Posted by Karl Denninger
Hattip to the forum for the pointer to this one…. yes, I know the original post was written in 2008. It’s still relevant, and should be required reading to understand exactly how screwed people’s opinions in the “homebuilding” space are.
As a Builder, I am extremely interested in the current debate about the home building and mortgage finance industry. One comment I have heard repeatedly over the past several weeks is the need to return to “sound mortgage standards” based on home values of 2.5 to 3 times income, 30 year fixed rate mortgages at 80% loan-to-value and a 20% down payment. But just how realistic is this?
Ah, the old “let’s appeal to what people deserve” game.
According to the U. S. Department of Housing and Urban Development, the median household income in the U.S. in 2007 was $59,000. If we return to sound mortgage standards, median home values would have to be $147,500 (2.5x) to $177,000 (3x).
So under “sound mortgage standards,” a household earning the median income would have to save $29,500 (2.5x) to $35,400 (3x) – 50% to 58.5% of their annual household income – for their down payment before they could purchase a home. Is this realistic?
“Realistic” (as defined by “what someone deserves”) is irrelevant. What matters is mathematics. You know, that ugly science that says that some things you want are just not achievable? Yes, that.
According to the U.S. Census Bureau, the median home price in the U.S. is $231,000, so median home prices would have to drop 37% to 48%. Is this realistic? Even those homeowners who purchased their homes using “sound mortgage standards” would owe more than their home is worth.
You helped create a massive bubble and support the mispricing of the homes in that bubble, and thus YOU are partly responsible for the above condition.
Now you wish to argue that it shouldn’t exist, because, well, people “deserve” something better. Wish in one hand and wipe your butt with the other; it won’t change what’s in or on either.
As a Builder, I would love to be able to build and sell new homes for under $148,000. But is that realistic?
According to the National Association of Home Builders Economics Department Construction Cost Survey, the average new home built in the U.S. in 2007 was 3,340 sq.ft, was built on an 11,968 sq.ft. lot, and had a total sales price of $454,906.
According to the NAHB the “average” new home built in 2007 was nearly three times the size of the one I grew up in and was built on a lot that was ten times the square footage of that same home.
Oh, and by the way, my family was decidedly middle-class. My father was a CPA for a glass company. Not exactly a “pedestrian” or “lower blue collar” income. Both he and my mother have college degrees; his in accounting, hers in education. She decided to stay home and raise a family, he went to work every day, driving 25 miles one way to do so.
We had three bedrooms for four of us (the adults obviously shared), one bathroom that had a toilet, a tub and two sinks, a living room and an eat-in kitchen. One story with an unfinished basement (containing the laundry gear, furnace, hot water heater and electrical panels); that’s it.
No air conditioning, one telephone on the wall, one black-and-white TV (we couldn’t afford color) which sported rabbit ears and, later in my youth, I helped my father install on the chimney an external antenna with a rotator.
According to the Idaho Department of Labor 2007 Occupational Employment and Wage Report, the median hourly wage for construction trades workers in the Boise City – Nampa MSA $13.85 plus 21% for payroll taxes and insurance equals $16.75 per hour.
That’s funny. I remember quite vividly that the glaziers in the shop my father worked at were union boys and earned about $31/hour gross – that is, before payroll and other taxes and such, and of course before overtime. This, I will remind you by the way, was in the 1970s. So if the actual cost of “labor” in Boise City is $16.75, I’d say you’re getting a hell of a deal, inflation considered and all.
In conclusion, how realistic would it be to return to “sound mortgage standards” based on home values of 2.5 to 3 times income, 30 year fixed rate mortgages at 80% loan-to-value and a 20% down payment? Not very. Doing so would certainly change the home building industry which historically accounts for 10% to 15% of the gross domestic product of the U.S. We would build fewer new homes and the ones we do build would be much smaller homes on much smaller lots. And home buyers would certainly have to adjust their expectations.
Maybe I should start building apartments
Maybe you should pull your head out of a place the sun does not shine and take responsibility for helping to bankrupt this nation.
You, and those like you, have led people to believe they can have something for nothing. That they can violate the laws of mathematics with impunity and never pay for it.
You are just like my father, who, after he retired, decided he would “get his” and thus supported (strongly) Medicare Part “D” – despite full and certain knowledge, since he’s a CPA and understands compound interest, that it would be impossible to sustain the program on an indefinite forward basis and HIS GRANDDAUGHTER would INEVITABLY get screwed as a consequence.
I don’t really give a good damn what you think you should be able to build and what people should be able to have. It’s not relevant.
What’s relevant is the mathematics of leverage and compound interest. These are mathematical laws, not suggestions. Violating them with wild abandon and willful intent is why the nation is in the mess it finds itself in now.
May I remind you that of those who have completed “HAMP” modifications find themselves with DTIs – that is, mandatory debt service payments – over 60% of their pre-tax income. If you then add into that things like automobile insurance, medical insurance and bills, fuel for said vehicle, utilities for the home, food and similar necessities both to live and continue to be able to earn an income, along with taxes (yes Matilda, everyone pays FICA and Medicare irrespective of income) you find that this so-called “beneficiary” of your profligate pumping of “home values” finds himself eating dogfood and being a literal leaking water heater away from family bankruptcy.
I simply don’t care if people are unrealistic about land values – that will change out of necessity, irrespective of what those people – or you – might want.
But to claim that the “average” family should be buying a 3,000 square foot house is simply outrageous. It speaks directly to the idiocy of “pump it up” finance and ridiculous and outrageous statements from people like Chuck. “We all are owed McMansions and by God, we’re gonna have ’em – whether we can pay for them or not!”
Yes, that posting was from 2008. But Chuck hasn’t stopped. No, just a few months ago he’s played “buy now or be priced out forever!” once again, citing, of course, the earthquake in Chile:
Are you waiting for the price of that new home you’d like to build to drop further? I wouldn’t.
That was copper, remember, along with oil (which goes into a lot of things, like, for example, asphalt shingles)
How’s that worked out the last few months?
It was “going to the mooooooon!” through 09 remember? Now, not so much:
And oil? Remember, Goldman (and others) told us it was going well over $100 soon (again.) Yes, I noted that it might, on a technical basis. Well, so much for that:
This looks more like “don’t be a sucker and buy into the hype” to me than “buy now or be priced out forever!”, when one looks at the issues analytically.
Make good choices folks, and kick to the curb the asshats who have, for the last two+ years, tried to goad you into doing something that will leave your bereft of your labor and accumulated wealth.
A “nice big house” isn’t yours unless it’s paid for – if you have a big fat mortgage on it the bank owns it and your future labor. You in fact own nothing other than debt.
Don’t let Chuckie talk to you into doing something stupid – when homes are 2-3x average incomes and you have saved that 20% down payment, then and only then do they make a moderate amount of sense to buy – and then as a place to live, not as an “investment” that you expect to appreciate in value.
Remember, Chuckie’s certifications (self-claimed, I’m not making this up) include Certified New Homes SALES Professional and Certified New Home MARKETING Professional.
That is, he’s certified in the art of separating you from your money by selling you something.
That, incidentally, just might be adverse to your interests.