Wednesday, April 9, 2008

Week of March 31, 2008--Income Trends Must Improve

Now we know just why Santa Barbara's Montecito and Hope Ranch home values have continued to rise while the rest of California's South Coast housing values have fallen slightly.

Two well-known economists who specialize in national incomes, Thomas Piketty and Emanuel Saez, found that the concentration of incomes at the top rose again in 2006. Average incomes of the top 1 percent (with a $450,000 average annual income) increased by $73,000 from 2005-06, while incomes of those in the bottom 90 percent of households rose just $20. That’s right, just $20.

This is why the median-price of Montecito homes rose to $2.5 million and Hope Ranch’s median soared to $3.5 million in 2007 when the median single-family price for the rest of the South Coast was $950,000, according to the Santa Barbara Assoc. of Realtors.

And to qualify for a $1million mortgage requires at least a $265,000 annual income, at today’s rates. This is the approximate income of the top 10 percent of households, which are therefore those who can afford those homes in Santa Barbara and the South Coast.

The current credit crunch will surely redistribute some of those income gains. But the trend that favors upper income households actually began in 1976. From 1946 to 1976 average incomes of the bottom 90 percent rose faster than the top 1 percent—90 percent versus 25 percent for the top 1 percent. But from 1976-2006 incomes of the top 1 percent surged 239 percent while that of the bottom 90 percent rose just 64 percent through 2006.

Those with mid-range incomes can still afford conforming and jumbo adjustable rate mortgages in most areas in California. And the mortgage market is coming back to life with the introduction of ‘jumbo-conforming’ Fannie Mae/Freddie Mac loans in April. The jumbo-conforming 30-year fixed rate with a loan amount to $729,750 is just one-quarter percent above conforming loans with a maximum limit of $417,000 for a single unit.

The Federal Reserve’s moves to stabilize the mortgage-backed securities market have caused a drop in interest rates. Mortgage refinances surged 82 percent and purchase applications rose 10 percent in the week ending March 21, according to the Mortgage Bankers Association (MBA).

The week’s activity was highlighted by the 80,000 drop in payrolls and rise of the unemployment rate to 5.1 percent from 4.8 percent in February. January and February’s payrolls were also revised downward for a total 232,000 jobs lost this year. Only healthcare, food services and mining added jobs. Construction and manufacturing lost the most jobs. This will certainly cause the Federal Reserve to lower their short-term rates another notch at the April 30 FOMC meeting.

Good news, though, was that the Institute for Supply Management’s March service sector index actually rose slightly, with production, new orders, and export orders all higher.

The surge in mortgage applications could also benefit the economy in months to come. And mortgage applicants are opting for more fixed rates, as adjustable rate mortgage applications actually fell to 3.8 percent of all applications, down from 7.9 percent in the prior week.

Copyright © 2008

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