The downside of rising house prices
This is a headline that's heard a lot: "Good news for the economy, housing prices are up." But think about that for a minute. What other products make the economy better when they get more expensive? Why do we associate more expensive housing with a better economy?
For people who own their home, rising prices means more equity. It's an investment in your future. But there is a down side to rising housing prices, and not just the unsustainable growth that leads to real estate bubbles. Even steadily rising home prices have consequences.
For decades, housing prices have gone up faster than incomes. As a result, there's been a decline in the number of houses that are affordable to the average family, and even families that can afford to buy a house have to pay more. I wanted to visit a city where this is playing out, and San Luis Obispo, Ca., seemed like an ideal place.
San Luis Obispo is on the central coast, about halfway between Los Angeles and San Francisco. The night I was there it was easy to see why people want to live there. One of the downtown streets was closed for a farmer's market. A street band played outside the Victoria's Secret, and everything had a soft glow from lights strung in the trees. The city is bordered by mountains and surrounded by vineyards that provide grapes for the blossoming wine industry.
Not only is it beautiful here, there are good jobs. The median income is about $71,000, well above the national average.
"The largest employer here is the State of California," says Brad Taunt. "That's with employees in two state penitentiaries. We also have Cal Poly, our university. After the government sector, then it's agriculture and tourism, ag being the wine industry."
Taunt is one of the first people I sought out in San Luis. He's been a mortgage lender here for 27 years. I presented him with an imaginary family making the median household income of San Luis Obispo and asked him what kind of loan he could offer that family.
"That particular buyer could find a house for about 356,000," says Taunt.
I then packed my imaginary family into the car, along with the imaginary loan papers, and drove over to real estate agent Monica King. I asked her to show me what that $356,000 would buy in the city.
In her office she pulled up some listings with photographs of single family houses.
"These pictures are wonderful compared to in person," King says, pointing to a ranch style house in one of the least expensive San Luis neighborhoods. "It's older, built in 1963, 1,585 square feet. It does have new carpet but it's pretty funky."
Then came the bad news. This was the cheapest house she had, and it was $475,000. She told me there were no single family houses that didn't need significant repairs, available for $356,000. My imaginary family was crushed.
So if more than half of the population in San Luis couldn't afford the cheapest house, what are their options? Most of them rent, or they buy houses outside of the city, in other parts of the county.
"We never imagined in a million years that we could afford a house," says Risa Brown. She and her husband, Martin, came to Brad Taunt over a year ago to get a mortgage loan. They were about to have a baby and wanted more space than they had in their rented condo. Together they still made below the median income. "I have a handyman business," says Martin, "Risa and her dad run a property management business so I do a lot of work for them, probably 95 percent of my work is through them."
The Browns were able to buy, though. I visited their new home in Atascadero, a town 20 miles north of San Luis Obispo.
"We paid $316,000 for this place. It's over 1,500 square feet, three bedrooms, two-car garage on a quarter-acre lot," says Martin.
Living in Atascadero means a half hour commute into San Luis. And they spend about half of their monthly income on their mortgage payment. Just a generation ago that was unheard of, says Taunt.
"Back then, income-to-debt ratios were 28 and 36 percent, meaning, of your gross income you could have 28 percent of your income going toward your housing expense." And you could spend 36 percent of your gross income on the combination of housing and all other debt, like student loans, cars, credit cards.
Today it's common for families to spend half their income on their mortgage payment. This means, cutting spending on everything from eating out to fewer vacations, or less rainy day and retirement saving.
And as families spend more on housing they are making less.
"Incomes, surprisingly, when you adjust for inflation, have been declining since 1999, which is pretty startling," says Erik Franks, an analyst with John Burns Real Estate consulting. "So purchasing power is slightly less. Actually 10 percent less than it was about 13 years ago,"
The day after I left San Luis Obispo I got a call from Brad Taunt. He wanted to emphasize that even with the challenges facing first-time buyers, this is a great time to buy, if you can afford it. Interest rates are still low. And housing prices are on the rise.