Alex Lazo had a nice story in this morning's LA Times about the absence of housing supply in Southern California. One person he interviewed was frustrated because he could not find anything he wanted at $525,000. As he pointed out, he is a "middle-class" guy.
This underlines a problem with California. Even after the crash, large swaths of the state (not just Malibu) have expensive houses.
Let us think about what a middle-class household can afford. The median income for a family of four in California is about $70,000. Once upon a time (i.e., before around 2002), the "front-end" ratio for a mortgage borrower was supposed to be no more than 28 percent of gross income. The front-end ratio is the ratio of principal, interest, property taxes and insurance to gross income. If one assumes that a borrower can get a 30-year mortgage at a 3.75% rate, pays 1.1% of property value in property taxes, and an insurance premium of 0.2% per year, AND assumes that the borrower has a 20 percent down payment, a household earning $70,000 per year can afford a $250,000 house. So the value of a "middle-class" house is $250K. This is a long way from $525,000.
This underlines a problem with California. Even after the crash, large swaths of the state (not just Malibu) have expensive houses.
Let us think about what a middle-class household can afford. The median income for a family of four in California is about $70,000. Once upon a time (i.e., before around 2002), the "front-end" ratio for a mortgage borrower was supposed to be no more than 28 percent of gross income. The front-end ratio is the ratio of principal, interest, property taxes and insurance to gross income. If one assumes that a borrower can get a 30-year mortgage at a 3.75% rate, pays 1.1% of property value in property taxes, and an insurance premium of 0.2% per year, AND assumes that the borrower has a 20 percent down payment, a household earning $70,000 per year can afford a $250,000 house. So the value of a "middle-class" house is $250K. This is a long way from $525,000.
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I would like to comment about the middle class in the golden state. The job situation today poses an interesting question for those on both the left and the right. Why is it or how can it be that companies in the standard and poors five hundred are seeing their earnings soar while at the same we are seeing such animic job creation by the private sector. The answer technology. Labor saving technology and also the increasing ability of many companies to move not just physical production overseas but also white collar jobs overseas. What we have here is a very serious dilemma on the one hand increasing productivty can keep prices down their by keeping inflation in check. But theirs a problem in our economic system. If a company is profitable and productive they could use their increasing productivity to improve both wages and benefits of their employees and they could also use their increasing productivity to lower prices or at least not raise prices. On the other hand they could use their growing excess profits which are directly related to their increasing efficiency and productivity to buy back their stock pay a larger dividend and do acquisitions or just hold the cash on their balance sheet. Rather than increase and improve the wages and benefits of their empolyees and lower or hold prices of their products and services steady. I believe the vast majority of the businesses in the united states have chosen to do the latter. In order to expect companies to pass on their excess profits in the form of lower prices or stable prices we must see increased competition among firms in the same business. This is often absent. Look at the huge money center banks that have a hold on huge regions of the country. With fewer competitors these companies can keep much of their excess profits instead of being forced to pass them along to consumers.. Another factor that is at work here is the tremendous amount of competition for jobs in the labor market as long as unempolyment remains high many companies are not inclined to increase wages and improve benefits. In the end we have a growing mismatch between the ability of the average consumer to afford the products and services being provided to the consumer by business.
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Middle class house? Well it depends - but for me, it can be a 2-storey house with 3 bedrooms at least with one comfort room on the first floor and one in the master's bedroom.I bet many agents taking their california real estate licensing courses can have an idea on this one as well.
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