Jump to: Basic Unified Equitable Home Price Evaluator
COPYRIGHT: December 20, 2010
OWNER: Thomas Blankenhorn
You may not reproduce this page in part or in whole. The math algorithm is similarly copyright protected.
You may feel free to post a link to this page.
The equitable home price is based on functions of the user entered values such that a modest home would be affordable for a single wage-earner at the local median income. The functions happen to line up to produce affordability values of 2.5 and 3, respectively, for a rural and urban home of 1700 square feet, 1/8 acre, 25 years old, 2 bathrooms, flat-land situated, and modest distance from a natural water source, specifically 15 miles from a large river.
The affordability Index generally indicates fair value when in the range of 2.5 to 3. A ratio under 2.5 would be either a very good value and/or be subject to some unfavorable conditions. A ratio over 3 would be not so good of value in pure monetary terms but if favorable conditions are associated with it, the overall value may be reasonable.
CRUCIAL COMMENTARY (see Proposed Solutions) In 1960, on average, you could buy a house at far less than 2X your annual income. From 1970 to 1990, the ratio was around 2.5 to 3. Today, in 2013, it is at 4. This ratio going up and not down is bad for society. It shows the wealthy are oppressing - there needs to be a limit on the number of homes any one person may own and this needs to apply to multiple dwellings such as large apartment complexes and condominium communities. Without the necessary restrictions, the cost of living will continue to rise and the wealth divide will increase. Right now this is crippling, but just wait until it worsens. Either you sit on your hands and do nothing or read my site and push on your failed leaders the real solutions to effect prosperity.
Specialty augmentations such as having a pool, high-end appliances, marble floors, or other out of the ordinary construction would best be left to personal notions of added value through knowledge of these costs. This home price evaluator would serve as a baseline only before accounting for these features.
One additional factor would be the highly specific living right on a waterfront that would be worth an additional 10-15% and this would require only a check box or radio button to effect but since this is so highly specific, it would be best left out.
It has been suggested that basis of a zip code would be useful and I agree it could in part, but in identifying those features of a particular area is more objective and does not feed into whim as if, for example, holding the view that living in Los Angeles, California has to be 5 times higher than living in Austin, Texas.
If you scroll to the bottom of the Thoughtful Living Book Extras, you will see a proposal for some floor plans of homes that would be easy to build and would allow many people to afford since present home prices are still far too expensive.
Thoughtful Living Book Extras
Below is an ordered table of the top 20 metropolitan areas of overpriced homes near the peak of the housing market in 2006. For ease with comparisons and taking into account significant digits, the values in the table are rounded appropriately. The source is Global Insight/National City with a more detailed table and analysis located at Global Insight First Quarter 2006 Housing Report. It appears as though the methodology in determining fair market values would be derived from total household income for the respective metropolitan areas along with the standard industry percentage of gross income allocated for the home mortgage. The standard industry percentage is often cited as 29% though some will push a different figure. A person mindful with other expenses could really afford to pay a higher percentage of gross income for a home and this is the reason why I choose 33% as a figure, but it's not for everyone as people who show little discipline with their money would have a harder time. In 2009, even after home prices fell considerably, home prices were still too high in many areas of the country (as is currently as well) as evidenced by 42.5% of homeowners paid more than 35% of their income for housing costs. Now, I do consider affordability different from fair value since affordability pertains more to a personal situation but fair value pertains more to the home value with respect to the people's income in the same area. The reason for injecting this table is to demonstrate that even WITHOUT the model used by Global Insight, the numbers shown are so lofty that people SHOULD have had some notion that the market was out of control even before 2006 and so there was little excuse in overpaying. Of course many entities are at fault including the FOMC Chairperson, Treasury Secretary, Congress, and the banking industry. There is also the other important, longstanding problems that helps home prices go up and these are unmitigated immigration, high birth rate particularly of certain ethnic groups, and no laws putting sizable downward pressure on persons owning multiple homes. However, since the final word rests on the adult home buyer, the major responsibility is the home buyer. Hopefully the lessons learned over the past few years prevents the same thing from happening in the future.
|Metro Area||Avg Price||Over Valued|
|Port St. Lucie-Fort Pierce, FL||$241K||77%|
|Punta Gorda, FL||$211K||73%|
|Santa Barbara, CA||$630K||73%|
|Riverside-San Bernardino, CA||$332K||69%|
|Yuba City, CA||$269K||68%|
|West Palm Beach, FL||$288K||66%|
|Atlantic City, NJ||$254K||64%|