One last chart showing the ratio of Home Prices and Median Income:

ISI via Comstock Funds

>

Previously:
Homes: Still Too Pricey to Stabilize (February 18th 2008)

http://www.ritholtz.com/blog/2009/02/homes-still-too-pricey-to-stabilize/

Category: Bailouts, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

74 Responses to “US Existing House Price / Median Family Income”

  1. Marcus Aurelius says:

    When it gets back to 2.5x income, we’ll begin rebuilding. Keeping in mind, of course, incomes are declining right along with house prices.

  2. Steve Barry says:

    Kudlow just said that housing affordability is at record highs…hmmmm…who to believe?

  3. krice2001 says:

    So, one has to wonder (or at least I do). The gov’t surely has access to all of this data (in one form or another). Therefore “they” know that housing prices are probably unsustainably high in most areas based on most commonly used historical affordability calculations. And surely they know that the problems with the banks and the economy can’t really be “solved” by taking stimulus actions such as have been proposed so far. So, is the point to just do something so that some degree of confidence is maintained among the general population in order to keep people from really panicking and causing more disruptions to the economy and equities market?

  4. wally says:

    Puts a whole new light on the idea of “repairing the economy’! We need to repair DOWN, not UP.

    The longer the government tries to delay the inevitable, the more long-term harm they cause by prolonging things.

  5. R. Timm says:

    I think it is a gross oversimplification to look at some magic multiple of income to predict a housing bottom. Does anyone here think houses today are anything like the 1950s? People have made a conscious decision to put a greater percentage of income towards housing, hence mcmansions and gernally much greater sq ft./person. Also not all workers are going to be homeowners so median income is the improper metric. With approx 1/3 of the population as non homeowners mostly from the bottom of the income scale the proper metric would be to take the 3rd quintile or so.

    Should I always spend 2% of income on a stereo system, or 0.3% on my TV? Should the value of my car equal 12.5% of annual income?

    People’s tastes and priorities change over the decades. Not to mention tax rates, tax treatment of mortgage interest, interest rates, etc.

  6. One of the most informative graphics ever.

    Here’s a question for those smarter than I. What, if anything, changed c. 1997 at the start of the spike? Is that when Glass-Steagall was repealed?

  7. MikeG says:

    What the government could possibly do is modify regulations so the banks will expedite writeoffs or foreclosure losses and get the price plunge over with – rip the bandaid off. Right now they all seem to be holding back, holding onto properties withwer in the false hope that prices will go up again soon or trying to prevent from having to acknowledge in accopunting terms the collapsed value of their collateral.
    Wouldn’t (real or nominal) interest rates have an effect on the house price/income multiple as well?

  8. Jim C says:

    I prefer an affordability graph. The graph shown here has no interest rate component. If you think house prices were nice and affordable in the 1970′s, you must’ve been paying cash. If you were getting a loan you wouldn’t have been as impressed.

  9. DL says:

    For those who are interested in some right-wing propaganda, Phil Gramm has an editorial in today’s WSJ:

    http://online.wsj.com/article/SB123509667125829243.html

    Predictably, he blames the current economic situation on CRA, and Fannie/Freddie.

    At least he’s no longer saying that we’re in a “psychological recession”.

  10. CaptainNed says:

    R. Timm seems to forget that in the 1950′s most households only had one person generating income. The McMansion isn’t so much a function of devoting relatively more income to housing as it is a function of having more gross income since there’s usually two breadwinners per household these days.

  11. What this graph illustrates — but is not made explicit — is that real wage growth has been stagnant for several decades. This greatly amplifies the effect of increases in actual housing costs on the graph. I think it is also showing the effects of NAFTA and employment offshoring, both of which are post 1995.

  12. seit says:

    The affordability picture is something I don’t understand.

    Take a $250,000 1 bedroom, 800 sqft condo in the Boston area. These homes are being marketed to the entry level buyers.

    Who are the entry level buyers?

    20-somethings who are increasingly single, so not two income households. They are just out of college making ~$75K with $80,000-$160,000 in college debt. So on top of the college debt, how long will it take first time home buyers to save the $50K downpayment? Seems like we could be waiting awhile…

  13. leftback says:

    It’s a long way down…. but we’re basically just waiting for the high end to melt down now, that’s all that is left. The low end in CA and FL have probably bottomed already. The pain in Jumbo land will be a joy to experience, I am sure. Here at Schadenfreude Asset Management we anticipate the rollover in jumbo home loans will gather pace rapidly as the bank stocks asymptote to zero. It’s just one pleasure after another these days.

    Interestingly, Manhattanites I speak with regularly are still charmingly patronizing toward renters and savers, while gamely clinging to the belief that the housing correction is only going to happen “in the suburbs”, and that the tony co-ops of Park Avenue and the chic lofts of Tribeca will be quite unaffected. This reaches levels of hubris and denial that even John Thain couldn’t quite maintain. Bonfire of the Vanities, part deux??

  14. Broken says:

    In Southern California, the affordability index is down to 2000 levels according to the LA Times:

    “Home prices are now below their historical average compared with incomes, putting them within reach of more people than they have been since about 2000, several studies show.”

    http://www.latimes.com/business/la-fi-homesales20-2009feb20,0,7584906.story

    I wonder if this is true other boom-bust states like Florida, Nevada, etc. In Phoenix, housing auctions are advertising opening bids in the $20K range for 3bd houses! Combined with low mortgage rates……

  15. Transor Z says:

    @seit:

    All they have to do is what kids have always done: ask Mom and Dad to liquidate some of their investments to help with the downpayment . . . Oh. Oops.

  16. franklin411 says:

    DL

    Thanks for the link. Typical response I’ve heard from many on that side of the aisle: Blame the coloreds.

    I suspect that Gramm’s rep is permanently in the toilet now, though. Time Magazine has a poll up to rank the top 25 people most responsible for the depression, and guess who’s number 1?

    Phil Gramm.

    http://www.time.com/time/specials/packages/0,28757,1877351,00.html

  17. ashpelham says:

    I think the main date to look at during the runaway increase period is the time around January 2002. I could make the argument that prices were on a normal, cyclical upswing from about 1997 until the recession of 2001. At that time, like every other recession since ’65(the furthest this data shows), there was a downturn in the percentage at the start or during the recession. It seems that the recession of ’01 came on, and there should have been a downturn in housing. Instead, it was at about that time (01/2002), that the Federal Reserve started lowering rates well below the norm, to spur growth. The recession of 2001 was shortlived, around 9 months by most estimates, but probably should have lasted 18-24 months, based on the conditions leading up to it, and the extreme shock from the 9/11 attacks.

    You now see what the result of prolonging a recession by intervention is.

  18. Steve Barry says:

    How bad are things? Citigroup is down 24% on the day and nobody cares.

  19. leftback says:

    @ ashpelham: Correct, and elegantly expressed. 20o2 was the second time I gave up the idea of buying.

    AT has called a rally this afternoon. Hmm… where’s Borchers? “The banks look cheap here…” ( I think that was with the UYG at about $5, it’s $2 now ). Andy, I have been getting short gold in anticipation of a major reversal.

  20. Mr. Obvious says:

    How can anyone say that housing is “near the bottom” in FL? Lee Co. (Ft. Myers, Naples, etc.) has a “rocket docket” that assigns 15 seconds to each foreclosure case it hears….they run through about 1000 a day.

    BTW, where is Cinefoz? I sure miss his rosy outlook….

  21. Steve Barry says:

    For those who complained when I said Dow closing low would break…ok…S&P closing low of 752 is now only 5 points away.

  22. CPJ13 says:

    C off 24%
    BAC off 20%
    WFC off 20%
    JPM (gov’s golden boy with the most deriv exposure) only off 6% (should change soon enough…)

    People are finally beginning to realize that 1 share of equity in these institutions is worth $0.00

    ’bout freaking time…

  23. Steve Barry says:

    GE…9.00 and struggling

  24. E says:

    To whomever it was that asked what happened in 1997, the answer is that the tax laws relating to residential capital gains were significantly changed. Often overlooked, this could arguably be the spark that set the fire.

  25. CPJ13 says:

    From a fundamental perspective, shorting these banks is the easiest trade in history. Look, point, click, get paid. Only variable is/was time.

  26. leftback says:

    The re-test approaches…. this afternoon could be rather interesting.

  27. Mannwich says:

    @karen: Got my case of wine ready?

  28. leftback says:

    If I was an unscupulous central banker I would probably sell a mountain of gold bullion about 2pm.
    That might end up looking like the PPT swinging into action. Know your enemy.

  29. batmando says:

    @ krice2001
    “So, is the point to just do something so that some degree of confidence is maintained among the general population in order to keep people from really panicking and causing more disruptions to the economy and equities market”
    More or less, it seems to me all is a rearguard action to calm the masses, to slightly impede the crowd edging toward the cliff’s edge or, to switch metaphors in mid-analogy, a re-arranging of deck chairs offering some tepid tea and stale biscuits while on the other side of the vessel ship’s officers are off-loading as much booty as they can from the purser’s safe.

  30. call me ahab says:

    @ CPJ13 1:19

    Dude- that was seriously funny

  31. employmentproof6 says:

    “Many people took out loans they were never going to be able to afford,
    never! That means somebody knew from day one they were never going to
    be able to pay back the loans.” The bankers approved these loans and used the money to pay themselves bonuses and payed our government representatives to look the other way…that’s where we are…any suggestions for getting us out of the mess are welcome…but if you just want to play the blame game…where does that get us?

    Read what was spammed on the comments section of my blog:

    The people that bend the rules GET PAID!

    You too can bend the rules by printing out fake paystubs w-2 w2 1099 forms using

    www PROOFOFEMPLOYMENT com

    Buy a home, car or get a huge irs tax refund just for being you! Do what you have to do to get yours! EVERYONE ELSE DID!

    Oy vey!!

  32. DeDude says:

    It looks like another 10-15% fall will get us within the range of the ratio for the last 20 years. That is not that bad for home values provided incomes don’t fall too much. I think stabilization will come sooner than you think – although NYC will probably get a bad dunk similar to CA and Florida before it is over. House prices are also affected by supply/demand forces, and it is not an optional product. So with a strong reduction in new units produced and acceleration in units destroyed (wrecking of abandoned houses), the market forces should soon start pushing in the upward direction.

  33. Darkness says:

    R Timm
    I think it is a gross oversimplification to look at some magic multiple of income to predict a housing bottom. Does anyone here think houses today are anything like the 1950s? People have made a conscious decision to put a greater percentage of income towards housing, hence mcmansions and gernally much greater sq ft./person.

    Relative to other necessary household costs which have far out-paced cost of living (healthcare, transportation, higher education), one could argue households can afford less money for a house relative to 1950s. People wanted bigger houses, so builders built them, but they were built on a massive influx of credit. That’s the real difference between now and 1950, not household priorities.

    I live in a house built in exactly 1950. We had a huge storm here. Our friends in a new McMansion suffered 15k in damage. We had zero. Just blocks apart. Construction quality/ reduced economic lifespan is a neglected consideration of those high square footage houses. Their resell value profile over time is going to look scary starting at the 30 year mark when the roofs start to leak and the plywood explodes. If anything, expect an undershoot on this chart when all this recent housing stock approaches zero on its short clock.

    Also not all workers are going to be homeowners so median income is the improper metric. With approx 1/3 of the population as non homeowners mostly from the bottom of the income scale the proper metric would be to take the 3rd quintile or so.

    The median income of renters also drives the cost of housing by driving what a landlord can demand for rent, hence what they can afford to pay and still make a profit.

    There may very well be a better measure, but that one shows remarkable stability over time. Try to deny that we are going to drop back to that line before we recover all you want–it won’t make a difference.

  34. ashpelham says:

    “E Says:

    February 20th, 2009 at 1:18 pm
    To whomever it was that asked what happened in 1997, the answer is that the tax laws relating to residential capital gains were significantly changed. Often overlooked, this could arguably be the spark that set the fire.”

    Right you are. I tend to overlook that piece of legislation as it was antiquated to begin with. The changing of laws simply kept up with the changing price of homes and Americans income. But you are correct; that was a small impetus to raise prices artificially for the next decade. Cap gains were higher! It might have completely changed the way most Americans viewed their homes. We went from home being “a roof over our heads” to an ATM.

    Once again, whatever the fuel, the fire burned until it didn’t anymore. It’s obvious to everyone except those with their heads buried in the sand that we must correct back to normal prices, and we will probably overcorrect. I don’t see nation-wide home appreciation taking hold again for 10 years.

  35. CPJ13 says:

    @ ahab

    thanks – true, and funny. sad. like shooting fish in a barrel. Good for me, bad for whoever took the other side of my trade (I didn’t pay anything close to what the premium should have been, tell you that for free).

    @ dedude

    forget who said it, but the quote was “if we didn’t have a single housing start for the next two years” we still wouldn’t push up through the demand ceiling and see price inflation due to supply/demand. We haven’t even seen the wave of foreclosed-upon homes hit the market, and there are ‘sellers’ out there who are holding on for dear life hoping for a rebound. Once they give up, and once the banks let loose the floodgates for one reason or another, you’re going to see the market awash in supply.

  36. leftback says:

    Mr Obvious said: “How can anyone say that housing is “near the bottom” in FL? Lee Co. (Ft. Myers, Naples, etc.) has a “rocket docket” that assigns 15 seconds to each foreclosure case it hears….”

    So, with respect, I think that kind of proves my point – that IS the bottom, although it may be an “L-shaped bottom”. Foreclosure auctions are a great tool to reduce inventory, and when that starts to decline we will be very near the bottom. It’s all local, though… by the time people start to panic sell their million dollar studios in NYC, the place will be a ghost town with no eager young bankers to sell to – just a few drug dealers, hookers, etc..

  37. E & ashpelton:

    I asked about what might have happened c. 1997 when the spike started. Thanks for the thoughts.

  38. Mannwich says:

    @leftback: Then the creative class can move back into NYC and make the city interesting again.

  39. Mannwich says:

    I’ll play Borchers role today since he doesn’t seem to want to show up: market going to rally today, maybe even go green.

    Panic is in the air and the number of posts on this blog are increasing at a clip similar to the Oct/Nov. time period.

  40. People wanted bigger houses, so builders built them, but they were built on a massive influx of credit. That’s the real difference between now and 1950, not household priorities.

    Good point. Where I grew up (Easton, Mass.) the typical house built in the 1950s and 1960s was a single story ranch w/5-6 rooms and 1 bath. In the 1970s split-level ranches become vogue, which added about 50 percent in square footage to the single story ranch. By the late 1980s the size was going up to 10-12 rooms and by the 1990s the McMansion became the de facto standard.

  41. call me ahab says:

    @ Douglas Watts

    the market had been in 10 yr slump- there was a big market correction in the early 90′s and RE prices- both residential and commercial- were contracting. Around 97/98 market prices started to recover. Case in point I had a rental home that I paid $149,000 for in the DC area in 1991 that I did not break even on until 2001- actually made around $10K (actually my ex-wife got the $$$). The rest of the story you should know- early 2000′s easy money and low rates- and CNBC promoting the next big thing- Real Estate- after the tech bubble/crash.

  42. Hulkster says:

    A fair price depends on the mortgage you can get – especially the term and interest rate. Give me a 30 year at 4% and I’ll buy up your whole block.

  43. Mannwich says:

    @Hulkster: You can have my place if you want it. I’ll take the equity (if there is any) and head to the beach in Costa Rica to hunker down for a while.

  44. leftback says:

    @Mannwich: “Then the creative class can move back into NYC and make the city interesting again.”

    Yes, exactly. The last decade the bankers used their money to perform ethnic and social cleansing in Manhattan. But life continued in Brooklyn, Queens etc. Hey – now maybe we can go watch the Mets at Queens County Stadium instead of Citi field. We might even be able to attend concerts at halls named after famous musicians instead of banks, hospitals named after famous doctors instead of investment banks, and one day we might not have medical schools named after fat Ponzi artists like Sandy Weill. The public revulsion is only just getting started.

  45. karen says:

    Jeff, did you win our bet? or did the dow have to hit 7000. i really can’t remember. glad all you boys are having so much fun today : ) i’m having fun, too, making money, of course.

  46. Mannwich says:

    @karen: Not yet. I was just getting ready. ;-)

    Has to hit DOW 7,000 and S&P 700. Think we’ll get another rally pretty soon before that happens but still think we’re eventually going there.

  47. JustinTheSkeptic says:

    Wow, isn’t it great the market is marching back….Bulls your gluttons of punishment.

  48. Steve Barry says:

    This rally is desingned by the PPT to start at 2-2:30 on expirations of course…I think it will still fail.

  49. HCF says:

    From CNBC:
    White House Says Strongly Believes That Privately Held Bank System is ‘Way to Go’

    PPT, baby, PPT… I think the problems are just being punted to a few weeks down the road.

    HCF

  50. Transor Z says:

    @ Darkness:

    “Construction quality/ reduced economic lifespan is a neglected consideration of those high square footage houses. Their resell value profile over time is going to look scary starting at the 30 year mark when the roofs start to leak and the plywood explodes. If anything, expect an undershoot on this chart when all this recent housing stock approaches zero on its short clock.”

    Amen, brother. I think the only justification for trying to support housing prices is to soften any 0vershoot. We need Capt. Sullenberger to guide us in for a “soft” crash landing. But he had to go study aeronautical physics and stuff.

  51. Broken says:

    Is it PPT or just option expiration?

  52. Steve Barry says:

    It is PPT picking their spot…this administration always announces news at 2 or 3 PM on down days.

  53. Steve Barry says:

    Dick Bove is alive…saying BAC is a buy…is it a generational buy?

  54. Tripower says:

    A reason for the McMansions in places like California is due to permit fees, impact fees, and all the other rising costs imposed by the government to build a house in your typical new subdivision. The average fee to build a house in California is $26,392, according to a 2007 WSJ article. When it costs that much for developers to build, they can’t put up 1,300 sq ft affordable homes that sell for $200,000 or less, so they build big houses that cost half a million or more.

  55. Mannwich says:

    @Steve Barry: You ARE kidding, right? Was Bove really on CNBC? I wouldn’t know since I’ve sworn off that channel for good.

  56. Steve Barry says:

    @Mannwich:

    Bove wasn’t on…Cashin cited him.

  57. Mannwich says:

    @Steve Barry: Tales from the Crypt redux. I thought Bove’s reputation would/should be in the toilet by now, but being wrong in a ghastly way has never been an issue in the pretend world of Wall Street, it seems.

    What about Cramer? Any mea culpas on his wrong bottom call from Nov? Let me guess – who is he blaming for being wrong now?

  58. Steve Barry says:

    @Mannwich:

    Cramer is on with melissa Lee now…he said something a few minutes ago that I honestly don’t what what the hell he was talking about…they are trying tio say the gov’t took nationalization off the table and are very excited that we had a panic low and rallied today. As Cramer once said, “THEY KNOW NOTHING!”

  59. Mannwich says:

    @SB: Oh God, when are they going to stop the unseemly charade that is Cramer? I love how he can “boldly” make a forecast and then write off being wrong due to some external factor that he didn’t account for. Isn’t that part of forecasting?

  60. Broken says:

    Cramer is Comedy Central’s diversification strategy.

  61. leftback says:

    @MW: Cramer – nothing to do with forecasting, everything to do with entertainment.
    Think of him as a stand-up comedian and you will appreciate him a lot more.

    Rally caps: Props to AT and Karen, who both called a bounce off today’s lows – in their contrasting styles. The real winners lately have been those who shorted the XLF from SPX 875. My call for next week: long oil:short gold as we see a reversal of some of this week’s fear trades. Armageddon averted again – for the time being. Hey, maybe Prince Al-Waleed is going to triple down on his bad bet on C?

  62. MRegan says:

    As I watch the market today I ask myself:

    1) Is the 20% plus move off the day’s bottom in WFC a prefiguring of major announcement over the weekend? More than 312 million shares have ‘exchanged’ hands. Seems like a lot.

    2) On day which has seen BAC off nearly 30% down off of yesterday’s close, why did BBT only fluctuate 5% or so? More than 687 million, wow. Why would anyone buy one share of BAC let alone 687 million- unless they enjoy a clarity that is not widely shared? Conversely, why would anyone sell @ 2.53?

    3) What is the argument for buying anything at this juncture? Is there sufficient clarity? What is the risk of significant and unexpected government action(s)?

    The risks only seem to grow. The more things break, the more things break.

  63. I-Man says:

    How is it that the government always manages to announce something right at the key trendline levels???

    Must just be coincidence.
    :)

    Looks like the PPT has been taking trendline classes.

  64. AGG says:

    Marcus Aurelius is right.
    This ain’t ovah.

  65. mathman says:

    Widening our view and looking ahead some it’s become ever more clear that none of this is going to matter much in the not-too-distant future. For example:

    Tomgram: Nobody Knows How Dry We Are

    http://tomdispatch.com/

  66. Andy Tabbo says:

    Today and Monday will prove to be critical days technically speaking.

    For the bulls…

    “If” from the November lows we’re witnessing a monster “Flat Correction” and now from the the 940 highs we’re in the middle of a very pretty textbook ZigZag B Wave, then we should end this B wave today or Monday. Any more downside…any more time wasting away at the lows will be ominous.

    The bull case for a strong C Wave higher is definitely running out of time….

    If the bulls can put in some kind of bottoming action between today and Monday then perhaps we will avert disaster for at least a few weeks…..

    If I were a technician working for the PPT I would craft some sort of miracle bailout bill this weekend and announce it on Sunday night before Globex opens…causing a limit up move on Monday……

    Things working for bulls….weaker DX and gold finally hitting that psychologically important 1000 level….

  67. MRegan says:

    Mathman-

    I have been following the Argentine story and know alot about the water issues in Arequipa, Peru. Don’t know what to say other than ‘crap’.

  68. DeDude says:

    After reading what the white house said, I do not see any indication that they took nationalization of the table. They just say they don’t like it. Delicate wording since they know it eventually will have to happen one way or another.

  69. R. Timm says:

    @ Darkness: I think your quality argument is not really valid. Materials and codes have improved greatly in many areas since 1950s. Home building technology today allows for better insulation,less windstorm damage and higher quality electrical wiring. There are undoubtedly some recent construction that is sub par, but in general a home today has better fit and finish than 50 years ago.

    I agree the rental market does have an impact on home prices. There may be some impact however on rising income inequality on the graph above.

  70. gpknopp says:

    “Homes are now more affordable than ever.”
    - The National Association of Realtors

  71. try2bamused says:

    Wow, look at that chart. I knew the 70′s were grim! Watergate. Alice Cooper. The SLA. Seedy rip-off Jamaican. A double-digit SPX. It was all real!

  72. Darkness says:

    >Materials and codes have improved greatly in many areas since 1950s.

    The codes have improved and then in our area been gutted again by the building industry. I could send you a photomontage of ice whales on the brand new mcmansions around here where they argue successfully that the R value of the paint (I’m not joking) counts enough that they can ditch the 6 inch exterior wall minimum rule.

    As to materials. Not a chance. I’ll put my solid wood tongue and groove roof decking up against even the most modern plywood any day for material quality. Of course the decking can always be replaced along with the roof, but the homeowner better not slack a day on calling a roofer as the water spreads. Even though given the crazy rooflines on the house they are going to have to send the kids to community college instead of university to afford the repair.

  73. nrigney says:

    I did not read every comment, sorry if this is repetitive information. Someone asked what changed around 1997 to drive prices up relative to income. Consider that the vast majority of purchases require financing, so availability of financing determines “affordability.”

    Factors involved in home financing: Income (and methods of verification,) Debt, Credit Worthiness, Loan Products, and Underwriting Standards. If income, debt and credit scores all remained constant (or decreased due to increased debt,) the obvious variables are loan products (ARM/Fixed, term length, Pay-option, interest rate,) underwriting standards and income verification methods. Plenty of arguments out there about why these changed, I’ll stay out of that for now.

    Using my logic (flawed or not,) if loan products and underwriting standards were to remain constant, home values would only fluctuate due to changes in levels of income, debt and credit worthiness. That seems valid to me, but the need/ability to refinance would decrease. In turn, the mortgage industry would not see much growth and former employees of mortgage companies would have to find new careers. Trading stability for potential growth (and decline.) Which would you rather have in a financial system?