What does Personal Income tell us about near future home prices?

There have been a couple of discussions in the comments section in the last week or so about the relationship between home prices and incomes.   I thought it would be  a good time to queue up a post about the long-term price-to-income trends, where we are now, and what the possible outcomes could be.

The analysis in this post are all based on annual data for King County for the period from 1969-2008 – a period that covers five recessions.  For home prices, I used the King County MLS median price for SFH, pulled from The Tim’s long-run home price chart.  Tim’s data in this series shows home values in April and October of each year.  I used the October data.  For income, I pulled the data for King County Personal income per capita (PCI) from www.bea.gov.  This time series runs from 1969-2007.  In order to estimate PCI for 2008, I grossed up the 2007 figure by 1%, which was the estimate of Median HHI income growth for King County by the Washington Office of Financial Management (OFM).

[Note from The Tim: For a more granular look at the short-term price-to-income trend since 1990, hit this post.]

The first analysis is a simple line chart showing the historical ratio of home prices to income.   Here we can see that, up until the turn of the century, home prices bounced around in a fairly narrow range when expressed as a multiple of incomes.  The multiple is closer to 4x in times of economic duress (e.g. the oil crisis and mid-eighties recession) and rises up closer to 6x in better times.  But the average multiple of home prices to incomes between 1969 and 2000 was almost exactly 5x.  Then, as lending rules are eased in 2001 –  we see the multiple grow steadily until it peaks over 8x in 2006, before falling back to 7.1x as of October 2008.

King County, 1969-2008

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.  There is no historical precedent for the median price for homes in the Seattle area being that low relative to income in most of our lifetimes – and even if it has fallen to that level at some point in the past, I doubt home prices have averaged 3x income for any extended period of time.  Based on the last ~40 years the “bottom” for home prices based on the income multiple appears to be about 4x incomes.

The second analysis uses the same data, but presents the results as a scatterplot.  Here we can see even more clearly the impact of the changes in lending standards in 2001.   From 1969 to 2000, the relationship between home prices and incomes (shown in blue) follows an almost linear path.  The r-square between these two time series is over 97%.  Using a “best fit” line shows that the best predictor for home prices as a multiple of incomes during this time period is 5.35x – slightly higher than the mathematical average from the analysis above – but probably a slightly better estimate of the long run trended value.

Home prices vs. Income Growth

The red points clearly show home prices diverging from the long-run trend line in 2001, and moving back toward it beginning in 2007.  I think this is the starkest evidence I have seen showing how the “fundamentals” of income as a driver of home values disappeared in the boom.  After tracking income for 30+ years, home prices set off on their own path just as new financing vehicles and standards were introduced to the market.

This chart also casts doubt on that the claim that the boom “started late” in Seattle.  You can clearly see that home prices were shooting up relative to incomes in 2001 and 2002, before leveling off slightly in 2003.  The perception that we were not “booming” was probably due to  income growth being depressed by the end of the dot com boom and the stock market crash – but the ratio of home prices to incomes was steadily increasing.

I also ran an analysis comparing the annual change in home prices to the annual change in incomes.  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.  I haven’t clipped the graph in here, but the r-square for this analysis was 0.3 – which is pretty high for a single variable regression using two fairly noisy series.  It was enough to satisfy my curiosity, as I am entirely comfortable with the premise the primary driver of  home prices is income levels, all other things being equal (e.g. financing terms, relative supply)

Based on this comparison, my observations are as follows:

  • This is evidence to me that we are clearly still far from the bottom.  Depending on your viewpoint, prices should fall back at least to the long-run income multiple (I’ll use 5.35x) and could drop as low as 4x.  Based on this data series, I see no precedent for a lower multiple.
  • King County PCI for 2008 should be about $55k, and given the state of the economy it will probably stay about the same in  2009 .  Applying those income multiples would indicate the King County median would  “bottom”  somewhere between $220k and $295k.
  • The April median for King County SFH was $380k, indicating a possibility of 22-42% of additional downside risk

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:

  1. Home price/income multiples would have to diverge greatly from 30+ years of historical precedence
  2. Incomes would have to fall dramatically
  3. Lending standards would have to be tightened dramatically from their pre-bubble standards.  (A simple increase in rates should not be a unique condition, as the period of this analysis includes the double digit rates in the early ’80s)
  4. Some other extraordinary event would have to take place such as a change in the tax treatment of real estate.

Note that I am not saying any of these things won’t happen. But it does seem to me that conditions would have to change quite dramatically to result in that extreme of a drop in values.  As of today, it appears incomes are relatively stable, lending standards have (for the most part) returned to pre-bubble conditions, and home prices are trending back to the long run income multiple.

My caveat: This analysis is not intended to be predictive.  It is intended as additional information from which you, the reader can generate your own opinions about where the housing market is going and make an informed decision on a housing purchase during a period of great uncertainty.  Hopefully it will generate good discussion in the comments section.

  

72 comments:

  1. 1
    Pegasus says:

    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.

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  2. 2
    patient says:

    “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?

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  3. 3
    deejayoh says:

    RE: Pegasus @ 1 – Source is BEA county level stats for all but 2008. They define it as “Personal income is a comprehensive measure of the income of all persons from all sources. In addition to wages and salaries, it includes employer-provided health insurance, dividends and interest income, social security benefits, and other types of income. ”

    RE: patient @ 2 – Patient – I think the impact of the recession, and falling GDP should be captured in income levels. I’m not sure what the stats are for the great depression – but with 25% unemployment and deflation, it’s probably a safe bet that income levels fell pretty significantly. Thus far, in this downturn income levels seem to be pretty flat. Not that this couldn’t change – but I think it is important to break down the levers to measurable drivers. Income, Interest rates, etc. The numbers certainly suggest that debt levels are above what incomes support – but to me the real question is what impact will the crash have on incomes.

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  4. 4
    patient says:

    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.

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  5. 5
    patient says:

    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.

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  6. 6
    deejayoh says:

    RE: patient @ 4 – yes, a divergence from historical ratios is a definitie possibility. We are long way from that at current levels, but as I said…. “Note that I am not saying any of these things won’t happen”!

    I do think it is interesting to get underneath what people think the drivers of change from history will be.

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  7. 7
    The Tim says:

    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.

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  8. 8
    masaba says:

    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.

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  9. 9
    patient says:

    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.

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  10. 10
    jon says:

    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.

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  11. 11
    Cheap South says:

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

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  12. 12
    Anonymous coward says:

    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?

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  13. 13
    Scotsman says:

    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.

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  14. 14
    Cheap South says:

    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.

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  15. 15
    deejayoh says:

    RE: jon @ 10 – Yes, HHI is probably a better gauge of income but I only had data back to 1989. I chose the BEA time series because I wanted to get a long run view of the data. I was more interested in the divergence from the long run trend, and the two series actually track each other pretty closely for the time period I have both.

    Using HHI the chart looks pretty much the same

    http://img193.imageshack.us/img193/1183/hhiscatter.png

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  16. 16
    Scotsman says:

    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.

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  17. 17
    anony says:

    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.

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  18. 18
    Groundhogday says:

    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.

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  19. 19
    deejayoh says:

    RE: Groundhogday @ 18 – yes, good point, it is closer to 3x on HHI, but the average for 1989-2000 was 4x, and the low point was 3.5x

    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 fault is broadly applying this to averages. 40% of residents of KC do not own a home, and these non-owners are disproportionately skewed to lower income brackets. So while home price may be 3x income of home owners, that is typically not the data people are referencing when they make that claim.

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  20. 20
    Groundhogday says:

    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.

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  21. 21
    Joel says:

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

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  22. 22
    drshort says:

    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.

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  23. 23
    b says:

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

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  24. 24
    Cheap South says:

    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.

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  25. 25
    deejayoh says:

    Interesting to see that BEA has released figures today showing that personal income is UP in April

    http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm

    I don’t see where this is available at the county level. I think that is an annual series only.

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  26. 26
    jon says:

    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.

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  27. 27
    meme says:

    “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.

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  28. 28
    Geek says:

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

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  29. 29

    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….

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  30. 30
    deejayoh says:

    By meme @ 27

    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.

    well, actually…

    http://seattlebubble.com/blog/2009/04/02/seattle-homes-still-10-20-overpriced-compared-to-rents-and-incomes/#comment-69885
    http://seattlebubble.com/blog/2008/07/02/whats-your-housing-bust-strategy/#comment-51078
    http://seattlebubble.com/blog/2008/07/02/whats-your-housing-bust-strategy/#comment-51016

    I agree with the point that the analysis should be on HHI and not PCI, but I can say with with some certainty the median home price has not been 3x median or average HHI at any time in a period of history that is relevant to today. Maybe if you are old enough to have watched the premier of “Leave it to Beaver” it was

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  31. 31
    patient says:

    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.

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  32. 32
    patient says:

    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.

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  33. 33
    Brad says:

    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.

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  34. 34
    patient says:

    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.

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  35. 35
    Pegasus says:

    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

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  36. 36
    David Losh says:

    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?

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  37. 37
    george says:

    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?

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  38. 38
    takenroad says:

    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.

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  39. 39
    2kt says:

    “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).

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  40. 40
    fwiw says:

    thanks deejayoh for all your efforts on this post.

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  41. 41
    Alan says:

    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.

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  42. 42
    Cheap South says:

    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.

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  43. 43
    David Losh says:

    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.

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  44. 44
    Angie says:

    deejayoh, this is really nice–thanks!

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  45. 45
    Sniglet says:

    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…

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  46. 46
    johnnybigspenda says:

    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.

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  47. 47
    jon says:

    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.

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  48. 48
    jon says:

    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.

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  49. 49
    The Tim says:

    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.

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  50. 50
    patient says:

    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?

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  51. 51
    anony says:

    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).

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  52. 52
    jon says:

    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.

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  53. 53
    KFK says:

    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.

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  54. 54
    Willie says:

    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.

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  55. 55
    Jonness says:

    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.

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  56. 56
    Jonness says:

    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.

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  57. 57
    Civil Servant says:

    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.

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  58. 58
    deejayoh says:

    RE: Jonness @ 56 – Yeah, I meant the “80% off” crowd. But you can join their ranks if you want!

    Who knows who is right. Only time will tell

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  59. 59
    The Canary says:

    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.

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  60. 60
    Jonness says:

    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

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  61. 61
    David Losh says:

    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.

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  62. 62
    gameboy says:

    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.

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  63. 63
    Willie says:

    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.

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  64. 64
    gameboy says:

    My Bad!

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  65. 65
    deejayoh says:

    By The Canary @ 59:

    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.

    Canary – I agree that HHI is a better measure of income. I used PCI because a) the trend tracked HHI very closely and b) I had 20 years more data! I was interested in showing the strength of the underlying tie between income and home prices – so the longer series worked better for me. The longest HHI series I could find was back to 1989. BTW – as of 2008, HHI for KingCo was $68k. Check the OFM site.

    But you can’t carry the multiples from this analysis over and apply them to HHI. The results of the comparison are different – and the long-run multiple is more like 4x with a low of 3.5x. I showed a chart comparing HHI to median in comment 15 if you are interested. So if you use that data, the expected “bottom” for housing would be between $238 and $272k – which is pretty close to what I get using PCI. That’s why I was indifferent to using PCI

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  66. 66
    Willie says:

    Hey, no problem.

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  67. 67
    patient says:

    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.

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  68. 68
    pfft says:

    “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!

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  69. 69
    aej says:

    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.

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  70. 70
    The Tim says:

    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).

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  71. 71
    EconE says:

    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.

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  72. 72

    […] 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. […]

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