Calculating the Housing Bottom

Its pretty simple.  I’m not sure why this is so difficult for people to grasp.

Housing prices need to reach a level where the average consumer can afford to enter the market with a 20% down payment on a home loan and have enough disposable income left over to afford the mortgage payment.  Any government intervention that prevents this market determined equilibrium from happening will delay the housing market from reaching a true bottom.

So, does the average consumer have the ability to come in with 20% down and make payments at current market prices?  Of course not.  44 million Americans are on food stamps and the rest of the population can barely get by.

Let’s see how close we can get to determining this.

Median household income 2009: $50,221 (around 33,000  after state/federal/local taxes 35% assumed rate)

Personal savings rate  2011-05-01  5.0%

Total annual savings per household of around $1,700 a year

Overall home price median as of March 2011 $156,100, which would make an average 20% down payment to be: $31,200

It would take the “median” person nearly 16 years while earning 1% savings interest just to save up for a down payment, and forget about inflation, retirement, paying for the kids college, etc.. etc..

Bottom line, prices are still too high.

I noticed that home prices have been trending upward once again, but this is simply another government fueled boom that is not predicated on solid market foundations.  My friend just recently purchased a home with 3% down due to government backing his mortgage.  While my friend did not use a VA loan, VA home loans also offer 3% down payments.  There are a lot of veterans out there.

I figure a solid 10 years is an appropriate time frame for the average person to save up for a down payment on a home.  Given that number, I figure housing prices need to fall by half in nominal terms before a stable bottom can be reached that is not predicated on govern ment subsidies to the banking industry.

Consider this previous article I wrote that details the massive financial problems our government is currently facing and it should become obvious that continued housing subsidies will be impossible for it to maintain.

If the government prints money until the value of the dollar is reduced by half, yet housing prices remain the same, this will still not solve the problem because savings rates will not increase.  The interest rates have to go UP in order to encourage the savings rates necessary for people to be able to accumulate the necessary money for a down payment in a reasonable amount of time without having to rely on government subsidies.

Looking at the year 1980, median income was 17,000 with a median home price of 47,200 with an interest on savings accounts at 10.5%.  That works out to a 2.77 ratio income to price in 1980 vs. 3.1 presently along with 10 times the interest on savings.  So 9,440 down, and the average savings rate was around 10%, if we assume a median take home income of 11,000, that means the average time for a person to save up for the average down payment in 1980 was less than 6 years as opposed to the 16 years it would take them today.

While this is all back of the envelope calculations, it should be readily apparent that the current income and savings levels of the US population do not justify a median home price of $156,100.  Home prices are still high strictly because of government intervention in the lending markets.  A true stable bottom is a long ways off.




  • KenC

    Median != average. Switching from one to the other to make your point is disingenuous.

    • When you have highly stratified income distribution, using the average would be disingenuous.

      Since the US has become a socialist state, its wealth stratification has increased tremendously.

      It would be far more disingenuous to use average income when calculating.

  • Nospamplease

    Taking into account the oversupply created by the housing boom prices will most likely over correct your model as well. Im sure we will see supply destruction in the form of whole suburbs being leveled en-mass across the US like the burning of wheat fields during the great depression.