Who can buy a $500K house?

I keep reading how the housing market will bottom out this year - I just don't see it. The days of crazy ARMS, ALT-A, balloon payment sub-prime nonsense is over (for now) so let's look at some simple mathematics.

The conventional wisdom is that nobody should buy a house for more than 3X or 4X their income - personally I think 4X is pushing it but let's use that to do some calculations.

From Wikipedia the breakdown is as follows: 28% of households make $0 to $25K, 27% make between $25K and $50K, 18% make between $50K and $75K, 11% make between $75K and $100K, and 13% make between $100K and $200K and the rest (~3%) make over $200K. There are about 111 million households in the US.

So if we take the 4X rule then a house costing more than $200K (people making over $50K) would only be affordable for 45% of households. Now for a house costing more than $400K there would only be about 16% that could afford the house. That's a pretty small market - about 18 million households (especially when many of these people do not want to or cannot buy a house for various reasons).

If we take the more conservative 3X income rule then the market for a house costing over $400K is only about 7% or 8% of all households - about 9 million households. That's tiny when you really think about it.

When I read about California housing and how the houses are $600K, $700K, $800K , $1.2 million, I just don't understand who is really buying these houses. The whole thing has been a scam. And when you include property taxes, utilities, etc., there is no way most of these people could afford these high priced houses. Just no way.

And if the banks weren't doing crazy stuff then they would have required a 10% down payment too - very few people would be able to come up with the tens of thousands of cash in the first place. Nothing but insanity. Just amazing.

I have also read anecdotes that these $800K type mcmansions really only cost about $200K or so to build, including the property too. That means the increase in "value" was complete nonsense and a scam. If people just sat down with a calculator they could easily see that this inflation of housing prices was unsustainable.

These horribly inflated prices are going to force the prices down hundreds of thousands of dollars in order to find enough of a market for them to sell - especially if what I read about the $200K to build them is accurate. The housing market is going to continue to crater until they become affordable again for a larger market (no more creative financing either - just conventional mortgages).

And to add to the deflation problem is that developers were building thousands upon thousands of new houses for years - the market is completely over-saturated. There is a huge inventory of houses now which will force the prices down too. Foreclosures are also causing prices to drop rapidly. And, or course, the US and the world is in the worst recession since the Great Depression causing further erosion of housing prices.

The housing bubble isn't so much a deflation as it is a correction to sane, reasonable housing prices that should have been there all along. But there will be deflation because developers built too many houses thinking that the price inflation scam would never end - the inventory is huge.

Banks are number one to blame for selling houses to people who couldn't afford them and using the BS creative financing to boot. But everyone was in on the scam - the banks, mortgage companies, appraisers, builders, developers, insurance companies, buyers, investors, real estate companies and agents, city planners, retailers like Home Depot, regulators, auditors, the SEC, states, Congress, the media - everyone. And now the taxpayers get to pay for it all in the end.

The housing market is going to be very ugly for a long time, especially in the really insane areas like Southern California, Phoenix, Las Vegas, and Florida. It's going to be a rough ride.

It wouldn't surprise me at all if city and state governments started to burn down empty houses to lessen supply in an attempt to keep house prices up - after all, property taxes are going to drop significantly with the house price deflation.

http://en.wikipedia.org/wiki/Household_income_in_the_United_States