Wednesday, May 29, 2013

Ratios and Housing Bubbles

On how Houston avoided the housing bubble and is thriving post-Great Recession.
Houston avoided over-building problems in this recession by tightening lending and home construction in the early years of the crisis. Houston didn't really have a housing bubble in the 2000s. The ratio between its median house prices and median household incomes peaked at 2.7 in 2006. By comparison, a typical Miami family would have to spend five-and-a-half years of their total income to afford an average home in the city by 2006. In Riverside, it would take nearly seven years. So as housing values cascading all across along the Sun Belt -- by 40 percent percent in Miami and 44 percent in Riverside -- they merely dipped about 2 percent in Houston.
The big key to me is ratios.  Median house price is 2.7x median income.  See, that makes sense.  You make 100,000 a year, the house you buy/own should cost about 270,000.  One glance at SoCal real estate and you quickly realize how much money you need to make to have a reasonable mortgage.  If you get much higher, you're devoting an incredible amount of your income to mortgage, or put yourself in a very vulnerable position to fluctuating prices.

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