Peak Market Conditions

This study pertains to the greater UPS neighborhood of North Tacoma, dating back to the year 2000. It encompasses a designated area description known to my appraisal-peers and industry professionals, that of which generally reflects most the 98406 zip code. The sample of data for each year analyzed is robust and lends credible results; bank-owned data has been excluded. This area has a well balanced blend of homes without many outliers to skew data. It’s an overall fair representation of the market as a whole. Annual Household Median Income data was gathered from the Washington State Office of Financial Management. Historic interest rate data was gathered from Freddie Mac online database.

For the last generation, housing affordability has consistently become worse each year. The most affordable time being in the year 2000 when the annual median income was 28% of the median home price, and then again in 2011 when housing prices had hit bottom as the result of the 2008 Great Recession. The ratio then was 24.4% median-income to median home price.

In 2007- at the peak of the housing market before collapse in the summer of 2008- the median annual income of $56,426 represented 17.6% of the $320,000 median home price. The median annual income for 2018 has yet to be reported however, is estimated to be in the range of $69,450 which is 16.6% of the median home price of $417,500.

In 2007, an initiated loan would have reflected an approximated cost of about $18,259 in annual interest on that $320,000 home based on an average APR of about 6.34% for that year period, and an 90% LTV. In 2018, that $417,500 home at an average APR of 4.54% will have cost about $17,059 in annual interest, assuming a down-payment of $41,750.

So, essentially the cost to borrow money on the 2018 median-price home is comparable to the last time the market experienced such a peak, and the contrasting income-to-price ratios are also nearly the same. The cost still breaks down somewhat differently. The debt/income ratio in 2007 relative to the cost of interest was about 32% of the median income. As of 2018, that figure is about 25%. The market is therein closely teetering on peak-conditions. As usual, interest-rates play a major role in affordability however, that’s only one factor.

So what has changed in the last 12 years since the last real estate peak? Local employment boom is instep with population growth, although income and wealth disparity is well documented. Despite the concentration of higher income jobs in some sectors, median incomes have only modestly increased. The wage of the typical wage earner is not entirely keeping up with the cost of housing.

An unfortunate and looming influence that has a direct and an indirect affect on most wage-earners has been ongoing Consumer Debt. Auto loan, credit card, and student loan debt is the highest it's ever been and continues to fuel the cost-of-living surge. Health care costs continue to soar, one of the largest influences on American credit card debt and bankruptcy. Since this study encompasses household income, the rising cost of childcare has fair mention, if not being a prominent factor.

So, is this the new normal for market behavior and housing prices? Has the median income been reduced to just a mediocre income? How did it get so off balance? What will happen next? There are no defiant answers- well at least not for the latter inquiry of what’s to come.

The sanctity of both lending and monetary policy is ultimately a mystery and is assumed to be sound. That being said, it would not appear that we’ll be seeing another sub-prime meltdown in the housing mortgage market, although other sectors such as auto-loans are up for speculation. The ice-field that sunk the market in 2007 was a combination of a number of issues not limited to- resetting Adjustable-Rate-Mortgages; mortgage payment delinquency en mass; REO saturation; floods of housing inventory across virtually all markets and price ranges; major collapses within the banking sector; credit tightening to the point of a lending-moratorium; and then a tax-payer funded bank bail-out. Unless the NINJA loan of the past is masked by another form of malfeasance, perhaps banking-failure can be ruled out. The fiscal sustainability and responsibility of consumers is perhaps more predictable factor.

Continued population growth to the Puget Sound would appear to be a foreseeable constant for a number reasons that doesn't stop short of employment. Economic studies suggest “pent up demand” of renters and millennial basement-dwellers will keep the pilot-flame lit for future housing spark, putting even more pressure on demand. Still, fundamental income disparity and consumer debt are valiant points of contention that can not and should not be overlooked and leaves major questions moving forward.