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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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 Posted: Tue Sep 21, 2010 2:08 pm GMT Post subject: |
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| Renting in Mass wrote: | | Admin, I remember a thread long ago where you defined some metrics you had in mind that would make you comfortable with buying when they got to a certain level. Where are we at with those. Any closer? |
I think that you might be referring to the price to income ratio. The last chart I ran is a little dated as it ends in 2007 due to the delay in income data being published. I had been watching the Census Bureau's website for an update on the income data, but they apparently changed the URL where it is published, so I only found the data for 2008 a few weeks ago. I was in the process of updating the charts, but I believe that 2009 is actually out now too, so I will need to update them again, but I can tell you what it looks like with 2008 added.
Using the chart from last time as a reference, the red (average + stdev), yellow (average), and green (average - stdev) lines represent three different levels for housing prices for my own personal determination. Above the red, I won't really think about buying. Near the yellow, I will no longer consider it a bad time to buy. Near the green, I would probably very actively look to buy. Personal affordability is taken as a given prerequisite. Similarly, if at some point I happen to have enough saved up that I wouldn't care about losing the portion put at risk by a house purchase, then I would probably ignore this chart.
With that background out of the way, when the income data for 2008 was added, the price to income ratio actually dropped below the red line, at last! However, the tax credit induced mirage of increasing prices this spring looks like it may have undone this and pushed the price to income ratio back up above the red line. That won't be possible to know with certainty for awhile since the income data for 2010 is a long way off. It's almost definitely still at least in cautious territory.
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GenXer
Joined: 20 Feb 2009
Posts: 703
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| Posted: Tue Sep 21, 2010 2:32 pm GMT Post subject: |
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Which income is that? Before or after one is laid off?
This is exactly why risk management should top price/income ratios. However, this should still be ONE component of making a decision to buy, not the only component. |
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Tue Sep 21, 2010 2:44 pm GMT Post subject: |
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| GenXer wrote: | Which income is that? Before or after one is laid off?
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That chart is not about my own income, and I think you know that. I explicitly stated that "personal affordability is taken as a given prerequisite." That includes having a buffer for being laid off. The price to income chart is a tool to gauge how leveraged other buyers are so that you can exercise extra caution when others are leveraging more than in the past.
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GenXer
Joined: 20 Feb 2009
Posts: 703
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| Posted: Tue Sep 21, 2010 2:58 pm GMT Post subject: |
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| admin wrote: | | GenXer wrote: | Which income is that? Before or after one is laid off?
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That chart is not about my own income, and I think you know that. I explicitly stated that "personal affordability is taken as a given prerequisite." That includes having a buffer for being laid off. The price to income chart is a tool to gauge how leveraged other buyers are so that you can exercise extra caution when others are leveraging more than in the past.
- admin |
This doesn't really say how much leverage is there, unfortunately. That is, what is the actual leverage distribution? I throw 5:1 out there because that's a typical number, but we know a lot of people don't have 20% in their houses, especially on the high end. So if every house was 50% paid out and the incomes were low, while prices were high, this would be preferable to having high income, high price and very high leverage (7:1 for example). This is the only way you can measure true risk - by measuring the leverage distribution. We don't know this from price to income, as prices went up a lot recently, while incomes didn't. |
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Tue Sep 21, 2010 3:10 pm GMT Post subject: |
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You are right that it does not map directly onto leverage. However, the price to income ratio is in part a function of leverage for recent buyers, and so it is useful as a proxy.
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Renting in Mass
Joined: 26 Jun 2008
Posts: 381
Location: In a house I bought in December 2011
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| Posted: Wed Sep 22, 2010 12:22 am GMT Post subject: |
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| Thanks for the insight admin. I know I still feel like being cautious... |
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