A "great time to buy" in San Ramon?? Not according to income/home price affordability fundamentals.

Asked by Nrv, San Ramon, CA Thu Apr 10, 2008

A lot of realtors have posted that "it is a great time to buy" in places like San Ramon. Yes, prices have dropped from the late 2005 peak, but they aren't inline with affordability fundamentals - i.e. housing shouldn't be more than 4 times your income, aka, if you make 100K, you can afford a 400K home, assuming minimal other debts. Even this 4X income level is a bit aggressive, but I'm willing to concede that level because San Ramon is a nice town with good schools and weather.

The average income in San Ramon from 2007 is $116,108, according to http://www.bestplaces.net/city/San_Ramon-California.aspx. According to Trulia, the average sales price from Jan-Mar 08 is 721,189. So, we are now at a 6.2 times income to housing cost ratio. In order to return to affordabilty fundamentals, average home prices would need to drop to $464,432, which is another 35% drop from now.

So, to the realtors and others, would you rationally explain why "its a great time to buy" in San Ramon?

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Lance Holtman’s answer
Lance Holtman, , 80138
Thu Apr 10, 2008
It is only a "Good time to buy" if the buyer is "ready" to buy.

From your post it seems you might have overlooked three things

1. average is the total income divided by the number of income earners. This doesn't disclose the actual income of the individuals.

2. Same issue with average sales price

3. These stats don't take into account of two income households.
0 votes
Newportfiji, , Long Beach, CA
Mon Apr 14, 2008
Why would someone waste their time asking a Realtor if it's a good time to buy? It was Realtors who were spouting off two years ago that "it was a great time to buy" and "prices never go down." We all know how foolish that advice was. According to Realtors, every day during the past 100 years was a great time to buy OR sell real estate -- and remarkably the same will hold true for the next 100 years.

Realtors may be knowledgeable on current and past prices for their area, but they are NOT experts on future price trends. Realtors are not economists and very few have any business or economic training to speak of. They are salespeople. The reality is that they only get a commission if you buy or sell, so they have an incentive to be less then accurate as to their assessments. The few compotent Realtors with integrity would admit that prices are going down in California and most buyers could save money by simply waiting for the bubble to further deflate.

NewportFiji
2 votes
Jia, Home Buyer, San Ramon, CA
Thu Apr 10, 2008
The 4x formular has never worked in Bay Area, and will not in near future. A large percent of population is immigrants, they have quite different culture background and life style, many of them put house as first priority in their life and are willing to cut down all other spend to be able to own a house. Also there is big skew in income percentile, $200K household income is farely common, on the other hand, many people earns minimum wage, so this "average" income may be deceiving.

But I have no idea when is great time to buy, no one does until the time has passed.
2 votes
canbasher, Home Buyer, San Ramon, CA
Tue Apr 15, 2008
Hi Nrv:

Interesting conversation. As a long time homeowner in San Ramon, many people here have afforded their homes by using equity earned in a first home. Using your formula, it is true that most people would NOT be able to buy a home for the first time if they intend to use 100% or minimal money down...the mortgage plus property tax would be outrageous. However, if you take into consideration that most average (NOT ALL AND NOT 1st time) home buyers use accumulated equity to get into a larger or "upgrade", then in a sense it does not matter if your income to home price fits the formula. Its what your income to the LOAN that matters. If my home is 900K and my loan is $400K and my income is 150K then it is not a problem and does fit your formula scenario.

Most folks I've met and also in talking to builder reps here in San Ramon and specifically in the Windemere area, people move here from other Bay Area regions and use equity or other money for qualifying. Lots of people move here as other have pointed out...great school, low crime, great weather, good job prospects, lots of city amenities, great community feel and access to all the Bay Area has to offer without being to far.

Most of the people who have foreclosed in San Ramon are due to "speculators" or investors who bought homes seeing how home equity in the area from the mid-to-late 90's to the early 2000 grew and wanted to bank on that price growth. Many people did a quick turnaround, buying in a Phase 1 of the development to get the lowest price of a community or model, then by the time a 6th or 7th release came out with the prices and demand up, they then SOLD the home with easily a 50K-100K gain in just 9-12 month. We watched it happen!!

Now, those folks who did not turn that around and/or got stuck in the 'boutique' loans to make a gain when the bubble burst is what I think, caused the price jumps and the foreclosure numbers. There was such a shortage of homes that it was not unheard of to have lotteries and/or 10-15 bidders on a single home!

Anyhow, I'm not an agent just someone who lives in the area and watches the market specifically in San Ramon as I have a vested interest :-) As far as I'm concerned...it is a great move to come to San Ramon for what it has to offer, but is it a great investment RIGHT NOW...that depends on how long you looking to stay and your loan situation. Because of what it has to offer, prices will not move down too much...but they will not move up as quickly as they have in the past, IMHO.

Cheers,

C
1 vote
Nrv, Home Buyer, San Ramon, CA
Mon Apr 14, 2008
Newportfiji - I'm quite aware that most realtors would say that it is a great time to buy since their payday is based on the commissions generated from home sales.

However, as your final sentence stated, I wanted to see if there were any objective, San Ramon realtors out there who were willing to say that the data I presented is rational and that home prices will continue to drop in San Ramon while this bubble deflates. So, far no local realtors have touched my question. To them, it must be a great time to buy.
1 vote
LoveBayArea, Home Buyer, San Ramon, CA
Mon Apr 14, 2008
May be foreclosure is very high in Bakersfield or other part of central valley. Windemere and San Ramon has very little foreclosure rate.
1 vote
Jia, Home Buyer, San Ramon, CA
Fri Apr 11, 2008
John, property tax for 1.4mil is 16K, assuming 1.2% rate, and it IS income tax deductable. I don't know why you keep saying property tax has to be pre-tax. I won't argue where the price will go, but let's get numbers straight first.

Khazeem, the ultimate question will be how many people are with you, i.e., thinking house price is overpriced and standing in sideline waiting for it fall? The recent activity in the market doesn't suggest there are many, but I may be wrong. With the current inflation rate and high material costs, in my opinion, there is bigger chance that increase in salary will catch up the 4x instead of house price drop.
1 vote
Jia, Home Buyer, San Ramon, CA
Thu Apr 10, 2008
Nrv, I don't know how much the price will go down. But I know in most of the bay area, house price doubled since late 90s, and salary certainly hasn't been grown that much yet. According to your theory, the whole area needs a big correction. But the market is still very strong in many cities, I don't see why San Ramon needs to be singled out and drops another 20%.
1 vote
Jia, Home Buyer, San Ramon, CA
Thu Apr 10, 2008
Khazeem,

Yes, using $100K income to support $700K mortgage would be overstretched. But let me share some of my observations. I won't say they are general rules applied to everyone, but I believe I'm a normal house buyer and worker in bay area, what I observed should not be extreme cases.

Frist of all, as I said, $200K household income is fairly common in bay area, for a double-income family with both couple working in a big tech company, they can earn that much or at least very close to it easily.

Secondly, again, a large percent of population is immigrant, and majority of them are from eastern Asian, China, India, Korea, Japan etc. I'm one of them, so are many of my friends, thus I know what they think. They hate debt and love to own a house. So what they do after they get their first pay check? They save every possible penney towards their first house. They buy only when they can pay at least 20% down. 50%, 80% or 100% are not unheard of. And they start with small place in a cheap area, then ride the market. When their kids get older, they put the gain from the first place towards a bigger house in a better district. And some of them repeat this two or three times. If you ask my friend who just bought a 1.4mil house couple of month ago, how can they afford such an expensive house, since no way they can earn $350K a year, that's how they did it.

The numbers I list below don't lie, the home price to income ratios in most of the bay area are way more than 4, and except San Ramon and few other cities, many places haven't seen big house price drop or even any drop yet. The couple I mentioned above had to beat 17 other offers to get the house, and the listing price was 1.2mil. Believe me, rules in real estate market DOES have something to do with the area.
1 vote
Jia, Home Buyer, San Ramon, CA
Thu Apr 10, 2008
Nrv and Khazeem Asadullah, again, you have to compare city to city in ONE area, Illinois or Dallas rule may not apply to SF bay area. I took a break at work and compiled following list, all are 2007 data from CNN Money, see link below. Those are the cities around east and south bay area on top of my head, I may have missed few, but you get the idea. Now considering San Ramon schools are among the best, crime rate is among lowest, and job growth is the highest, do you still think houses in San Ramon are overpriced??

City, Median family income, Median home price, home price to income ratio
San Ramon, $126,965, $725,686, 5.72
Danville, $148,676, $970,394, 6.53
Dublin, $99,758, $688,603, 6.9
Pleasanton, $120,671, $829,628, 6.88
Fremont, $97,103, $634,184, 6.53
Newark, $83,731, $559,692, 6.68
Union City, $89,589, $585,076, 6.53
Milpitas, $101,853, $585,046, 5.74
San Jose, $87,941, $627,430, 7.13
Santa Clara, $90,757, $594,567, 6.55
Sunnyvale, $94,349, $724,061, 7.67
Cupertino, $130,536, $945,938, 7.25
Campbell, $93,517, $660,342, 7.06
Los Gatos, $144,730, $1,129,342, 7.8
Saratoga, $185,791, $1,421,383, 7.65
Los Altos, $181,543, $1,390,732, 7.66
Mountain View, $92,991, $701,930, 7.55
Palo Alto, $142,033, $960,444, 6.76
Menlo Park, $130,260, $927,808, 7.12
1 vote
Rouriel Noub…, Both Buyer And Seller, San Ramon, CA
Tue Jun 17, 2008
Using income multiply is just too rough for affordability calculation. 3x or 4x is generally applied to average American family who earns $55k living in $200k house. People in high income area like San Ramon earns twice of that average but living cost (except for housing) is not doubled. To just maintain same living standard as average American, they can spend more relative to their gross income into hosing related. Maybe 5x or even 6x is reasonable at high income area.

I do believe other than Price vs. Income ratio, the Price vs. Rent ratio and PITI vs. Gross income ratio makes more sense to assess affordability in particular local market. The PITI vs. Gross income ratio shall be more important. A good rule of sum, PITI shall be no more than 35% of gross income. By counting tax deduction saving and cost of renting, it is more like spending 10%-20% more than renting. For example, if you are a renter and suddenly got 20% pay cut, you can still maintain your current living standard, then you shall be able to afford a house.

The major drawback owning a house is flexibility. As a renter you can move whenever you want to. In case your income shrink, you can just scale down by moving to a smaller and cheaper apartment. But if you have a house and run cash flow in red, in a market like now, you are in deep trouble.

It is important not to stretch (leverage) too much. For Sub-prime meltdown and mounting losses from Financial institutes, we all learn how critical risk management is.
0 votes
Analysis-par…, , San Ramon, CA
Thu Jun 12, 2008
I think the price level for homes in Windemere community has returned to the level of late 2002. I purchased my home in late 2002 for $640K. Adding $50K in backyard, flooring, and shutters brings the total to $690K. Now my home is probably going to fetch $760-780K. Assuming 3% CPI per year, the inflation factor for the last 5.5 years would be 17.6%. So if I can sell my house for $780K now, it is still only $663K in 2002 dollars. Reasonable or not, no one knows.
0 votes
Calvin, Home Buyer, 95125
Thu Jun 5, 2008
Hmmm...You didnt count down payment, did you? I assume if I make 100k, I can afford 400k mortgage, not necessary a house worth 400k. If I have 200k in th bank, or equity from the house I live, I should be able to afford a 600k home, am I right?
0 votes
Jared, Home Buyer,
Tue Apr 15, 2008
Canbasher,
Your situation is more unique than you may realize. If I were to have bought a $400k five years ago, for 200, then I still would only be able to afford a $600k home now, I would not have "owned" a home that I bought 5 years ago and a 30 year note. I use 30 because that is what the common 3-4X income ration is usually applied to. By the time someone has enough equity in their home to 'upgrade" as you put it, they are many many years into the mortgage. Unless they plan on working 'till they are in their 80's someone would need to carry the equity just to finance the new home, still at about 3X their income just to pay it off before they leave it to their kids. Although there are many fortunate people like yourself, I believe characterizing it as normal is the kind of thinking that caused so many people to get in so deep. A 50 year old with 20 years of equity in a house financing into a 30 year note on a new place is about as smart as taking a 50 year note to start with.

The idea that salaries will catch up with prices before prices drop also troubles me. Rapid lay-offs and an economic downturn rarely cause wages to rise en mass. A few people will get rich, but more people will get unemployed or take a pay cut. The increase in wages we see in the next several years will probably not keep up with the rapidly increasing cost of commodites, especially if the economic contraction (I think that the word recession is a bad word politically, but as soon as they can exploit the word Depression we'll go straight to that) causes the "commodities bubble."
0 votes
J R, , New York, NY
Tue Apr 15, 2008
Newport: JR, I could see a realtor tell a someone they should list fast. If they didn't list, no transaction and no commission.

JR: Is this in reference to my friend story below? I wanted her to list because she owned two houses that they said they were having trouble carrying, and I could see the market going down. I did what everyone is complaining that we don't do: advising my client the market was headed down! Darned if you do, darned if you don't, is that is?

_______________

Newport: But, I am curious. In 2005 were you telling your clients they should delay buying because prices would likely fall and what advice are you providing your client's now. The reality is that few if any Realtors were telling their clients to hold off purchasing back in 2005 because prices would likely fall. If you actually were, kudos to you.

JR: I don't deal with buyer clients unless they are close friends or relatives. No one here dealt with buyer clients in 2005

NewportFiji
0 votes
Newportfiji, , Long Beach, CA
Tue Apr 15, 2008
JR, I could see a realtor tell a someone they should list fast. If they didn't list, no transaction and no commission.

_______________

But, I am curious. In 2005 were you telling your clients they should delay buying because prices would likely fall and what advice are you providing your client's now. The reality is that few if any Realtors were telling their clients to hold off purchasing back in 2005 because prices would likely fall. If you actually were, kudos to you.

NewportFiji
0 votes
J R, , New York, NY
Mon Apr 14, 2008
It was Realtors who were spouting off two years ago that "it was a great time to buy" and "prices never go down." We all know how foolish that advice was.
~~~~~~~~~~~~~~~~
I truly find this humorous. About 2 years ago I was trying to make one of my friends who had two houses understand that they'd better list it NOW and get out before the market fell. She kept insisting that they didn' t need to sell, and they would just "hold on" to the house till things came back up. She soon found a buyer, privately, who doodled them around for 6 full months without signing the contract. After she listed with me, we had a buyer in contract for a little less than that private "sale". She was hoping it would fall out of contract because she'd "given it away", and they shouldn't have listed, blah blah blah. Now, almost a year and a half later, we have 3 times the inventory, and a 3 year supply. Prices have some down about 15%. So I guess I was the only realtor in the world who wasn't saying what these two keep insisting we were saying. Go figure.
0 votes
Jared, Home Buyer,
Mon Apr 14, 2008
There is a reason that forclosures in that area are sky high. I agee with your common sense analysis.
0 votes
Nrv, Home Buyer, San Ramon, CA
Mon Apr 14, 2008
I guess all the local San Ramon realtors didn't want to touch my question...they all must think it's a great time to buy and the data I presented in my original question is a bunch of bunk. I'll be happy to wait out this housing mess until 2009 at the earliest.
0 votes
Nrv, Home Buyer, San Ramon, CA
Fri Apr 11, 2008
Jia - I think we'll have to agree to disagree on the 4x formula, but thanks for all your replies.

As for the realtors, I certainly know that the majority will say it is a great time to buy (see the original question), but I'm curious to see if there are any local realtors who agree in any way with the points addressed in my original question.
0 votes
Jia, Home Buyer, San Ramon, CA
Fri Apr 11, 2008
Nrv, I was just saying there is bigger chance in salary increase than house price drop if you want 4x formular to be met. But will we ever see 4x in near future? I don't think so, otherwise I wouldn't be in the market right now.

Oh, and what do you expect local realtor to say?? To buyers, they always say right now is great time to buy and to sellers, it's always the last chance to dump the house at good price.
0 votes
Nrv, Home Buyer, San Ramon, CA
Fri Apr 11, 2008
Jia - I think you indirectly agreed that the home price to income ratio should be a 4 X multiple per your last sentence. You looked at it from the perspective of incomes increasing rather than home prices dropping, as I suggested.

So far, the discussions have been from local residents and out of state realtors. While those inputs to my original question are certainly appreciated, I'm eager to hear from local realtors and their thoughts on my question.
0 votes
John, , Moraga, CA
Fri Apr 11, 2008
Jia
your friend who bought the 1.4 million dollar house will need to earn around 40K dollars a year pre tax just to pay property taxes. Doesn't sound like a 'smart' saver type person to me. Also, in a few yrs when the house is worth 700K, they'll lose all the hard earned money/savings.

If your argument has merit than house prices in japan should have never gone down. But have been down 50% or greater since 1989.
0 votes
Khazeem Asad…, , Dallas, TX
Fri Apr 11, 2008
Jia,

The example that I gave that you admitted was a stretch was based on YOUR data. See: Dublin (i only used whole numbers). And that one was a 6.9 cost to income ratio. Some of your data shows a much higher ratio like Sunnyvale ($94k income / $720k homes)..... a whopping 7.67. That is so overpriced that it should be criminal. And your example of the immigrants is truthful, but it has no affect on the argument put forth by Nrv. His argument still stands as the truth. Sorry Jia, you're on the wrong side of this one. An overpriced market is an overpriced market...... PERIOD!
0 votes
Nrv, Home Buyer, San Ramon, CA
Thu Apr 10, 2008
Jia and Khazeem - Thanks for your views.

Jia, you mentioned some factors about the racial demographics of the Bay Area, and how there are many Asians who move up into larger homes after saving money. While that may be the case, I still don't see how this justifies the home prices being about 6 times the average income in San Ramon? Let's look at a few data points:
1. In the year 2000, median household income in San Ramon was $95,856 and median home price was $428,700 - this is a 4.47 home price to income ratio (START/EARLY STAGES OF BUBBLE). 2. In 2005, median household income in San Ramon was $104,600 and median home price was $944,800 - this is a 9.03 home price to income ratio (PEAK) see http://www.city-data.com/city/San-Ramon-California.html ; and 3. In 2007, there is about a 6.0 home price to income ratio (I found it as 6.2 and you found it as 5.72, so let's settle on 6.0).

With these data points, the correction is already taking place, and there is still another 25-35% drop needed to get down to a 4 to 4.5 home price to income ratio.
0 votes
Khazeem Asad…, , Dallas, TX
Thu Apr 10, 2008
Jia,

Your information is great but you failed to make a solid counter-point to Nrv. Therefore, Nrv's point is still valid. What you posted says nothing about the affordability of a home in these areas in regards to income. For example: i don't care what you or anyone else says here, a person making near $100k per year cannot afford a home priced at nearly $700k. Not possible with the cost of gas, insurance, taxes, food, etc. Impossible. And that's the point that Nrv was trying to make, and his point that anything above a 4X is too expensive, and I agree. This has nothing to do with area.

But thanks for that information, I was looking for something like that... lol.

Khazeem Asadullah
0 votes
Khazeem Asad…, , Dallas, TX
Thu Apr 10, 2008
Let me add, I make pretty good in my business. In fact, I'm being modest, I do very well. But the average median household income is only $48k in America. I don't know where we get out data from. For those of us that make $200k or more, we are in the top 5% of income earners in America. This is not my data, this is the official data, so if its a lie, its a lie that they tell. But I deal with people and the average person doesn't make a lot of money. I have a link here : http://en.wikipedia.org/wiki/Median_household_income and below.
0 votes
Khazeem Asad…, , Dallas, TX
Thu Apr 10, 2008
Nrv, I just mentioned this on another forum. This is not only true for San Ramon, its true for most of America. Good post.
0 votes
Lance Holtman, , 80138
Thu Apr 10, 2008
NRV

Your link did not work and from your post, interpreted (wrongly , I guess), "income" to be individual.

After thinking about your question some more, maybe I should add, the 25% rule has not been used by lenders for many, many, many years. Currently almost everything is computer underwritten and the automated systems do not even look at that ratio (housing). The criterion now is an overall debt ratio of 50%, and case-by-case even higher.

$116,108 = $9,675 mo.
9,675 x 50% =$4,837 This is the amount available for all installment and revolving debt
$4,837 would support a LOAN of $723,514- assuming no other debt and a 6% 30yr note.
0 votes
Missy, , California
Thu Apr 10, 2008
Jia, so wise :)

Basically, high inventory=better for the buyer than the seller... therefore, BUYER'S MARKET.

Also the number of homes in escrow versus closed transactions is another indicator.

Again, you are just playing the number game. When you buy a house, you do not buy a mean value!

As an analyst, I am sure that you understand that you can make data say anything...
0 votes
Nrv, Home Buyer, San Ramon, CA
Thu Apr 10, 2008
Lance,

Thanks for your reply, but what other data would you say I should look at? I understand what an "average" means in point #1 and #2. By the way, I don't understand what you're saying in #3. According to the link I provided, the $116,108 amount is the average household income in San Ramon.

The point I'm trying to make is that based on the average sales prices of homes in San Ramon relative to average household incomes, there is a 6.2 X income multiplier to the average sales price of a home, when affordability calculators show a 4X income multiplier to the avg. sales price of a home.
0 votes
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