Insanity

Here is one way to think about the total insanity of real estate prices:

Today, I was talking to my dad about home ownership. When my parents bought their house -the house they still live in today - the total amount they paid was roughly double the combination of their two salaries at the time. These are all pretend numbers, but that is like saying their combined salary was $100,000 and the house they bought cost $200,000. My dad couldn't remember exactly, it might have been a little more than double, so say $250,000 just to be generous to what we know to be inflated current prices.

Now, today, if you make over $200,000, that puts you basically in the upper 10% of income earners - the people Obama calls "the rich." Based on the real estate price to salary ratio of my parents time, ie pre-total insanity, these folks could roughly afford a $500,000 house. Here are some houses that cost $500,000 in Los Angeles. Not what I would call rich.

Let me think about the numbers here...

$500,000 house putting down 20% with a 30 year fixed. Nifty google mortgage advisor tells me the following:

You need $100,000 down and with a $400,000 mortgage, your monthly rate is $1,880.

Let me do some more math...a couple with a take home of $200,000 probably ends up with $100,000 after taxes...and (12*1880=22,560), so that amounts to about 1/4 of their income going to the home, which is probably a pretty wise and thrifty ratio leaving you enough money for other expenses and having kids. Plus, somewhere along the line, the couple needs to have amassed $100,000 which is no easy feat without familial assistance.

Now, all this assumes a couple makes $200,000 a year combined. I know exactly NO couples who make that much money who are looking at buying their first house. Someone making that much dough in their 30s is doing incredibly well. Probably a lawyer or a finance person or an MBA or doing well in entertainment. This is not a model for average folks - and when I say average - I'm saying college-educated, used to upper-middle-class kind of stuff, folks. This doesn't even begin to touch upon lower middle class wage earners or folks struck by poverty.

What is a median salary for a college educated person in LA in their 30s? I don't know. Maybe $60,000? Seems pretty good to me, especially in this economy. Two people with two decent jobs, you'd probably be happy making $120,000 combined. That is roughly what a doctor in residency or a just-getting-started Creative Executive or Agent or Staff Writer in TV probably makes per year. Using my earlier math - this couple can afford a $300,000 house. I don't where you can a real house in LA for $300,000. Probably a condo, if that. Otherwise, you're up north in Calabasas or out in the Inland Empire or San Gabriel. Not exactly primo locations for well-to-do professionals wanting to raise kids.

What is my point here? Housing prices need to drop or wise folks will continue to rent. So long as housing prices stay artificially high because of insanely low interest rates, the mortgage tax deduction, and the banks sitting on foreclosed properties, housing will remain a bad investment for first time buyers. Furthermore, it will incentivize ponzi-scheme behavior that got us into the crisis - people leveraging their existing houses into buying other houses.

Who buys 1 million dollar homes in LA? I doubt many are well-to-do professionals who scrimped and saved $200,000 and who make $400,000 per year combined. There are very few of these type of people. I imagine it must be people who are taking out money against their existing home and throwing it into another home. Or people with lots of cash lying around. Or people who can't afford a $1 million dollar home.

Very curious.