Everyone talks about when the market will correct itself but few talk about what is the correct level.

With affordability gone out the window, I met many sellers putting their $1.5 to 2 million homes on the market saying they knew their children could not afford a home in this market. Indeed, not even those same sellers could have afforded their homes had they bought a year ago.

The La Times had a good article that reflected on how far this market went and how unsustainable it became for many. Thanks Calculated Risk.

Indeed, consider in 2002, the median price of a home around Los Angeles was $270,000 and the median homeowner’s income was $65,000. And that with a $50,000 down payment, the annual cost of that house would add up to about 33% of the median household’s income — just under the 35% mark that the Federal Housing Administration calls the upper limit of “affordable.” Now take into consideration this, in 2006, the cost of that same house doubled, to $540,000 but median income rose a paltry 15%. So today that same set of costs come to 60% of gross income and it is not uncommon to hear some households sinking up to 75%! Yikes! Three quarters of what is left in your bank after taxes ad other fun stuff goes to your home. Who exactly can afford this? Sometimes it feels someone tried to create a generation of mortgage paying people.

Yes prices will come down. Yes prices are coming down. Yes prices need to come further. Even of they come down 33% it still would make for a nice appreciation curve. And don’t listen to overly-optimistic people telling you the market will go up soon. It can’t. Simply said, it has plateaued and hit the ceiling. There is a certain point when it becomes unaffordable.