So it is established that the housing market is no longer a viable rock solid investment. So what can we expect to face here in Southern California or any other large overpriced metro area in the country? In this article, we will use the clairvoyant power of Excel and run four likely scenarios that will occur here in Southern California. We will use the current median price, current income, and try to predict future scenarios. Consider it a housing premonition.

These are the key reference points we will use:

• Current Southern California Median Single Family Home Price: $502,000
• Current Southern California Media Income: $60,000*
• Los Angeles County Family Median Income: $43,518
• Orange County Family Median Income: $58,605
• San Diego County Median Family Income: $51,939
• Ventura County Median Family Income: $59,379
• San Bernardino Median Family Income: $43,179
• Riverside County Median Family Income: $46,885

(Source: Census.gov)

• Income growth of 5 percent annually.

*We’ll be generous and use an upper-limit since we are looking at the ENTIRE region.

Scenario #1 – Housing Goes up 10% Each Year for 5 Years

You may be thinking to yourself, there is no way this can ever happen. Well keep in mind that we did have 5 years and 2 months of 10+ percent year over year gains in Los Angeles County so not only can this happen, it did. In addition, before 2007 hit full stride, we had many housing pundits predicting double-digit growth! Each month after more and more negative housing news, they slowly scurried away and now they are silent in the dark green jungles of mortgage implosions. Irresponsible public policy and financial negligence led to this mess. But let us humor these heroes and take a look at how these scenarios would look if we let them run their course for another 5 years:

Median Home Price: 2012

While the current annual income to home price ratio is hovering around 8.3, by the time 2012 hits it will be approximately 10.6! Keep in mind we are also using a higher reported family income. If we were to use current Census data the housing to income ratio would be much higher. What will the mortgage cost look like?

10 percent down with 30 year fixed at 6.5 percent:

Budget 2012

You think we have affordability issues now? Just wait if we hit this scenario. Let us take a look at a more conservative 5 percent annual increase.

Scenario #2 – Housing Goes up 5% Each Year for 5 Years

Now we are being more conservative. As a matter of fact, Southern California is currently up, 2.4 percent year over year. Housing bubble? Not here in the ever resilient SoCal market. Let us take a look at a 5 percent annual appreciation rate (which is more historically accurate):

Clearly this scenario seems more probable. Let us run the numbers once again with the 5 percent annual appreciation rate:

Budget 2012

Okay, now at least we aren’t running into monthly household budget deficits. But the basic monthly nut will consume 90 percent of our net take home pay of the hypothetical median income family. Talk about taking it to the house. Let us now look at some more bearish predictions. First, let us examine a 5 percent annual decline.

Scenario #3 – Housing Goes down 5% Each Year for 5 Years

Even at a 5 percent decline annually over 5 years, we now see the median house price hit $388,438. Many in Southern California haven’t seen the fabled $300,000 mark in many years. Can it be possible that we have a blast from the past? Let us break down this scenario:

Budget 2012

Now this is looking more reasonable. And all we saw was a 5 percent annual decline over 5 years. Not exactly a horrific crash or bubble bursting. In this scenario, the monthly housing nut will only take 54 percent of our net income. Seems like we are approaching a more realistic and reasonable environment. For the heck of it, let us do our maximum doom and gloom scenario of 10 percent annual declines for 5 years. After all, we did see 10+ percent increases for 5 years (sometimes even 20+ percent annual gains) so why not on the downside?

Scenario #4 – Housing Goes down 10% Each Year for 5 Years

Now most folks cannot imagine this scenario. Are you telling me we can actually be in the $200,000 range? If we follow the above scenario that is where we will eventually end up. $296,426 doesn’t even get you a studio apartment so how can it ever purchase a single family home? Let us see how the household budget works out:

Budget 2012

We actually have a monthly payment of under $2,000. Now, the housing nut only takes up 41 percent of the median family’s net income. Keep in mind in more prudent times, most financial advisors recommend that housing not consume more than 1/3 of your household income (some go with net and some use gross). Either way, even with our massive decline of 10 percent year over year for 5 years, we are finally reaching parity with ancient financial standards.

I hope the above gives you an idea of how ludicrous it is to expect 10 or even 5 percent continued annual appreciation rates. Unless income starts going up by 10 or 15 percent a year, the positive scenarios will simply not happen. There are two questions that I’ll throw out:

1. Do you think housing will slowly decline or will it happen faster and more abrupt?

2. Do you think interest rates will go up? Because if rates do go up, the above scenarios will make it even more difficult for the average family to purchase a home and not stretch their budget like Gumby.

Related Articles:

The Housing Tipping Point

10 Real Homes of Genius in 5 Southern California Counties

The History of The Los Angeles Housing Bubble

The Foreclosure Story: $130,000 Income and Going Through Foreclosure

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