Sunday, August 3, 2008

WILL WE EVER BUY ANOTHER HOUSE?

We ended up houseless in California when we took too long looking for a new house after we sold ours in 2006. Prices climbed from crazy expensive into the stratosphere, far beyond what well paid techies could qualify for. Being old fashion, we still believe in the old algorithm, that we can only afford to buy a house that is three times our income.

Now we are living in Hilo, Hawaii far from the California bubble economy and we can’t help but look at housing prices here with our calculators. In our zip code, the average price of a house has gone up 291% since 1999. During that time, average wages in Hilo have gone up only 39%. Houses for sale in our immediate neighborhood are listed for $700,000 to $900,000. These are not McMansions, but fairly ordinary houses on smallish lots with 1200 to 2000 square feet of house. The yearly income needed to qualify for these houses (assuming a 6.5% fixed 30 year loan and 0 down) would be between $212,000 and $275,000.

The average employee pay in Hilo is $38,539 (based on the US Census County Business Patterns). A current job opening for a senior civil engineer with the county of Hawaii, one of the largest employers in Hilo, advertises a maximum yearly salary of $72,000. Most Hawaii county jobs in Hilo pay under $35,000. Senior professors at the UH in Hilo are paid under $150,000. Two senior PhD professors at UHH could jointly afford one of these houses. A two career couple with average Hilo incomes would qualify for a $231,000 house, less than a third of the price of the modest houses in our neighborhood.

The website zillow.com shows 17 houses listed in our zip code in some phase of foreclosure and 608 houses for sale. A house across the street from us that sold in 2004 for $161,000 has been for sale for 9 months, first at $899,000, and now at $599,000. If this house were priced in relation to wage increases in Hilo since 2004, it would be priced at $193,000, a price that a two career couple in Hilo could pay. In 1999, the average house sales price in our Hilo neighborhood, as defined by zillow.com, was $128,000. Based on average wage increases in Hilo, the current average housing prices should be $179,000, not $350,000! In Hilo, as in Silicon Valley, the math of the current housing prices just doesn’t make sense.

We created a “housing affordability graph” showing the average house sales price in Hilo between 1995 and 2006 compared that with the amount of house an average Hilo salary can buy and since it didn’t come close to being able to buy anything, we added the amount of house a two career couple with two average Hilo salaries could buy.

In 1999 the math worked for two career couples to buy a house in Hilo. By stretching financially or getting lower interest rates, a two career couple could still buy a house up until 2003. After 2003, house prices went completely out of reach financially and lost all relationship with the income earning potential of families in the community.

These unrealistic house prices are holding constant even as more houses are steadily added to the backlog, unemployment is rising (Hilo unemployment increased by 56.6% from May 2007 to May2008), tourism is falling off ( Hilo had 40% less tourists arrive by air in June 2008 than June 2007) and county tax revenues are down (26% so far this year) impacting income of the biggest employer in Hilo.

As boomers, our priorities have changed from local school ratings to local golf course ratings. A huge backyard no longer has the appeal it did 20 years ago and the energy and naiveté we had for our first fixer upper house is long gone. We are too old to count on increasing wages or inflation to cover for buying an over-priced house.

After two decades of home ownership, or more accurately mortgage-holding, we are starting to see the upside of renting. We like having the flexibility to move where ever we want without having the cost (6% to sell and 6% to buy: 12% just to change houses) and the financial risk of not being able to sell a house for what we paid. It gives us peace of mind to be able to downsize our monthly costs by moving to a cheaper rental or area. In this volatile economy we find it nice to sit back and watch what happens next. And as we wait for a time when housing prices make sense again, we are beginning to wonder if we will ever buy another house again.

7 comments:

Bruddah Aloha said...

Aloha! love your blog, Awesome information, very detailed. Yep, its outrageous everywhere!!! Our Ohana is surviving in Hilo too... So we know first hand what your talking about. Aloha! Bruddah Sean

Anonymous said...

I moved from San Diego to Hilo last month; still haven't seen the first month's bills. I'm a youngin' in the tech industry, and couldn't afford the SD prices, so I moved here. I found your blog, and I thought we were two in the same.

I've been plotting the Federal Reserve data for the past few years, and it's impressive to see how much the US has borrowed in the past 6 months.

You'll be able to buy another house when/if you're paid in Euros and living in the States.

Telecommuting + US depreciation = future outsourcing to qualified English-speaking professionals.

larry said...

since the top of the bubble in late 2005, house prices in hilo have actually dropped by 20 to 30% ... but it is obvious many realtors have not noticed this drop and still are listing homes for prices beyond what the market will pay or what lenders will loan.

we purchased a home in hilo (in komohana gardens) in october 2005 and put 20% down. at that time the prices were already dropping here and we got the seller to lower the price by $50,000.

this was actually the first time we purchased a house that was more than 1.5 times our yearly income ... the loan amount was 2.7 times our income and even with 20% down our home now appraises for less than what we still owe.

there still is a long way to go before home afford ability gets back to 2003 levels but it eventually must happen or people will be forced to leave for more affordable areas.

here is where a lot of the craziness exists, a 10,000 sq ft lot on our street is currently for sale for $215,000 ... that's over 200K for a piece of vacant land!

Tibo said...

Finding an ideal place to live is not as easy as it may seem. You need to be sure about what you would like to see in your future house and how much you can afford. For buyers with children it is sometimes difficult to find a good school nearby. Recently i have found this service http://schools.fizber.com/ that can help visitors to explore the school system in the neighborhood.

deirdre g said...

Nice graph. Your surviving very well. Keep it up!

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Tiago said...

Sometimes I don´t understand under what bases Real estate Agents assess departments. It doesn´t seems logical or fair this kind of prices variations. And it is not good for the business either because it creates a big uncertainty that may paralizze the industry.

Nobanno said...

Oh I feel sorry for you. This real estate industry is growing day by day and this type of wrong behaviors is not expected from the real estate agents. But there are still so many good real estate agents for giving great support.
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