Posted by: deejayoh

72 responses to “What does Personal Income tell us about near future home prices?”

  1. Pegasus

    Nicely done! Where are you getting the up-to-date(2007 and earlier) personal income figures for King Co.? Is that household or individual incomes? Thanks.

    Rate this comment: Thumb up 0

  2. patient

    “4.Some other extraordinary event would have to take place”

    What about the biggest economic crisis and recession since the big depression? Or an unprecendeted national an private debt burden? Does any of that qualify?

    Rate this comment: Thumb up 0

  3. patient

    It would be interresting to see where another bubble city that has come further in the correction as Las Vegas plots on those charts i.e what the historic income/price ratio is and what the current ratio is. ( LV has not yet bottomed out price wise.) I’m just not sure if the historic ratios can be used as a probably bottom ratio when the system balance is so fundamentally shaken. If we can almost double the ratio with huge lending and psycology stimulus why can’t we half it with an equally huge crisis ( high unemployment, huge debt, low spending confidence, home owning caution/aversion psycology etc ). I’m leaning towards a significant undershoot compared to the historic ratio by the factors already in place.

    Rate this comment: Thumb up 0

  4. patient

    I wouldn’t be surprised if we settle at a 5x ratio when the unprecedented private debt have cleared and employment has recovered to historic “good times” levels but that could easily be 10 years out from now. And as you say the what income will that be? Companies will not be in a hurry to inflate salaries in the current environment.

    Rate this comment: Thumb up 0

  5. The Tim

    RE: patient @ 4 – It’s not Vegas, but here’s a look at a similar stat for San Diego. Rich’s data sources are slightly different, so you can’t necessarily directly compare San Diego’s price-to-income ratio to Seattle’s, but it does show you how much they’ve corrected compared to their historic (back to 1977) ratio.

    Rate this comment: Thumb up 0

  6. masaba

    I have been looking forward to seeing an analysis like this. Your second figure is great, and really shows, better than anything else I have seen, a good way to predict where home prices will land after the bubble correction.

    I’m a little curious about your methodology in the comparison of annual change in home prices vs. annual change in income levels. Particularly, could you explain this statement: ‘This is a “purer” analysis because with two trended series (e.g. home prices and incomes) a large portion of the explanatory value is the result of autocorrelation.’

    Are you talking about autocorrelation or cross-correlation? For instance, if the annual home price change is given as h(t) and the annual income change as x(t), it seems to me that you would want to find the normalized cross-correlation between the two, not the autocorrelation.

    Rate this comment: Thumb up 0

  7. patient

    RE: The Tim @ 7

    Thanks, nice charts! The author says it refelcts prices in Nov. 2008. At that time it looks like SD was about on par with the historic ratio. It shouldn’t be far fetched to assume that they are some what below that today with the last recorded monthly and yearly decline rates for SD.

    Rate this comment: Thumb up 0

  8. jon

    There is a problem with using per capita income in a regression going back to 1970, which is when the number of children in a household was higher than it is now. Children are included in the per capita denominator, but make no contribution to the numerator. If you were to adjust out the number of children per household, the graph would flatten out, and it looks to me like the 2008 data point would be right back on the long term line.

    #8 masaba – the high R2 from the analysis is just an artifact of the autocorrelation (actually it is probably just inflation). The .3 R2 is a better indicator of the real strength of the relationship, but even then it probably overstates it because other demographic and economic changes are adding correlations. One of those is the aging of the population means that an increasing fraction of the population is interested in owning and living in a SFH.

    I agree that are many reasons why a debt to income ratio of 3 will not apply to the housing market overall: that would apply only to first time homebuyers, homebuyers are mostly the upper end of income earners, and as the pre-boomer generation gets older a larger number of fully paid off houses are being inherited.

    Rate this comment: Thumb up 0

  9. Cheap South

    Personal income (single) or Household (couple) 2 salary income?

    Rate this comment: Thumb up 0

  10. Anonymous coward

    It would be interesting to not only see the difference in household income vs PI, but to remove the renters from the graph. If you remove all those who are making less than 100k and renting, what is the ratio?

    Rate this comment: Thumb up 0

  11. Scotsman

    Nice work!

    I think one issue here is in how PCI is calculated, and how closely it resembles actual spendable income verses simply being a statistical construct. And it’s obvious a ratio in the 4-5 range assumes either significant savings or move-up equity. Will those be available going forward? But all that aside, as long as the definitions remain constant the conclusions are valid.

    I would suggest there’s a very good possibility we may see lower ratios in the future than we’ve seen in the recent past. The near certainty of continued and deepening national economic malaise, abnormally high unemployment, additional lending restrictions, population outflows due to lost employment opportunities, and even a major change in societal values regarding the desirability of owning a house can push the ratio well below 1969-2009 levels. While 1969-2009 saw some economic turbulence, it was nothing compared to what happened during 1920-1960 . I don’t think there’s any doubt the next decade will more closely resemble the 1920-1960 period.

    All that aside, even a median in the low $200K range will be a shocker for many. My guess is the the upper tiers, where many purchases were even further from traditional ratios thanks to financing gimmicks, will collapse even further pushing the median down more.

    Rate this comment: Thumb up 0

  12. Cheap South

    King County Median HH income ~ $70K. Times 5 = $350K.

    I do believe in this research; but I can’t believe people have overpaid in Seattle for over 40 years. We must be missing something.

    Rate this comment: Thumb up 0

  13. Scotsman

    RE: Cheap South @ 14

    Move up equity, inheritance, one time bonus money or asset sales, cashed stock options, etc. are part of the purchase price. Obviously, financing at 5 times income, when income is defined as including the value of all employment benefits, many of which are not cash, is not available.

    Rate this comment: Thumb up 0

  14. anony

    RE: jon @ 10 – “If you were to adjust out the number of children per household, the graph would flatten out, and it looks to me like the 2008 data point would be right back on the long term line”

    If there were more children in the denominator in the 70s included in the per capita number, that would make the 70s income lower. If you factored that out somehow, it would increase the 70s income and lower the price to income ratio. Basically the points on the left of the graph would move right, but not up, making the graph steeper, not flatter.

    Of course children do affect the disposable income per household, so maybe you shouldn’t factor them out entirely.

    Rate this comment: Thumb up 0

  15. Groundhogday

    Great work! Interesting that HHI tracks the personal per capita income so closely… but it does yield a ratio closer to the 3-4 rule of thumb. Personally, I always thought the rule was 3 x household income.

    Rate this comment: Thumb up 0

  16. Groundhogday

    RE: deejayoh @ 19

    Got it…You would need statistics on the average or median income of homeowners to get aggregate price vs. income ratios more directly. Interesting that aggregate per capita income still works so well.

    Of course, a couple of years ago when we were pre-qualifying our friendly neighborhood credit union set our max loan at 6x income. And they were considered conservative relative to other lenders.

    Rate this comment: Thumb up 0

  17. Joel

    Yes, but what do the graphs look like for North King County?

    Rate this comment: Thumb up 0

  18. drshort

    I believe it was your mortgage should be no more than 3x your income. Move up buyers and those with larger downpayments will obviously be more than 3x income.

    Rate this comment: Thumb up 0

  19. b

    If you remove everything from the graph, then it shows that home prices will fall to $0. Buyer beware!

    Rate this comment: Thumb up 0

  20. Cheap South

    By drshort @ 22:

    I believe it was your mortgage should be no more than 3x your income. Move up buyers and those with larger downpayments will obviously be more than 3x income.

    This morning there was another report on how “special” this recession was because of the large number of people with degrees out of work for very extended periods.

    Back to old school; if you are part of a 2 income household, make sure you can make ends meet with one salary.

    Rate this comment: Thumb up 0

  21. jon

    RE: anony @ 17 – You are correct. I didn’t think that through carefully enough.

    Still, when I look at that graph I see a steady accumulation of wealth, apart from a few deviations. For example from 1991 to present the housing stock has gained 2 years income worth of value over an 18 year time span. For a long term asset class like real estate, that is not too alarming a number. If houses were discarded at the end of one year, then you could be more concerned about it.

    As a member of a cohort near the peak of the baby boom I look at these things as being driven also by where I and my peers are in the lifecycle of housing needs because that group often shows up in the overall statistics. During that time we bought houses and endeavored to move into bigger houses. Once they were all in their main family houses, the cycle of rising prices ended and the bubble collapsed. But the younger cohorts are nearly the same size as the peak baby boom. It is the older cohorts that are smaller. So that is why the graph shifted and will not necessarily shift back.

    Rate this comment: Thumb up 0

  22. meme

    “Based on this chart it is pretty clear to me that claims that home prices falling to their “normal state” of 3x income are best discussed on Snopes.com”.

    No one has ever claimed that home prices should normally be 3x per capita income. As has been pointed out above, it is 3x household income, or family income.

    Per capita income is really not the statistic which should be used, especially if you’re looking over a long period of time, since changes in family size or changes in the distribution of wealth in society (people on the top becoming billionaires) can throw this average way off.

    It’s difficult finding the stats you need to properly do this sort of thing, though, I understand.

    Rate this comment: Thumb up 0

  23. Geek

    30 years of data is great! Can we get more?

    Rate this comment: Thumb up 0

  24. softwarengineer

    INCOME UNKNOWNS IN YOUR CHARTS

    I too have watched the incomes [household] mysteriously rise with high unemployment/underemployment and wondered how this could happen…..we know that a lot of kids/parents are moving together with kids/parents in this recession; could it be when that happens you have 1.4 single incomes per average household, rather than the old 1.2 single incomes per average household?

    This means we could actually be making less per capita; but household incomes rise from like $40K average to the present $50K?

    Since there are twice as many single households with just single incomes; perhaps you could make a revised chart for the mainstream household: divorced and never married. We rule you know…LOL….

    I’m sure it makes the comglomorate optimistic married charts you used look way “overly optimistic” for the majority of single income households in Seattle….we’re probably the 1st time homebuyers only hope too, as even two young adult incomes with young kids and daycare expenses really have about one income anyway….

    Rate this comment: Thumb up 0

  25. patient

    I dunno, I think 3x HHI sounds pretty reasonable even if in our case i would regard it as a stretch. It would mean a mid $600k home which would require a very,very low interest rate to make it comfortable for us if we want to continue paying for daycare, 401ks and college funds and keep a positive savings rate not counting the 401k and college funds. Not to mention the down payment required,we happen to have it but I think it’s pretty rare. 3x HHI actually seems a bit high for families. Dinks should be ok so perhaps it averages out. But 5x would take us over $1m which I regards as impossible and completely financial suicide.

    Rate this comment: Thumb up 0

  26. patient

    RE: patient @ 31

    I guess this is where the lower income population that rents acts as a buffer and make the higher ratios statistically possible.

    Rate this comment: Thumb up 0

  27. Brad

    I wonder if income insecurity won’t permanently move this target downwards. I’m in my early thirties, earning a very good wage on a career track with a stable company, but I wouldn’t want to commit to a mortgage which required me to have my six figure salary for the next 30 years. I hope and expect that my income will continue to rise as I get older, but I don’t want to bet the farm on it, so to speak. With globalization and a shifting economy and technology trends, I could easily see my job going away and it being very difficult to replace that salary. Maybe if I was making closer to the median I wouldn’t be so concerned, but today I wouldn’t commit to a payment I couldn’t afford on *half* my current earnings.

    Maybe that means I’ll never be a homeowner – I’ll always be outbid by those willing to take bigger risks. In the new economy if home prices stabilize at 5-6x income, ownership seems like a big gamble instead of a road to financial security.

    Rate this comment: Thumb up 0

  28. patient

    There are a few other things to consider when making historic comparisons. Have there ever been a price decline like the current in modern history? I think not, what does it mean to prices that perhaps 25% or more of all home owners will endup with negative equity with no means to use equity in a move up? Have we ever had the current amount of forclosures in modern history? What will it mean that currently 12% of all homes with a mortgage are delinquent? Will it lead to that perhaps 20% of all households that owned a home with a mortgage during the bubble will be foreclosed out of the market for about 5 years? There are many unusual and severe factors that can work against any normal income/price ratio.

    Rate this comment: Thumb up 0

  29. Pegasus

    Here are some charts that splain how we will go cliff diving again real soon. It would be nice to see these done on a more local level but no matter what that would show we will not escape this incoming typhoon:

    http://www.economicpopulist.org/?q=content/subprime-meltdown-over-now-comes-bad-news

    Rate this comment: Thumb up 0

  30. David Losh

    Real Estate is based on House Hold Income. Mortgage payment is 25% of house hold Income and the over all Debt to Income is 30%.

    You take the mortgage payment based on a thirty year fixed mortgage or fifteen year and you get the price of the property.

    Tax and insurance added in gives you a mortgage payment of about $1100 for a $50K Income, $2200 for $100K.

    How are we doing with that?

    Rate this comment: Thumb up 0

  31. george

    What does this analysis look like if you look just at the top 1-2 percent of home prices and earners?

    The top 1-2 percent of earners can now afford much more expensive homes (correcting for inflation) than their counterparts could in 1969. But wages for the rest (bottom 90 percent) have not kept pace.

    Second question: Are the multiples likely to stay somewhat higher now partly due to the growing income gap in Seattle and King County since 1969? Or is that a silly question?

    Rate this comment: Thumb up 0

  32. takenroad

    The discussion of rules of thumb is interesting (3x income, etc.).
    “The Millionaire Next Door” recommends that you not borrow more than 2x your income to buy a house. Their rule of thumb for how much wealth you should have accumulated is income*age/10. “Your Money or Your Life” also asks the illuminating question, of all the money you’ve earned in your life, what portion do you have today in wealth?
    I’ve been tracking those numbers in my own life for many years. The 2x recommendation saved me from taking out a much larger mortgage in 2007 when we investigated remodeling or buying a bigger house. Boy am I glad.

    Rate this comment: Thumb up 0

  33. 2kt

    “The “rule” – to the extent that there is one – is one that lenders apply to individual borrowers: home price should not be greater than 3x income. ”

    The old established “rule” is for mortgage payment to be at or below 28% of one’s gross income (not purchase price).

    Rate this comment: Thumb up 0

  34. fwiw

    thanks deejayoh for all your efforts on this post.

    Rate this comment: Thumb up 0

  35. Alan

    This looks useful to help gauge how far away we are from the bottom, but I do not think it is evidence that once should buy at home at 5x their own income.

    I present the following arguments:
    a) PCI is averaged across owners and renters. Owners can afford to buy because they earn more. If you could get PCI for the top 70% of earners, then the PCI would be higher and the Price:PCI ratio lower.

    b) PCI does not take into account dual income households. That will also skew the Price:PCI higher. Again, if you could calculate the household PCI, your income distributions would be higher and the ration lower.

    I suspect the potential botton is closer to 3x income.

    Rate this comment: Thumb up 0

  36. Cheap South

    By patient @ 31:

    I dunno, I think 3x HHI sounds pretty reasonable even if in our case i would regard it as a stretch. It would mean a mid $600k home which would require a very,very low interest rate to make it comfortable for us if we want to continue paying for daycare, 401ks and college funds and keep a positive savings rate not counting the 401k and college funds. Not to mention the down payment required,we happen to have it but I think it’s pretty rare. 3x HHI actually seems a bit high for families. Dinks should be ok so perhaps it averages out. But 5x would take us over $1m which I regards as impossible and completely financial suicide.

    And please add health care costs.

    By they way, Beaver’s dad not only paid 2-3x income; but he had a pension (no need for a 401K), incredible job stability, and an amazing health plan. Those were the days; if the world needed from wire hangers to lollipops, they had to buy them from the US. Boy, are those days over….in fact back then the biggest employer in the US was…..GM. Few people realize their bankruptcy marks not only the end of a company; but the end of an era for us.

    Rate this comment: Thumb up 0

  37. David Losh

    These are great rules that have to do with debt load to your income. Houses are a different story.

    I’m amazed this year that $250K to $350K buys you a two bedroom, one bath house, and people think that is great.

    The price of property has nothing to do with your income or interest rates. It has to do with the value of the property. We have a long ways to go to address value.

    Town houses should be cheap housing units. That’s what they were built for, that’s what we permitted them for. When they sell for $300K that compromises all property pricing. It drags in an expensive price per square foot.

    The money you spend should buy you something.

    The first time I saw a Target Store I made the comment that it is the most expensive store I had ever been in. You pay a very high price for really cheap carp. There again Nordstroms has followed that business model today so there must be something to it.

    Rate this comment: Thumb up 0

  38. Angie

    deejayoh, this is really nice–thanks!

    Rate this comment: Thumb up 0

  39. Sniglet

    While 1969-2009 saw some economic turbulence, it was nothing compared to what happened during 1920-1960 . I don’t think there’s any doubt the next decade will more closely resemble the 1920-1960 period.

    I tend to agree with Scotsman. I think the last 40 years may not be a good comparison for what is lying in store. When you look at home appreciation for the last 100 years, the post WWII years stand out like a sore thumb. The developing world has experienced over 2 generations of almost continuous economic prosperity, which is (historically speaking) an extrraordinary aberration.

    Here is a look at the average US home price increase by decade for the last 100 years.

    1890′s 0.53%
    1900′s 1.40%
    1910′s 3.30%
    1920′s -0.70%
    1930′s -0.45%
    1940′s 8.16%
    1950′s 2.67%
    1960′s 2.57%
    1970′s 8.12%
    1980′s 5.86%
    1990′s 2.84%
    2000+ 9.27%

    I don’t see why home prices in the Puget Sound won’t return to at least the late ’90s levels. Wages have barely gained since 1999, and are now in a tailspin (just ask anyone looking for a job right now how much lower the salaries compared to their previous employment). It is also clear that the massive sprike in prices since 2000 was unprecedented even by the unprecedented appreciation post WWII appreciation rates. I see no reason we can’t lose all the gains of the last decade.

    Of course, I think prices will go even lower than 1999 levels, but that’s another topic of discussion…

    Rate this comment: Thumb up 0

  40. johnnybigspenda

    thanks for the great post Deejayoh… excellent work.

    Do you know if there is data available related to:
    -average income for homeowners
    -average income for non-homeowners
    -number of owners vs. renters or as a % of total in King County
    -% of homes that are owned outright
    -% of homes that are owned by retirees
    -average time since purchase by homeowners in King County

    I have a feeling that the numbers are skewed by the mix of these variables. ie. retirees with low incomes who own a house they bought in Magnolia in 1969 which is now worth $850,000, or the median income being skewed by some very low data points (these people never bought in the past and never plan to… nor should they), ect ect.

    Rate this comment: Thumb up 0

  41. jon

    RE: johnnybigspenda @ 46 – Take a look at page 28 of
    http://www.census.gov/prod/2005pubs/h170-04-60.pdf

    2004 Median household income of owners: 72,009, renters 34,268.

    Page 36 breaks down mortgage vs. no mortgage.

    I think that document has all the other info you ask for as well, as of 2004.

    Rate this comment: Thumb up 0

  42. jon

    Among homeowners with no mortgage, their median household income (2004) is 43K. Their median home value is $247K. So that group has a 5.7 ratio of home value to income, and zero debt. They are 40% of the total owner occupied homes.

    Don’t expect that group to dump their houses in fear that prices are heading towards 3 times income.

    Rate this comment: Thumb up 0

  43. The Tim

    By Sniglet @ 45:

    I don’t see why home prices in the Puget Sound won’t return to at least the late ’90s levels.

    Well, he did say it wasn’t meant to be predictive, but Deejayoh’s stated potential “bottom” range of $220k to $295k corresponds with the (non-inflation-adjusted) medians of July 1998 and June 2003, respectively. So based on this analysis, late ’90s pricing doesn’t actually seem entirely out of the question.

    Rate this comment: Thumb up 0

  44. patient

    RE: jon @ 48
    I’m not sure I follow your train of thought. These people will obvisouly not be foreclosed upon but they can still be interrested in perserving the current equity by selling before values decline further. I would also guess that a large part of them are close to or in retirement. So, they might want to free the cash and live in a rental in Florida and another part will likely pass on and leave an estate. Do you care to expand a bit on your line of thinking to clarify your point?

    Rate this comment: Thumb up 0

  45. anony

    I wouldn’t expect anyone who would pay off a mortgage to sell in fear of price drops. They bought something they like and that hasn’t changed. (sure they will move to Florida/Arizona and die, just like always).

    I would be more concerned about those underwater on their mortgages, particularly the subset who took out several HELOCs, and the other subsets who may be suffering loss of income and/or resetting ARMs. I wouldn’t even expect these to sell in fear of price drops, but rather in fear of foreclosure and the social stigma of not being as rich as they were before (or pretended to be).

    Rate this comment: Thumb up 0

  46. jon

    I don’t disagree that there are plenty of people in over their heads. But they are not the median. At 40%, the mortgage-free group is close to half. A little bit more and the median homeowner would be a person with zero debt. So the median homeowner is probably someone who has lived in their house for a long time, and the house still is worth much more than they owe on it. Being that they are nearing retirement, they would not have HELOCed it. My main point is that the median house value to the median income ratio is always going to be far removed from the criterion used to evaluate first time homebuyers. Looking at that ratio is not going to tell you much about the group that is driving the market currently, which are the people who can’t afford their payments.

    Rate this comment: Thumb up 0

  47. KFK

    There is quite a bit of data suggesting continued declines in RE markets.

    Check out: http://www.economics.harvard.edu/files/faculty/51_Aftermath.pdf

    After a financial crisis, RE prices fall, on average, 35% and the duration, peak to trough is 6 years. The worst scenario is 50% drop lasting 10 years.

    Looking at the available trends, I believe that housing prices of the 1997 – 1998 period are a good guide for the bottom of the market in general and for specific locations. I wouldn’t pay more.

    Rate this comment: Thumb up 0

  48. Willie

    Willie says:
    I think it would improve the representative value of this analysis to factor in income disparity over the time frame in question.

    This PDF: http://www.investmentpostcards.com/wp-content/uploads/2009/05/green-shoots-or-smoking-weed.pdf
    shows in chart 1 that according to the IRS from 1969 to (I think) 2006 the top 1% of income earners saw their percentage of national income rise from approx 10% to 23% respectively.

    If one were to assume that the income distribution of the US as a whole is significantly representative of King county, then backing out these top 1% and their respective income percentages from the PCI would give a much more representative picture of the other 99% of the population.

    If one were to do so it appears it would show prices more out of the ordinary currently and subsequently with a more significant correction in order.

    Rate this comment: Thumb up 0

  49. Jonness

    deejayoh:

    Great analysis!

    “The April median for King County SFH was $380k, indicating a possibility of 22-42% of additional downside risk ”

    I believe the historical homeownershiip rate will factor into the ultimate bottom. IOW, if we are at the upper end up your range, and the homeownership rate is still well above normal, I expect prices to keep falling.

    If I’m reading you correctly, a 22-42% drop represents a potential for a further $83K-$151K off the median price.

    “For home prices to fall much further than this (e.g. the super-bear’s $100k prediction), it seems to me that one or more of the following things would have to be true”

    OK, it looks like I’ll have to read it again.

    Rate this comment: Thumb up 0

  50. Jonness

    OK:

    Duh, I get it. $100K is meant as the prediction of median price at bottom–not the predicted amount of drop from current.

    Hmmm, looks like I’m not a super-bear. Then again, I’m not exactly an optimist either.

    Rate this comment: Thumb up 0

  51. Civil Servant

    Jon @ 52, I’d quibble with your definitive statement that those nearing retirement are unlikely to have taken out a HELOC. Among the parents of friends of mine and people I’ve worked with, AARP-ers who own houses outright have done just this to pay for vacation properties, RVs, their children’s weddings, their children’s or grandchildren’s private-school or college tuition, their children’s down payments (ouch), “dream vacations” along the lines of monthlong luxury cruises to celebrate retirement, and elective surgeries (neck lift, hair plugs, bunions, etc.). In my experience this is not unusual, especially in the public sector where people know they can count on pensions. And, in Seattle, for someone who bought his or her house 20+ years ago and has a pension coming in — two-pension households are also pretty common — the feeling that one can or is even entitled to live a little bit, why not buy that sweet condo on Maui… well, it is understandable. Some percentage of the population is just plain susceptible to housing-market hype.

    Rate this comment: Thumb up 0

  52. The Canary

    Not sure why you are using per capita income, the comparisons I have seen in other analysis that refer to the 3X ratio are Median Family income to Median household price. Someone earlier mentioned median family income in kind county was 70k, which I think is a little low based on prior research, which I didn’t keep, seems like it was 76k, which would give you a house price of around $230k, which would be comparable to your estimate, of 5 X per capita income. Median family income is likely more accurate as it accounts for dual family incomes.

    Rate this comment: Thumb up 0

  53. Jonness

    RE: deejayoh @ 58

    For quite some time, I’ve had my eye on Seattle-area house prices declining to about year 2000 levels. I don’t have data to back up my suspicions. It’s either a gut feeling or purely wishful thinking. House prices seemed affordable to me back then, and they don’t now. Even with the latest discounts, current prices are crazy high. I agree with you though that what ultimately matters is where median incomes are headed, and that we’ll eventually adjust toward them.

    Interestingly, when a lot of people I know speak about “getting back to a normal economy,” they are referring to getting back to a completely abnormal period of bubble-mania. This chart says a lot about what it will take to return back to where we were a few years ago:

    http://graphics8.nytimes.com/images/2009/05/08/business/economy/joblosses.jpg

    Rate this comment: Thumb up 0

  54. David Losh

    RE: Jonness @ 60

    Interesting chart. People do seem to think that those years of high appreciation are a normal occurance. Even here on the Bubble people try to use those years between 2002 and 2007 as a part of a larger equation.

    Housing starts and construction spending became such a huge part of the economy during that time. Job loss is the perfect word because we will never again see the amount of construction we had during those years.

    Rate this comment: Thumb up 0

  55. gameboy

    By Willie @ 54:

    Willie says:
    If one were to assume that the income distribution of the US as a whole is significantly representative of King county, then backing out these top 1% and their respective income percentages from the PCI would give a much more representative picture of the other 99% of the population.

    If one were to do so it appears it would show prices more out of the ordinary currently and subsequently with a more significant correction in order.

    This is false.

    The whole reason why you use median numbers instead of averages is to minimize the effect of top/bottom 1% inluencing the numbers. It does not matter if the top 1% gained 1000X growth in income instead of 10X, unless their numbers increased, it would have no effect on median.

    I also believe too many here are focusing on minor details. The fact that the chart show is that there is a VERY VERY strong correlation between personal income and housing prices. It does not matter if you think HHI would be better or something else would be a better indicator. The numbers show that PCI is excellent as is.

    Don’t make it more complicated than it needs to be.

    Rate this comment: Thumb up 0

  56. Willie

    Gameboy

    Per Capita is the Average, in this case of income, not the median so it will matter.

    http://en.wikipedia.org/wiki/Per_capita
    http://en.wikipedia.org/wiki/Per_capita_income

    “Per capita income gives no indication of the distribution of that income within the country, so a small wealthy class can increase the measured per-capita income far above that of the majority of the population.”

    From the PDF I posted above we know this is the actuality over the period in question in the analysis.

    Rate this comment: Thumb up 0

  57. gameboy

    My Bad!

    Rate this comment: Thumb up 0

  58. Willie

    Hey, no problem.

    Rate this comment: Thumb up 0

  59. patient

    RE: jon @ 52

    “My main point is that the median house value to the median income ratio is always going to be far removed from the criterion used to evaluate first time homebuyers.”

    This I kind of agree with but the median price reported is for homes sold, not homes that are not. I don’t think it’s median income / median value I think it is median income / median price that is tracked?

    The same kind of goes for this comment of yours:
    “Don’t expect that group to dump their houses in fear that prices are heading towards 3 times income. ”

    If these homes are not part of the “market” as in homes that trade hands they have no impact on the market. But when these homes do change hands they need to follow the current market prices independent of if they are paid off or not.

    Rate this comment: Thumb up 0

  60. pfft

    “Based on this chart it is pretty clear to me that claims that home prices falling to their “normal state” of 3x income are best discussed on Snopes.com.”

    ahhh, but in the late 90s you could have said the same to someone who said home prices were going to 8X incomes!

    Rate this comment: Thumb up 0

  61. aej

    Per capita income seems to an inappropriate measure. Why not median income – which according to the Seattle Times is $68,832? That would the bottom somewhere between $275K and $344.

    Rate this comment: Thumb up 0

  62. The Tim

    RE: aej @ 69 – If you use median income, you have to use it to establish the historical baseline multiple, as well. You can’t just take the multiple established using PCI and then apply it to the median income.

    Per deejayoh’s chart @ 15, instead of 5.25, the baseline becomes around 4.0, so if you assume some possible overshoot, the bottom would be between $224k (3.25x) and $275k (4.0x).

    Rate this comment: Thumb up 0

  63. EconE

    It would be interesting to see a distribution chart of incomes overlaying a distribution chart of homes for sale and their corresponding asking prices.

    I know that the “low end” of the income distribution isn’t buying homes.

    I also know that the upper tiers are not as constricted to the 3x income thing…however…those top earners are not only buying just one home. Someone has to buy all those ski and beach condos…not to mention, the rental units for the low income earners.

    Rate this comment: Thumb up 0

  64. Asheviller » Blog Archive » The Final Countdown

    [...] been following another blog called Seattle Bubble that has a really scary analysis that compares Personal Income (wages) vs House Prices in King County.  Historically, the average house price in our area has averaged 5.3 times the average wage. [...]

    Rate this comment: Thumb up 0

Leave a Reply

Do you want a nifty avatar picture next to your name, instead of a photograph of Tim's dog? Just sign up with Gravatar, and make sure to use the same email address in the form below. It's that easy!

Please read the rules before posting a comment.

You have 4 comments remaining on this post.

Archives

Find us on Google+