Pricing vs Affordability vs Median Income

It seems like all I ever hear about in the news and in general is how affordable a house is, or really how much the monthly note is. No one seems to talk about the true price of the house and how much it actually costs. I feel like the general pricing in my area of northwest chicago is quite high given the general income of the populus.

I can't help but feel like something is artificially keeping prices high? Am I just imagining this, are people really willing to stake out and fork over $250K for some rotting husk of a house? $250K for a small garden condo? $250K with HOAs near $500/mo and taxes near $5K/year? The median household income according to http://projects.nytimes.com/census/2010/explorer is about $60K a year. After taxes $60K/year is about $4000/mo. At $250K + $100/hoas + $5K + utilities + taxes your looking at forking about $2000/mo just to have a place to sleep, eat, drink, and pop a squat in comfort. 50% of the income for the average *household* would be going to living expenses for a low end property in the area. How is this possible? Are people really willing to suffer with that?

It seems I'm not the only one concerned

http://www.forbes.com/sites/zillow/2013/04/16/high-home-price-to-income-ratios-hiding-behind-low-mortgage-rates/

Is there some defining cause of this housing price situation besides low interest rates? If its just low interest rates, when does the bubble burst?
  • January 29 - Logan Square
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Answers (8)

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Profile picture for hpvanc
Many economists agree. I think you need to look at it from the perspective of values as a multiple of income, looking at it on a monthly payment basis has really distorted the picture and led to the current manic phase in the housing market. Interest rates are low because inflation is low, wages aren't rising, sustainable housing appreciation is also driven by inflation. Current prices are not sustainable for most of the country.

I don't think housing bubbles are hard to see if you look for the signs, what I acknowledge is, that it is almost impossible to predict when they will start to deflate. There are some very strong signs that the market is stalling, whether the current situation is the one that breaks the mania or just a temporary pause. The bigger it gets before it turns the more economic damage there will be from the depressive phase.

I noticed that the agents responding so far have all tried to change the topic to something more friendly to their sales pitch, rather than defend current values.
  • January 31
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It goes back to basic economics: supply and demand. Right now inventory (homes for sale) is low and more people want to purchase compared to last few years. That is driving the prices up. If you think you are going to purchase something for 250K today and sell it with a profit 2 years from now, and save money on paying rent, why not purchase?
  • February 03
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Profile picture for Gail Manion

Have you considered looking at 2 flats? There are several for sale in the Logan Square area for under the $250,000 price. As you could live in one unit and rent out the other -

  • January 31
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buying a house is much more than investing money it's part of adulthood.  A home represents commitment, stability, and big picture thinking. If you want a big house for low money go buy one in a less dense area, if you want low payments buy in a place that does not have buses, lakefront, or an airport nearby.. I agree it's not cheap to live here but let me tell ya.. of the top 50 cities in the world Chicago which is in top 10,is very affordable. 
  • January 30
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Thomas, we talk about what we can measure.

What I'd like to add to the calculus is that about one third of the population rents, so while we are measuring the earnings of the entire population, pretty much home buying is always going to be done by higher-earning people. 
  • January 30
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Profile picture for Matt Laricy
Everyone is entitled to their own opinion. Not everyone is meant to buy a place. That is why you have the option to rent a place to live.
  • January 30
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Profile picture for Tony Mitidiero
Jorge has a good point.  Urban growth has bolstered the Chicago market.  We are seeing the same in other metro's around the U.S.  In my opinion this will continue for years to come. 
I do not think the very recent low interest rates have had an inflationary effect on values as most of them are still less than they were before the downturn.   That being said, I do believe we will see interest rates as well as the cost to acquire financing stabilize appreciation in 2014 in areas that are experience the greatest rates. 
  • January 30
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Population growth is also causing prices to increase. If "Chicago is estimated to be about 11,864.4 people per square mile" is true then that gives you a good indication why people are willing to pay top dollar to live in some of the hottest areas or at the very least an area with a grocery store nearby. Hope this helps!
  • January 30
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