In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Monday, June 23, 2008

Ratio: Median Home Price to Median Income

by Calculated Risk on 6/23/2008 03:48:00 PM

The Harvard Joint Center for Housing Studies report: "The State of the Nation's Housing 2008" is now online. Unfortunately the table I was really hoping they would update is the House Price to Income ratio by metropolitan statistical areas (MSA).

Here is the excel file from the 2007 report: Metropolitan Area House Price-Income Ratio, 1980-2006

Here is some price-to-income data from the 2007 report (data through 2006). I picked a few random cities and plotted the national average (dashed). Check out the excel file for your MSA.

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

Different areas have different price to income ratios. There are several reasons for this (land restrictions, demographics), but on a national basis, the median price to median income ratio rose from around 3.0 to 4.6 by the end of 2006 (and has probably declined sharply since then). This would suggest that a combination of falling prices and rising incomes would need to adjust this ratio by about 1/3 from peak to trough.

For Los Angeles, it is reasonable to expect the price to income ratio to fall to between 4 and 5 (the historical average). This suggests price at the peak were about twice as high as normal.

Imagine buying a home at 10 times income. With 10% down, and a 6.0% 30 year mortgage, the P&I payments alone (pre-tax) would be about 54% of the homebuyers gross income. Add in taxes, insurance, maintenance and this homeowner is "house poor" from the get go.

And that brings us to table A-7 in the current report. This table shows that 8.8 million owner occupied households dedicate more than 50% of their income to housing in 2006. Another 13.3 million owner occupied households dedicate 30% to 50% of their income to housing.

Of those 8.8 million owner occupied households with housing a severe burden, approximately 3.3 million are in the middle 50% of household incomes - and this is the fastest growing segment - the middle class with housing a severe burden.