclosure numbers. And this Nevada home really didn't lose 50% of its equity--it has been "statistically massaged" to appear that way. And the mortgage backed securities, CDOs, etc, aren't really in any trouble--more "statistical massaging" at work.

Dr Housing Bubble said...

@anon 11:38,

You seem to be doing well. That is great you have nearly $1 million in investments. At 41, this is great. You are doing the right thing, keep saving and when the numbers work, buy a place. Otherwise, continue renting in a desirable area like you are doing.


You can find the data at the Census.gov website. You can even pull up median income for households by state. An excellent resource.

@anon 2:53 and 3:27,

It will be interesting to see what happens in areas where many California equity giants took their earnings out of state. Montana is gorgeous and many retirees and soon to be retirees took their money to other states for 2nd homes including Montana. But this was based on massive appreciation which we are not seeing anymore.

@anon 3:45,

You and your wife are in the top 1.5% of the entire US population. This is how absurd the housing bubble has gotten. Even folks at this level have a hard time justifying $500,000 for a small 500 square foot box.


Minorities do lag behind other groups especially in net worth and homeownership rates. But you’ll never hear this from the housing syndicate. Their happy quoting their 70 percent homeownership. But a large number of the foreclosures in Southern California are occurring in minority groups because of risky subprime loans.


It can be frustrating. But once you are above a certain rate, you get taxed at a crazy rate. Keep in mind you also pay sales tax, property taxes, and other taxes that after all is said and done, most people pay 40 to 50 percent of their income in taxes. This housing bear market won’t happen overnight. It’ll take a few years before we hit bottom. Keep on saving and your time will come.

@marty van diest,

That is absolutely correct. But we have 88 cities in Los Angeles County alone and all are overpriced and have ratios above 5 times the local annual income. That is why looking at local lease rates is a good litmus test of market prices. The disconnect is so incredible that we can clearly see there is a bubble.


Congrats on your journey out of debt. You are doing the right thing and preparing yourself for retirement. You may have about 20 years before you retire so it may feel like you are late in the game, but you are doing everything that is financially prudent. Look at it this way, housing is going down in SoCal. Whether you buy in 2008 or 2009 prices will either be the same or lower (from what we are seeing lower). Good job.

@anon and speedingpullet,

That is correct. Just because people make a certain amount doesn’t mean they need to pay a price. If you made $1 million a year you wouldn’t pay $50,000 for a Pinto just because someone said “well you make so much.” Absurd argument. You pay for an asset for its value on the market.

@anon 11:17,

I’m not sure the majority of Americans are buying in areas like yours, where the median home price is $1 million. Glad you think this is representative of the market. You make many assumptions that are incorrect.

1. The subprime market is not a small minority. Over $1 trillion in mortgage debt is in this market. Much of it due to reset in 2007, 2008, and 2009. Last time I checked a trillion is a lot of money.
2. 7.2% housing appreciation? Says who? According to the last decade of bubble data? Over a hundred years (you can verify this with the Census Bureau) real estate has gone up at the rate of inflation, which good for you, have highlighted at 2 to 3 percent.
3. This data is real. Only 34% of the population makes $65,000 a year or more. And only 2.6 percent make over $200,000. Glad you are using a small sample size and thinking this is representative of the entire population. You are obviously in a very high priced market that is completely removed from the middle-class to upper-middle class of America. There is nothing wrong that you are dealing with the rich. But don’t try to assume this applies to the majority of the market.
4. You buy, make equity, and buy another more overpriced home. We appreciate that real estate lesson. “That is how the system works.” According to you. I hate to burst your bubble but you are at the tail end of a massive housing market set to decline. It is part of long-term 100 year real estate cycles. But why look at factual data by reputable sources when we can spout off NAR speaking points.

None of this data is massaged. Show me somewhere pointing to your 7.2% appreciation rate of real estate over the long-term. You say this data is massaged? Take it up with the Census Bureau or the Center for Economic Policy and Research.

@anon 12:47,

People fail to see the amount of taxes we pay. Again, those in the upper brackets pay anywhere from 40 to 50 percent of their income to taxes.

Anonymous said...


Thats what I meant. I do NOT WANT to buy a house for 500K that should be 300K when you look at fundamentals and the income of the community. Buying now may just bail someone out who made a speculative error in the last couple years. I don't want to do that.

My tax guy says that my current rent payment is the same as a 700K mortgage P&I at 7%, taking into account the tax advantage. That means a 700K mortgage will not "feel" any different than what we are doing now. But I still would have to pay off a 700K loan!

In any case I would agree with anon 11:17 except for the fact that prices HAVE come down. They will continue to come down... it's basic supply and demand. The demand goes down when people can't get a loan: toxic or non-toxic. Supply is WAY, WAY up. One house in my neighborhood that was priced at 1050000 is now listed for 899,000 and one that was about 675,000 is now a bank repo listed less than 600. And GUESS WHAT? No one comes to the open houses, almost nothing is selling AND in a one block radius of my house (which is in a great school district) in the inland empire, there are at least 12 houses for sale. At least I can remember 12 just thinking about them, maybe more.

So, you can think what you want, yes it takes all kinds of people. This kind of people (ie, me) doesn't want an albatross around my neck for the rest of my working career (my house) and I'll bet I get WAY more house for my money in about a year from now than I can today.

Reality is really more than one letter away from Realty these days.

The North Coast said...

To Anon, I'm with you.

Anyway, why would someone who makes an income like $350K a year want to buy what is really slum housing, for $500K?

Seeing what's on the market for $500K in Chicago makes you wonder why you work so hard, and the houses listed in SoCal for that price are unfit for human habitation. Nobody who makes over minum wage ought to have to live like this.

Moreover, even if you get your money's worth for the house, why spend up to every dime you make? One of the great things about a high income is that it enables you to put a lot of money away. But you can't do that if you are up to your eyeballs in a house. So $500K just might be too much to spend even for that income if you are conservative and cautious, and your financial goals include a substantial cash reserve, tuition for your kids, a secure retirement for yourself, and a cushion against hard times.

Most people have to spend up to every dime they have just to get a decent place. Therefore, anything over, say, $45K a year per earner ought to be surplus and put away.

There is nothing that makes a person as secure as living well below his means.

Anonymous said...

Anon 1117

After reading your post I can see that you must be a new reader to this blog. I can see where you are coming from and I can also bluntly see that you are in denial like the masses. "I sell properties in an area of median homes over $1 million." So this means you commission a hefty amount on every sale you make. So every ounce of you wants to convince itself that what Dr. HB is saying must be false...better be false otherwise your ass is grass and this housing market is the lawn mower.

Suppose that in all fairness we consider that what you are saying is true. I think that the people you speak of are a very small minority. Ideally you would think that the wise thing to do is to built equity on a starter home then move up, move up, and move up. Bullshit! MOST (emphasis on the most) people I know will or have cashed out any equity that they had in their homes, starter homes or not, to either spend on crap that they don’t need or things they do. This makes it very difficult if not impossible for them to upgrade since they have no or very little equity in their home.

On another note what you are saying makes no sense what so ever. A person who bought a starter home for say 300K when homes were “affordable” has a particular income. Say their homes appreciated 100% so now it’s worth 600K. With the principal they have paid over 10 yrs and they down payment on the old house they now have about 400K in equity. They sell this home and have about 350K after they pay the commissions and the closing cost of the upgrade home. So your argument is that they will buy an 850K home put the 350K down and have now a 500K debt instead of the 250K old debt? I don’t get it. Not to mention that the new home will more than likely be bigger and come with additional expenses. Everything from maintenance, utility bills, more furniture, and not to mention the INSANELY HIGHER TAXES are going to take a toll on the person’s budget. Dr. HB argues that although their equity might have gone up 100% percent their incomes have not. So now you have to maintain an 850K house with 500K debt as appose to 250K debt.

On another note, your argument would hold if people could buy starter homes on which they can build equity to upgrade to these million dollar homes you sell. “Wake up and smell the coffee. We didn't get here by accident.” Dido buddy! Have you seen the Real Homes of Genius? Cities that are mentioned like Compton, Inglewood, Lynwood, East LA and others not mentioned (South Gate, Paramount, Bellflower) are cities that I know very well and they are by no means cities where you upgrade like you say. These homes are the homes that your job depend on and these starter homes are the ones that are over priced. If anyone thinks these homes are an exaggeration, you are wrong! It’s like fucking Tijuana. Drive down Alameda Blvd and you’ll even see fucking taco stands like in Baja. 300K - 450K for 800 – 1100 sq ft is just ridiculous I don’t give a shit about the weather it’s just not worth it.

How then have we gotten here if not by accident? Fuckin’eh have you been reading? Easy credit to anyone with a pulse is how. I know countless realtors and loan officers who are speaking to people who simply say “oh well ill just loose it.” Why the ruthlessness? They have no skin in the game (No money down loan remember). If the local BMW dealer said they would sell a car to anyone with no money down, no income verification, and no credit checks im sure they would sell for any price too. Especially if they mentioned that they will REPO the car 3-6 months after you stop paying. So I can rent a BMW for 3-6 months for free…no way. But it will ruin their credit you say? Oh that’s right it’s fucked already.

Only time will tell who is right. I know that if by listening to the Doc’s advice I am wrong I will have lost nothing. However if you are wrong you’ll have to go a’job huntin soon buddy! Best of Luck.

Anonymous said...

Here's a good summary of the subprime debacle, hedge funds, CDOs, and mortgage backed securities. In the end, the author states it's anyone's guess what this stuff (homes, CDOs, etc) will be worth, but the market will provide the answer. Agreed.

America's subprime market includes approximately six million abodes mortgaged to nearly 100% of their value. When these houses begin to sell at big discounts, the whole mortgage industry - from the Bayou's Best Mortgage Deals to Wall Street's Enhanced Leverage CDO Funds - begins to stink.

Son of Brock Landers said...

To DR HB, Great post, you might want to check out "Consumed" by Benjamin Barber. Not as good as Jihad vs. McWorld by the same author, but hits on some ideas you have discussed here and in other posts.

A little time bomb I see in this financial mess is the US Federal Income Tax Schedule. If we consider how low taxes are right now compared to the history of the US income tax system, everyone should be planning for the great tax hike of 2011 (only consider the expiration of the Bush tax cuts). This goes for even low marginal tax rate payers. For people making over 100K, it's going to bite even more. With ARM resets, it is going to be ugly even for higher income homeowners. A bigger chunk of income is going to be eaten up by taxes in the next 10 years.

Anonymous said...

We've all been talking about local incomes not supporting the price of homes. What about the thought of foreign investors, flush with cash made overseas, driving up prices?
Is there any data on that? Is real estate prices truly set from local economy?

Anonymous said...

@anon 10:01,

There may some wealthy Europeans, Asians, Middle-Easterners that buy investment homes in the US, especially in prime coastal area, but do you really think these folks are interested in homes in the Inland Empire and less desirable parts of the country? If you were wealthy and had a few hundred grand to invest, would you buy a single family home in another country if all the facts point to falling values for the next few years?

Anonymous said...

Anonymous 11:17 AM's message made me rip out my hernia stitches laughing. Either they are a REALTOR (TM) or a seriously-underwater house flipper.

If you look at the graphs for nearly any major metropolitan area, it's blatantly obvious that this is the biggest housing bubble ever. With the lesser bubbles in the past in local markets, it usually takes 10 years for house prices to regain to their former peak. But because of the hugeness of this bubble, and its national (actually global) nature, it could take even longer. We are in for a doozie. Enjoy the ride!

Make Mine A Bubble said...

What Anon 11:17 doesn't seem to get is that those buyers who come to the table with 50% down from equity in their previous home, had to SELL that starter home in order to withdraw the equity!

If starter-home purchases evaporate, we all come to a grinding halt. With no infusion of "new blood" into the housing market, your turnip is dry, dry, dry.

BTW, here is another great column from Bill Fleckstein over at MSN. Gotta love this guy:


I smell desperation,

Anonymous said...

Doctor, are you in california? Where do you see 500K for homes in california? Maybe you are talking about desert california or backwards contry living california? or the eastern cities in california, such as stockton? modesto? santa clarita?
or bad areas in california such as Vallejo, Oakland, Hayward, or East LA?
Most educated professionals prefer to find a desirable house in a nice neighboorhood, such as del mar, poway, carmel valley, arcadia, newport beach, laguna hill, palo alto, cupertino, etc...there you cannot find any 500K prices. The minimum asking price is 900K!
So, that is more like a california price.
Don't expect prices to come down significantly in these areas. In fact, in a good area with top schools, there are still multiple offers for a house, specially in cities like cupertino (home of Apple).
If you really know any house in california, asking for only 500K, please don't forget to mention the names of the cities.
Even in california, you still find a lot of uneducated, low class families, composed of mostly black or mexicans, or vietnamese, filipinos, and blue collar whites. You don't want to live in these areas for sure!!


Anonymous said...

Let me chime in with the others.....me and the wife make around 250k combined per year. we own our condo outright and are technically millionaires.

having said the above, we have looked at property around us and at the jersey shore. we cannot afford it.

so here we are, technically millionaires, looking at properties and realizing we cannot afford them.

If we can't....who can? who has been putting themselves into such debt? If millionaires look at a 700k condo and say no way, then why is Joe Sixpack buying it?

its a shame in this country they teach you to be a debt slave. It took us awhile to learn that.

the old fashioned way works pretty good. spend less than you earn and save your pennies when you can. Dont be a debt slave.

peace of mind is not achieved with some big house. it is achieved by living debt free.

Taylor said...

I still think it's silly that people think that 401(k) programs are "saving" in any way, shape, or form. They are investments at best, and speculation at heart, as much as the dysfunctional housing "market". The only way to actually save money is not to spend it. "Investing" is not "saving", and 401(k)s are one more way to gamble on the market, hoping that it will pay off later.

Sad thing is, the US economy is based on spending, consumption, and speculative greed. If you truly want to be wealthy, or just be able to save for your retirement (as in, be able to pay for what you need, without requiring "liquidation of assets" to do so), spend less than you earn, and don't rely on other people to make you wealthy (which is what Wall Street amounts to). Be a producer, not a consumer.

Too bad there's not really any support for such a "puritanical" work ethic these days. Saving money by loaning it to the banks in savings accounts pays substantially worse than "investment" (appreciating 10% a year, anyone?), and even that's only if the bank guarantees being able to reclaim your money at any time.

Bottom line, there are no safe investments, by definition. As long as our economy is based around taking risk and gambling away our livelihood, hoping to leave someone else holding the bag, this sort of bubble is inevitable.

Anonymous said...

Too bad you understand very little about investing. True putting money in a 401K has some risk but all studies have shown that over long time periods you will come out ahead. Look at the past 80 years of investing history and you will see that any 20 year rolling period will product returns of 10%. This is assuming you are properly diversified of course. Yes, technically the stock market is risky but there are many ways to mitigate this risk that any reasonable person can use to save responsibly. Investing in the stock market is not a game, it is funding the economic growth of the future. Putting money under your pill will surely degrade its value over the long term because of inflation.

Anonymous said...

I still think it's silly that people think that 401(k) programs are "saving"..
no offense but this is the dumbest statement I read in a long time.. if this is the level and kind of people this board attracts and talk about housing bubble and such?
you as bad as the idiots paying 500k for a shack..good grief

Anonymous said...

Why are we comparing NATIONAL income numbers to CALIFORNIA housing prices. If you compare the national income numbers to the national median home price (about $200k?) you'll find that a home is within reach for a much larger percentage of the population. I would imagine California income numbers are higher than national average as well, which correspond with higher housing prices here. That doesn't mean that housing isn't currently over-valued here or nationwide, but the situation is not as dire as that portrayed when comparing numbers for two different populations.

Dr Housing Bubble said...

@anon 2:55,

You are doing the right thing holding back. And why would anyone buy at the peak in the housing bubble? Not sure what the desperation is to buy right now. A few years ago, the argument was that real estate was going up 20% per year so next year you would be out. But wouldn’t the logic of a declining market lead you to think that maybe you would wait because the market may go down 20%? Somehow for housing pundits whether the market is going up or down doesn’t really matter, it is always a good time to buy regardless of price.

@anon 6:05,

Thanks for the link. The CDO market implosion is only beginning and look at how much brouhaha is already happening.

@son of brock landers,

I will make sure to take a look at that book. We have unbelievable trade deficits. I’m not sure we can keep on spending without raising taxes. Kind of like buying a $500,000 home with a $60,000 income. Someone is going to eventually need to pay for all this spending.

@anon 10:01,

That is a good point but I think the number is small. I mean how many times have you seen the Japanese salaryman or the London trader living in Lynwood, South Gate, Compton, or Huntington Park? If anything foreigners are buying the MBS debt. Little do they know that the notes they have in their hands are securitized by fabulous homes in areas with high crime and low rent rates.

@anon 10:03,

As long as they use facts to back up their arguments, then we can listen. But when they use anecdotal evidence of someone in a $1 million dollar neighborhood, I’m not sure this has any macro significance to the overall housing market. This thing is global and beyond local dynamics.


My parents didn’t buy their starter home in crime invested areas. They bought in blue collar areas that had decent schools and safe neighborhoods. We aren’t talking about Newport Beach here. But a starter home is now some tiny box in an area where schools are marginal. The middle class will not move there. And this idea of everyone trading homes like baseball cards and making it to the top is absurd. This is the definition of a ponzi scheme because the last folks in get hammered, but those in the beginning do well. No economic logic to this.

@anon 10:54,

I am in California. You can get a condo in Irvine or San Diego for $500,000 in a nice area. Prices are now adjusting. I agree that homes are a lot more but in time these will adjust to reflect local income levels. Some poorer areas unfortunately will be hit much harder.

@anon 10:54,

But you’re not a true millionaire until you have a mortgage. Or so the housing industry would like you to believe. The key is to manage your debt and income. Of course there are folks making $500,000 a year so they don’t worry about their ARM adjusting and increasing payments by $1,000 a month. But what about the $65,000 household that went with a 1.25% teaser rate mortgage? They will face a harder reality.

@taylor and anon 1:04 and 1:14,

I think investing is important. There is a difference between bubble speculation, outrageous home prices, and investing prudently. Like a stock, you have a price to earnings ratio giving you an idea of how well a company is functioning. Some stocks are priced at a low to moderate value and you can make decent money from here. Some are riskier and you pay for this risk. I think this applies to housing as well.

Housing has gone from being a bond-like investment where appreciation was moderate but steady to a speculative stock with a lot of upside and downside potential. A homes price should reflect local lease/rent rates to a certain extent. After all, it is only worth what someone will pay you to be in there. But right now the price/rent ratios are looking more like a technology stock than an intermediate bond fund.

@anon 1:26,

California actually has one of the lowest homeownership rates 57% compared to 70% nationally. Income levels overall are higher in California but not in the realm to justify the prices we are seeing. So let me give you some numbers instead of hyperbole or using imagination:

US Median Income: $46,326
CA Median Income: $54,000

US Median Home Price: $212,300
CA Median Home Price: $555,290

So you can see, that even though income is higher by 16%, home prices are higher by 161%. But you are right, nothing dire about that minor discrepancy.


I think having a pseudo-name for everyone will make the discussion flow a lot more smoothly. You can easily make up a blogger account in a few minutes. Hope this will help because I’ve noticed many anons post multiple times and it is hard to follow.

MMG said...

thanks dr. bubble for the info on CA incomes, I was just about to ask.

alot of the people I talk to seem to think that because the prices here are higher, then incomes must be too(or thats what they want to believe.

Actually what's interesting is incomes tend to be lower her in socal becuase everyone wants to live here is true to some extents. in some fields you get higher offers if you leave cali. thats why I strongly agree with you that prices will continue to correct over time to fall in line with income, including the more expensive areas.

Again not too many people making 250k even in SoCal to support average prices.

Dr. bubble, I wonder if you have a break down of incomes in SoCal like the national ones. I wonder how many people make 200-350k in SoCal or OC.

excellent post by the way.

R said...

Dr. B—

Continued acumen.

I happened to write an original paper in college on this exact topic (“The Coming Downward Mobility”, in 1986…NINETEEN EIGHTY SIX !). I believed I was being speculative and na├»ve, by just logically extending the (smaller) run-up in prices in the early 80’s…

…but if the trend continued, from a secure, government-backed mortgage on a home worth 2X annual household income in the ‘50’s, I figured home prices would eventually reach near a million, easily outpacing the wage curve, chilling large demographics at least…

…OF COURSE I COULDN’T predict the privatization and junking of the mortgage sector, the commoditization of homebuilding and homebuilders, outsourcing, automation, elimination of social and health insurance, and the myriad factors that make me look like an unintentional genius now…

One of the more frightening circumstances being--


Some ten thousand (brave) real estate professionals are letting us know that it is in fact white-collar organized crime we are living through. Nothing less.

R said...

R=Bob from Brooklyn : )

lendingmaestro said...

hey doc-

I want to make a clarification about the subprime market. Please don't confuse aggressive PRIME financing with aggregious subprime lending. Both are bad. Any 1% or 1.25% option arm loan is NOT subprime. These were written to millions of PRIME borrowers. Also anyone who purchased within the last 2 years with an 80/20 or 80/15 are screwed.

The CDO debacle that has started to occur is just the tip of the iceberg. This has had nothing to do with neg am loans recasting, or the 5/1 arm of the 80/20 adjusting. The shit is going to hit the fan when the prime borrowers who made no late payments and still have flawless credit, cannot refinance into an affordable mortgage.

This is starting to happen now, but the high risk prime loans that were originated in 05 to now will not adjust/recast until 3-5 years from now. By that time enough sub prime sludge, rate increases and job reduction will utterly destroy many prime borrowers

Desi said...

It's a good article. But housing in
the Silly Con valley still continues to appreciate.

Me and my wife are Software Engineers from India. Between the two of us we earn around 260K per year.

For some reason that kind of money
is not making us feel rich in the
Silly con valley.

I have looked at the houses that
can be bought for 600-800K and
for some reason they remind me
of the shanties in the slums that
I was born in Bombay.

Meanwhile I invest the money I save
and those investments now pay my
rent and feed me well.

My 1200sq. ft. rental is better
than my 250 sq. ft. shanty in Mumbai and costs only 2k per month. So for a slum dweller like me this is a huge improvement in life.

I don't owe a penny to anyone.
My rent comes out of my investment.
I drive decent fully paid for
cars. Yes I drive a cheap TL.
My kid goes to a private
school. I don't see any reason
why I should take a loan and pay 800K for a shanty and screw this all up.

I struggled all my life to get
out of that shanty in the Bombay slums and for some reason I am not paying 800K to go back to one in the Silly Con Valley.

Thank you.

Dr Housing Bubble said...


You’d be surprised at some of the median incomes. Take a look at some prime Orange County cities from the 2005 Census Data:

Median Household Income

* Anaheim Hills: $120,852
* Villa Park: $116,203
* Tustin Foothills: $96,230
* Irvine: $85,624
* Newport Beach: $83,455
* Yorba Linda: $79,593
* Rancho Santa Margarita: $78,475
* Mission Viejo: $78,248
* Aliso Viejo: $76,409
* Laguna Niguel: $76,408
* Laguna Beach: $75,808

* Laguna Hills: $70,234
* Fountain Valley: $69,734
* La Palma: $68,438
* Lake Forest: $67,967
* West Garden Grove: $66,830
* Huntington Beach: $64,824
* Brea: $64,820
* Cypress: $64,337
* San Clemente: $63,507

* Dana Point: $63,043
* Placentia: $62,803
* San Juan Capistrano: $62,392
* Orange: $58,994
* Tustin: $55,985
* Los Alamitos: $55,286
* Costa Mesa: $50,732
* Buena Park: $50,336
* Fullerton: $50,269
* Westminster: $49,450
* Garden Grove: $47,754
* La Habra: $47,652
* Anaheim: $47,122
* Santa Ana: $43,412
* Seal Beach: $42,049
* Stanton: $39,127
* Laguna Woods: $30,493
Interesting diversity of income wouldn’t you say?


Glad to see you onboard Bob. Interesting petition. From sea to shining sea we see the signatures coming in. Maybe you were a couple of decades early in calling the large credit bubble of a generation. Things take time to play out in the chapters of time but this credit bubble is one for the ages.


You bring up a solid point. Many Alt-A loans, the riskier loans made to prime borrowers, will default in the coming months. The current “sludge” as you mention is simply the low fruit that the market is currently grabbing, that of the subprime market. The egregious outright criminal loans made on buyers who financially had no business buying a home.

I agree that we are in the 1st inning of the CDO debacle. We are only seeing the first pitch being thrown out of this extra innings game. And many folks that have prime credit, should their loan reset, may find themselves unable to afford their mortgage. Many people will simply walk away from their homes. And prime when I was in the industry was 620, not exactly stellar credit. But lenders where so happy churning commissions and had a safety net of a market that was in bubble mode that even outright ludicrous loans were remedied by selling into a rising market.

I recall the experiment of the chimp throwing darts at a stock chart during the tech boom. He beat a large number of expert analyst.

lendingmaestro said...

many people erroneously think that they can walk away because of the homstead law that exists. They don't realize it only pertains to the purchase money loan and not the cash they sucked out during a refi.

In addition they'll have a heavy tax lien because the IRS will see a short sale as a forgiveness of debt. I think you've also posted about this. But now, our former homedebtor will no longer have a home to levy...so guess what??? They'll get a wage garnishment and have their wages levied. Not a situation I want to be in.

graphrix said...


This report shows how we have had net-migration in socal. It also shows how we have less foreigners staying in socal and dispersing elsewhere. And these guys have been housing bulls for years.

graphrix said...

Sorry here is the tinyurl:


turdly said...

Today, exactly, I am a millionaire. Yesterday I had $992,806 today I finally have $1,000,000 cash in the bank. Taxes will take a toll, but I'll come out at the end of the year with a million left after taxes. I turn fifty in a couple of months.
I do not play head games with myself so I have never counted my homes as an asset of value. It costs me $3300 monthly in upkeep and lost interest to keep the PAID FOR houses running. I do not understand how that is an asset of any sort until I sell it.
I did this on 5% cd and savings accounts.

I remember very well;
I recall the experiment of the chimp throwing darts at a stock chart during the tech boom. He beat a large number of expert analyst.
11:16 PM, July 09, 2007

It was a supposedly funny experiment that I think 60 minutes did for about 18 years in a row. I think the expert won once, the monkey every other time, or that's how I remember it. I was very young at the time but it sure sunk in that invesment in the stockmarket was a pyramid scheme at best. So whether I remember correctly or not, it paid off for me.
Anything that you pyramid, without pulling out your initial investment, is a pyramid scheme. I don't care if it's thinking you're a poker player, a market analyst, a cdo speculator, or just playing the lotto; when you win you take out your principal and play with the interest. When that's gone you move on.

Laypeople investing in anything without the proper education or without implicit instruction of masters is going to fail.

This is just a random rant from someone who just doesn't understand.

Here's what I think goes on in their heads;
'I misunderstood a poorly worded soundbyte taken from an obscure forum aimed at a target of which I am unfamliar with. I think it was specifically designed for colloquial usage by an imbedded faction of which I have no knowledge. Therefore; I'm all in. Let's invest.'

While sheeple won't be so succinct as to say this, I find it to be the truth with the whole housing debacle, whether on a layperson level or a CFO level, it all boils down to this is where they got their information.

Dr Housing Bubble said...


Good to see you and thanks for the link. Again, many public policy assessments have been conducted on the state regarding housing and what we need is more high density affordable housing. The in migration is of low wage workers; the middle and upper middle class are actually migrating out.


Congratulations on an extraordinary milestone and sharing it with us. To do this by 50 is great. Considering that the average nest egg of someone nearing retirement is $50,000, you are well beyond that already. You’ve done the prudent thing and invested well.

Each person has their own expertise in various areas. If you are good at programming, think about consulting. If you are excellent at accounting, become a CPA with your own firm. Ultimately, your knowledge and education is the most valuable investment you will ever make. Whether this is through formal schooling or you buying books and teaching yourself. Either way, learning is a life long process and goal.

You’ve done an excellent job and proven that you can be a bear and be wealthy.

Dr Housing Bubble said...


Northern California has bigger bubbles than here in the south. You are doing very well with your family and there is no reason to rush out and purchase a home, at least not today. The time will come to buy.

Your perspective is interesting because you have two world views; coming from a tough area to supposedly the most prosperous area in the country. Yet you are still able to see how out of control prices are.

Peppermint Hippo said...

Great blog. Question for the good Doctor and other experts:

What is the penalty/downside to homeowners who have little skin in the game (no equity) and decide to simply walk away from their homes? Besides ruining their credit, what do they have to lose?

Is it true there could be some sort of seizure of the individuals' future income?

I'm a renter but ask because I think many first time homebuyers that put 0% down believe they have little to lose financially by going through a foreclosure.

The North Coast said...

Hippo, I am in Chicago and don't know the specifics of the law in CA.

However, in most states, if you walk away from a mortgage and let the place go to foreclose, you will OWE any deficiency between the amount you borrowed and the amount the place sells for. By the same token, you are entitled to any profit from the sale over and above what you paid for the place, but profits are pretty theoretical-obviosly, if you could have realized a profit, you'd have just sold the dump.

Believe me, you don't want to just "walk away" from the deal even though you put no money down, because a foreclosure does much more damage to your credit than a bankruptcy. A foreclosure is a complete disaster. A bankruptcy is off your record after 10 years but a foreclosure follows you forever. I know many people who bought with no money down, who will do whatever it takes to hang onto their places, because they have a stake in their credit ratings. Thankfully, most of these people got sensible loans. You can get a fixed rate with no down payment, for rather more interest, and if you buy sensibly, it is not a problem. Just remember that you can buy less house.

And if you walk away owing $50K or more, the pain would be indescribable. I don't know how people ever recover,and they just about have to bankrupt, usually.

Dr Housing Bubble said...

@peppermint hippo,

Good question. It is the case that we are starting to see more short sales occurring. A short sale essentially is the bank allowing the seller to sell a home for less than the mortgage balance. For example, say you bought last year a home for $500,000 with 100 percent financing. The home is now worth $450,000. Say you sell the home minus expenses (say 6% for commission and other expenses) so that leaves you with an end balance of $450,000 - $27,000 = $423,000.

The bank has essentially "given" you $77,000. What you get in return is a 1099-C, the C stands for cancellation of debt. You will need to pay taxes on that $77,000 as income only if you have equity in assets equaling more than the forgiven debt. After all, if you are insolvent what are they going to do, take your underwear?

They cannot go after you if you are insolvent or bankrupt. The laws have changed but there is only so much blood you can squeeze out of a turnip. So many homes in California fall under this criteria I doubt lenders will have much recourse. Cars are leased and many have saved very little in 401(k) accounts.

In the end, they will have to shoulder the brunt of the damage.

The North Coast said...

Doctor, what a wonderful concept this is, shortselling your house and getting the debt cxl'd. Why was I not the one to think of such a thing? WOW- it removes a lot of the risk in overpaying for a house.

Tell me, how does this look on the seller's credit score? Does he have to bankrupt, or is avoiding BK the point of the whole business?

Something about the whole idea really smells. It seems to be a way for a person to do insane things without assuming the risk involved. I have never heard of it here in Illinois.

ned flanders said...

u wrote about "but we pay 15% into a fund we'll never see.....i am pretty sure that the standard SSI contribution is less than 15%...get the numbers right....

Dr Housing Bubble said...


Try doing some research...

Straigth from the Social Security website:

"The Social Security tax rate for 2007 is 15.3 percent on self-employment income up to $97,500. If your net earnings exceed $97,500, you continue to pay only the Medicare portion of the Social Security tax, which is 2.9 percent, on the rest of your earnings. "

"The Social Security rate of 6.2% has held steady for quite some time, but the threshold tends to increase every year. Social Security taxes are paid on an individual level; there is no discount for being married. If you and your spouse both make $90,000, then your wages will both be fully taxed by Social Security. Social Security withholdings are sometimes referred to as OASDI (Old age, survivors, and disability insurance) or FICA-SS (Federal Insurance Contributions Act - Social Security).

Next comes Medicare. 1.45% of every penny you earn is paid in to Medicare. There is no threshold. Whether you make $5 or $500,000, the entire amount will be taxed for Medicare at a 1.45% rate. This tax rate has been sitting steady for many years as well. Interestingly, when you receive Social Security income in retirement, a small amount is withheld from that money for Medicare premiums. Not only is this something that never really goes away, but the government is starting to significantly raise the premiums of well-off retirees. The law seems to change with the wind these days so I wouldn’t get too excited about this part yet unless you are already in retirement. Medicare may show up on your paycheck as FICA-MC."

Most employers will pay the other half. The number may seem high but unfortunately this is the reality.

Doug said...
This comment has been removed by the author.
Doug said...

The downside for savers is that the economic and tax system is giving you (us) every disincentive to do so. If you're earning 5% on a bank deposit and you are a high earner in California, you are paying 45% of that in taxes to the feds and the state, so you are earning less than the inflation rate, which many of us suspect is fudged to look low anyway. You (we) will be screwed again if/when the gov starts to means-test social security (which they are already doing in stealthy ways, like taxing half of it, assessing medicare premiums, etc.). And then there's the mountain of government and personal debt, much of it accumulated current-accounts deficits. How are our leaders going to get out of it? They appear to have only one option left, and that is to climb into the wayback machine and set the dial to 1973. Yep, unfortunately, I think there's a good chance they'll just try to inflate it away. During such times only hard assets hold value. People with low fixed mortgages and houses made out like bandits in the 70s. The market is not pricing this possibility in, and yet still the dollar has been sinking for years. Stock market? Have a look at the total return on the S&P in real dollars during the 70s, no safety there either. Gold did well for a while, but then tanked and even now has not returned to late-70s nominal prices. In short, nowhere to run, nowhere to hide. I'm hedging my bets - I'm keeping the house with the low fixed-rate mortgage, keeping my index funds, and keeping a pile of 1-2 year CDs even though I know I'm slowly losing purchasing power.