Using data from the US Census, two versions of the household income to home loan ratio werecreated. The first version (
) shows the ratio assuming a 20% down payment on thehome, or an LTV of 80%. The second version (
) shows a ratio assuming a 0% downpayment on the home, or and LTV of 100%. While an LTV of 100% was probably less then50% of home buyers, it is still useful to see what sort of risks a significant portion of buyerswere putting themselves in.
“The survey covered people who bought and sold homes from August 2004 through July 2005.The association (NAR) said 43 percent of first-time buyers surveyed financed 100 percent of their homes, up from 28 percent two years ago when the trade group began tracking such figures”- Washington Post Jan 20, 2006
By 2001 a clear trend of an increase in the household income to purchase price ratio is visible(
). Given that there was an increasing rate of buyers using exotic financing topurchase homes and that LTV was generally increasing throughout the growth phase of thehousing bubble, it may be helpful to look at (
) to get an idea of what sort of financialsituation a non-trivial portion of home owners may now be in. The data used to generate theincome to purchase price charts was the median purchase price data. So a home owner thatpurchased a home in the northeast with a traditional LTV of about 80% would be taking out ahome loan about four times their annual household income. By the peak of the bubble the datashows the loan to income ratio peaking between 6.5 and 7 times household income.History shows that during the last US housing bubble in the 90’s, people who were underwaterwere generally able to continue paying the house note and as such there was not a significantspike in foreclosure. Such a trend would suggest that in the Northeast region, the income toloan ratio of 4X is sustainable. The Peak value of 6.5 – 7 times household income is clearlyunsustainable as we are now reading about the growing “foreclosure crisis”. People boughthomes substantially outside their ability to financially support in the long term while countingon short term gains created from bubble driven growth to make up the difference.An additional view of the real estate bubble can be seen in home ownership rates. Thehistorical rate of home ownership tends to be between 64% and 65%. The current bubble haspushed home ownership to 69% while the nest closest high was 66% in 1983. This is asignificant difference in historical terms as can be seen in
.This collection of data alone is capable of putting forth a very strong argument for a brutalreversion to mean in the housing market. Virtually any argument that the bottom is near innational or even regional terms is specious at best. The recent housing bubble appears to bethe greatest housing bubble in the last 100 years. The only growth that has kept pace withhousing is the indebtedness of the US as a people and as a nation (
).The question at hand is how far we have to fall. The chart in (
) shows the currentCase-Shiller values for each of the twenty urban areas that are represented by the data set.