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A key indicator of the health of any real estate market is activity in the lower end of the market, as new buyers provide liquidity for growing families to trade up into bigger homes. Median home values are a better barometer than average home values in assessing the health of this market segment.
One way to evaluate how much farther prices will have to fall is to approximate median incomes in each zip code and to apply some basic financial planning concepts to determine what median prices should be. Any study of this nature requires a number of material assumptions which are highlighted below.
Median Incomes: Year 2000 Census Data shows 1999 incomes by zip code. If I increase these incomes each year by an average 3% inflation adjustment, the result is:
Approximate 2008 Median Incomes:
• Tiburon: $187,500
• Mill Valley: $153,500
• Sausalito: $127,285
After tax budget spent on housing: Basic financial planning concepts dictate that no more than 25% - 30% of one’s after tax income should be spent on housing costs. Due to the desirable lifestyle and great public schools in Marin County, people tend to stretch their budget a little farther, so my assumption is that the average after-tax income spent on housing in Southern Marin is 37%.
Debt to Equity Ratio: In the United States, the average homeowner’s home equity in has steadily eroded: from 81.5% in 1950, to 46.5% in 2008. In the calculation below, I use an average Southern Marin homeowner’s equity of 35% -- or 65% of the home is mortgaged. Small changes in this ratio yield large changes in projected median home values.
Tax Rate: The average tax rate is approximately 12% of gross income after deducting home mortgage interest, property tax, and personal deductions.
Example: A family living in a Tiburon home earns $187,250, and pays ~$21,250 income tax after deductions, leaving them with $166,000. If they spend 37% of this income on their home (30% on interest) and they would be able to afford a $50,000 annual mortgage expense (rate 5.75%), and an $870,000 mortgage. If the average debt to equity ratio is 65% then the median home value in Tiburon should be approximately $1,322,650.
The implication here is that median home prices have farther to fall. For instance, in Tiburon, adjusted median incomes point to median home values of almost 25% lower than where homes are currently trading. In Sausalito it is 26% lower, and in Mill Valley it is 10% lower.
An important consideration in this analysis is that if Tiburon median home prices are $1,322,000, then the median family buying a home in Tiburon should have $463,000 (35% equity) cash in the bank for a down payment, as well as several months of living expenses in cash for their “rainy day fund,†for a total of approximately $600,000 in cash.
Another important consideration has to do with the public schools and the percentage of after-tax income new families are willing to allocate to be within the Mill Valley or Tiburon public school districts. Considering the price of private school over time, the cost savings is substantial (provided the state budget cuts do not materially change the quality of public education).
How Far Will Housing Prices Fall
A key indicator of the health of any real estate market is activity in the lower end of the market, as new buyers provide liquidity for growing families to trade up into bigger homes. Median home values are a better barometer than average home values in assessing the health of this market segment.
One way to evaluate how much farther prices will have to fall is to approximate median incomes in each zip code and to apply some basic financial planning concepts to determine what median prices should be. Any study of this nature requires a number of material assumptions which are highlighted below.
Median Incomes: Year 2000 Census Data shows 1999 incomes by zip code. If I increase these incomes each year by an average 3% inflation adjustment, the result is:
Approximate 2008 Median Incomes:
• Tiburon: $187,500
• Mill Valley: $153,500
• Sausalito: $127,285
After tax budget spent on housing: Basic financial planning concepts dictate that no more than 25% - 30% of one’s after tax income should be spent on housing costs. Due to the desirable lifestyle and great public schools in Marin County, people tend to stretch their budget a little farther, so my assumption is that the average after-tax income spent on housing in Southern Marin is 37%.
Debt to Equity Ratio: In the United States, the average homeowner’s home equity in has steadily eroded: from 81.5% in 1950, to 46.5% in 2008. In the calculation below, I use an average Southern Marin homeowner’s equity of 35% -- or 65% of the home is mortgaged. Small changes in this ratio yield large changes in projected median home values.
Tax Rate: The average tax rate is approximately 12% of gross income after deducting home mortgage interest, property tax, and personal deductions.
Example: A family living in a Tiburon home earns $187,250, and pays ~$21,250 income tax after deductions, leaving them with $166,000. If they spend 37% of this income on their home (30% on interest) and they would be able to afford a $50,000 annual mortgage expense (rate 5.75%), and an $870,000 mortgage. If the average debt to equity ratio is 65% then the median home value in Tiburon should be approximately $1,322,650.
The implication here is that median home prices have farther to fall. For instance, in Tiburon, adjusted median incomes point to median home values of almost 25% lower than where homes are currently trading. In Sausalito it is 26% lower, and in Mill Valley it is 10% lower.
An important consideration in this analysis is that if Tiburon median home prices are $1,322,000, then the median family buying a home in Tiburon should have $463,000 (35% equity) cash in the bank for a down payment, as well as several months of living expenses in cash for their “rainy day fund,†for a total of approximately $600,000 in cash.
Another important consideration has to do with the public schools and the percentage of after-tax income new families are willing to allocate to be within the Mill Valley or Tiburon public school districts. Considering the price of private school over time, the cost savings is substantial (provided the state budget cuts do not materially change the quality of public education).