Tuesday, November 25, 2008

House Price-to-Income Ratio

by Bill McBride on 11/25/2008 01:03:00 PM

This morning I posted the price-to-rent ratios for the U.S and a few selected cities. Here is a look at house price to median household income:

Price-to-Income Ratio Click on image for larger graph in new window.

This graph shows the price-to-income ratio and is based off the Case-Shiller national index, and the Census Bureau's median income Historical Income Tables - Households (and an estimate of 2% increase in household median income for 2008).

Using national median income and house prices provides a gross overview of price-to-income (it would be better to do this analysis on a local area). However this does shows that the price-to-income is still too high, and that this ratio needs to fall another 15% or so. The further decline in this ratio could be a combination of falling house prices and/or rising nominal incomes (Note: this uses nominal incomes, and even if real incomes are stagnant or declining, nominal incomes usually are rising).

Last quarter this index was over 1.25. Now it is close to 1.2. At this pace the index will hit 1.0 in Q3 2009. However, during a recession, nominal household median incomes are usually stagnate - so it might take even longer.

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