Here's a big warning sign of trouble ahead in the housing market, courtesy of Zillow.
The average Boston area buyer is now spending 4.5 times his or her annual salary to snag a home. Basically, that's equivalent to a buyer making $100,000 anteing up $450,000 for a house, according to a new report out by Zillow this morning. (Can't find the direct link - here's Bloomberg's take on it.)
That's compared the ratio of 3.5 times income that was prevalent back in the 1990s in the pre-bubble years - basically the same buyer springing for a $350,000 house.
While price increases are starting to kick into high gear, with a 10 percent jump in Greater Boston in February, as anyone knows who has looked at their pay stub recently, incomes aren't going up and if anything, have fallen since the Great Recession as inflation slowly erodes buying power.
So what's enabling Boston area buyers to stretch so they can spend the equivalent of 4.5 times their annual pay on a house?
You probably already guessed it, but it's those crazy low interest rates, courtesy of the Fed's multitrillion-dollar monetary manipulations, that are driving this market distortion.
OK, I guess that's great if you've managed to cash in and buy while rates are low and prices are still in the early stages of recovery. Still, you have to wonder whether those dirt-cheap borrowing costs simply enabled you to pay more for the same house.
Yet whatever the case, the free lunch, courtesy of Ben Bernanke, is about to end. All that cheap money is whipping up prices, which, in turn, are easily outstripping incomes. (Congrats if you got a 10 percent raise in February, the rest of us didn't.)
Second, interest rates are slowly but surely lurching upward again.
Here's what Zillow economist Stan Humphries had to say in the press release accompanying the new numbers.
"The days of historically high levels of housing affordability are numbered," Humphries stated. "Current affordability is almost entirely dependent on low interest rates, and there's no doubt that rates will begin to rise in the next few years. This will have an undeniable effect on demand for housing, as home buyers will have to spend more of their incomes to buy a home. Home values will have to either remain stagnant while incomes catch up or, quite possibly, home values will have to fall in some markets."
What say you? Is this truly a real estate recovery or just the case of an addict switching his drug of choice? In the bubble years, it was reckless bank lending. Now is the Fed playing a similar role by keeping interest rates at ridiculously low levels?
The author is solely responsible for the content.