Original post by Rabbit2I am most familiar with [of course], the real estate market on this side of the pond. From about 1950 to 1975-1980, the average* house anywhere in the US, sold for about 3.5 times the average* salary in whatever area it was located in. In Nevada, most ppl don't make much money, so houses were relatively cheap. On Madison Avenue in NYC, ppl make a lot of money, so flats were expensive. Overall, though - the 3x to 3.5x ratio seemed to hold pretty well. After the early '80s, this seemed to sort of fall apart. Now, a house that i paid $37,800 for in 1971, is typically being 'listed' for something over $300,000. If you apply the 'double every 10 years' criteria, which used to hold for securities and other investments back in the '70s, to 2010, this would result in a multiplier of "8". Multiplying $37k by 8, yields about $296k, so at first blush, it seems to work. The problem is, that virtually nobody has received a raise (in real numbers) since the early 1980s.
When i went to work for the Federal Government in 1969, they hired me at $18,800 as an electrical engineer. That wasn't bad pay then: pump petrol was about $0.20 a gallon a loaf of 'day-old' bread (3 lb), was $0.25 on the 'knock down' shelf at the supermarket, and you could eat lunch in a transport caffe' for under $3 (including a cuppa). Now, the same lunch will cost you $8 to $12, petrol is about $3.30/gallon [varies with region], and the flat that you paid $820 a month for in 1971, is now costing you $2500 to $3500, depending upon neighbourhood. When i left the Fed Govt, i was making about $65,000. With my master's degree [in EE], and experience, i should get between $100,000 and $125,000 today. This is NOT typical of the average worker, because engineers (at least here), are in short supply - particularly those who have had NO criminal convictions and no drug involvement. In 1969, if they turned up that you had TRIED pot [on a polygraph or through verbal interviews], you could kiss your employment chances good-bye. Today, it seems that if you have never been a high level drug dealer in NYC, nobody cares. Baffling!!
With houses 'selling' for $300k, assuming you have a 20% down payment (say 60k), this leaves $240k to finance. Even if you get a 5% loan, this gives you $12k for an 'interest only loan'. Your PITI [principle, interest, taxes and insurance] monthly payment would have to be in the $1300 - 1400 / month range. The taxes on this house (in the D.C. area - northern Virginia) would be about $5600.00 a year, or $466.66/month. Neglecting the insurance you would have to carry, to keep the lender happy, we will add the tax burden to the loan payment. An average loan rate on that property would run about $1300 - 1400 per month. plus taxes, would be about $1866.66/month. Now, lets assume that the husband's income is $50,000. This would be a 'lower mid-level' engineer or software developer. Bearing in mind that, with an average tax burden (local and state + federal), you get to keep about half of your gross salary - so your monthly income would be the gross annual salary/24. The "24" derives of half the monthly salary. With the $50k gross income, this gives you about $2083.33 a month. Subtracting your PITI house payment, you are left with about $216.66 a month. This is to pay for commuting petrol, clothes, food, utilities, and everything else.
Clearly, one person at this income level, cannot 'float' a house these days. In 1971, one person could - because i did. Obviously, for the average working person, things have gotten worse. They must be even worse elsewhere, because 'illegals' keep flocking in here to live and work. Now, certainly, you have 10 or 20 of them living in one house. THAT way, they can 'make it', but not in a conventional life style. Another approach would be to rent out the garage or spare bedroom. I see a lot of that too.
When interest rates go up - as they certainly will have to, i suspect that we may see a wave of loan defaults and foreclosures, as people discover that they can't keep the plates balanced on the wooden wands any more. Note that this is assuming $50k for the first resident's salary. This is pretty high, when you consider that in this neighbourhood, many of the residents are plumbers or construction workers. Often, the wife drives a school bus. She is probably making less than half of the $50k. If you had two professionals in one household - say a physician and an engineer, their combined incomes would probably be over $150k to 200k. But then, of course, they would not be living in this neighbourhood.
Cheers.