Big Picture Week: Price to Income Ratio

Like the price to rent ratio, it’s been over a year since we visited the subject of Seattle’s home price to income ratio, so let’s take another look.

Here’s how the ratio stacks up when you use King County median household income data from the OFM:

Seattle Home Price to Income Ratio

Not too different from what we saw in yesterday’s analysis of home prices versus rents. Things started getting out of whack around 1997, then got really insane starting in 2005. However, let’s have a look at another take on the price to rent ratio, using per capita income from the BEA instead:

Seattle Home Price to Income Ratio

Notice that using this method, the ratio doesn’t really start to get too crazy until about 2002. My theory is that per capita income better reflects the “wealth effect” of the dot-com boom here in Seattle than the median household income.

Here’s a plot of home prices, per capita incomes, and median household incomes each indexed to January 1990 = 100. Note that the income data is only released yearly, so the data between releases is a simple linear interpolation:

Seattle Home Prices and Incomes

Looking at per capita incomes gives us a better picture of where home prices really began to detach from the local economic fundamentals. From 1999 through 2002, the per capita index averaged 0.4% lower than the home price index. In January 2003, the home price index was only 7.7% higher than the per capita income index. By mid-2007, the difference had skyrocketed to 40.4%. The latest readings put the home price index 10.2% above the per capita income index.

By this measure, home prices look to be still about ten percent higher than where incomes suggest they “should” be, similar to the low end of the remaining correction suggested by the price to rent ratio.

Big Picture Week on Seattle Bubble

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

39 comments:

  1. 1
    LA Relo says:

    In my opinion average incomes are the most important factor in determining what prices should be, because it more than anything else determines what people can afford.

    The only other significant factor that impacts what people can afford (given constant prices and incomes) is interest rates.

    I’d be interested to see what price to median HH income ratio graph looks like with the going mortgage rate added to it.

    With rates so low people might argue this ratio should actually be a little higher than normal.

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  2. 2
    dancingeek says:

    Looking at the per-capita income vs HPI, it looks like the dot-com bubble started the housing sector on a roll. That started a little bit of a feedback loop with housing “wealth” that the HPI barely noticed the dot-com bust. If that is the case, then it stands to reason that the housing bust would bring all three trends back in line unless another “wealth” bubble is able to form.

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  3. 3
    The Tim says:

    By LA Relo @ 1:

    I’d be interested to see what price to median HH income ratio graph looks like with the going mortgage rate added to it.

    That’s pretty much exactly what the affordability index is. I posted that on Tuesday.

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  4. 4
    WoodinvilleRenter says:

    What does it say? Prices need to drop another 25% – 30% to get back to historic norm?

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  5. 5
    deejayoh says:

    By dancingeek @ 2:

    Looking at the per-capita income vs HPI, it looks like the dot-com bubble started the housing sector on a roll. That started a little bit of a feedback loop with housing “wealth” that the HPI barely noticed the dot-com bust. If that is the case, then it stands to reason that the housing bust would bring all three trends back in line unless another “wealth” bubble is able to form.

    I’ll say the same thing I posted on the other thread. As of 1997, the capital gains treatment of home sales changed, making the sale of homes basically tax free for most people. Removing taxes on an investment is going to maie that investment more attractive, at least by the marginal tax rate. A bunch of the early run up can probably be attributed to that change which was a one time event.

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  6. 6
    Scotsman says:

    Here’s some good numbers info on how incomes relate to homes, and homes to jobs, wealth effects (overall consumption), and recovery. This is as good a place as any to put it since income is really the driver for many of the issues we face going forward and home prices play a central role. It’s foolish to believe any increase in home prices is possible until personal incomes recover. Prices easily have another 20% to drop, all else being equal. What we haven’t talked about much is the feedback loop between home prices, wealth effects, personal consumption and future job growth. An economy where home equity was a significant part of retirement plans, ATM/HELOC liquidity, etc. is rapidly changing to a more income or cash flow based model:

    http://politics.usnews.com/opinion/mzuckerman/articles/2010/09/23/the-american-dream-of-home-ownership-has-become-a-nightmare.html?PageNr=2

    “Every further 1 percent decline in home prices today lowers household wealth by approximately $170 billion. For each dollar lost in housing wealth, the estimate is that consumption is lowered by 5 cents or 5 percent. “

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  7. 7
    redmondjp says:

    When I bought my home in Redmond back in 1998, the price of the house was just a bit more than 3x my gross income at the time, which was lower than the median income for the area. Now, median house price in Redmond is somewhere in the 6-8x median income range (haven’t seen latest income #s from recent census) and now please do commence with stories about Microsoft, high tech, and how price and income are no longer related because “it’s different here” . . .

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  8. 8
    D. in Ballard says:

    Tim, I sense a higher assurance from you that prices are too high in the most recent posts. Maybe I’m seeing something that isn’t there, but there appears to be even more assurance that we are still way off than before. Say in the summer when you thought the Goldman prediction was a bit much. Not long ago you said that you were very likely to buy a house this winter. I feel like this is a bit conflicting. Since I am in the same boat, wait or buy, maybe you could talk about it.

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  9. 9
    m-s says:

    So, is the difference in these incomes (median household vs. per capita) just the difference between an average (average known to skew due to a few high incomes) and a median, then multiplying by about 1-2, for the scale factor between per person and household? Is it “average house price” or “median house price” in both cases?

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  10. 10
    query_squidier says:

    By D. in Ballard @ 8:

    Tim, I sense a higher assurance from you that prices are too high in the most recent posts.

    It may just be anecdotal, but I’ve perceived a shift as well.

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  11. 11
    Snigliastic says:

    Not sure how reliable this is, but here’s some Snohomish County info: http://www.city-data.com/county/Snohomish_County-WA.html

    estimated household income for 2008: 66,701
    estimated house value for 2008: $364,400
    Lower value quartile – upper value quartile: $277,300 – $481,500

    price/income ratio =5.46

    I make about 3x the estimated household income (wife = student), and am not thrilled about spending 400k on a house. How on earth can the average person in Snohomish County do so?

    Tim, that site (reliability unknown) breaks out medians for stand-alone, condos, townhouses, etc. Did you do that with your graph, or do you have the ability to do so? This site says the mean house price for stand-alone is $422,844

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  12. 12
    Tim says:

    I’m not THE Tim, but I’m really beginning to believe that the Goldman prediction is spot on. Price reductions are occurring across the board up here in Bellingham with not much buying going on since July. It seems like the PNW is really starting to crack now. That’s just my opinion being up here in Bham and looking at listings daily for the past year and half.

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  13. 13
    ray pepper says:

    RE: Tim @ 12 – GS is spot on. I learned long ago to not fight their tape or their calls. Over the next decade another 20% slide will be graphed quite well by The Tim.

    Bank it and make your offers accordingly Buyers.

    Going to Data Snap investor meeting tonight: http://www.mydatasnap.com/terms.php

    Will see if their work is worth 3% at the auctions. So far very unimpressed with Vestus and PNWE.

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  14. 14
    anonimaniac says:

    PNW house market = T-O-A-S-T. Down at least another 30%. Mark it, now!

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  15. 15
    WoodinvilleRenter says:

    RE: Tim @ 12 – Were you talking about this prediction by GS talking about -22% for Seattle in two years?

    http://www.zerohedge.com/article/no-cheer-housing-bulls-goldman-which-goes-negative-house-prices

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  16. 16
    Macro Investor says:

    RE: Scotsman @ 6

    “Every further 1 percent decline in home prices today lowers household wealth by approximately $170 billion. For each dollar lost in housing wealth, the estimate is that consumption is lowered by 5 cents or 5 percent. “

    5% seems like MSM optimism/deception. How many people were refinancing and spending 100% of their wealth effect gains? That’s gone, obviously. Other bloggers have pointed out sales tax revenue is still 10-20% below the peak. Based on that I’d say it’s around 50% (30% drop in prices –> 15% drop in consumption).

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  17. 17
    Jonness says:

    By D. in Ballard @ 8:

    Not long ago you said that you were very likely to buy a house this winter. I feel like this is a bit conflicting. Since I am in the same boat, wait or buy, maybe you could talk about it.

    If you find the perfect house of your dreams, you might want to consider paying a premium by purchasing now. But it if the house is easily replaceable, why not wait until prices are lower and your down payment is higher?

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  18. 18
    ray pepper says:

    Tim, I felt compelled to go to the Best Mortgage Steve Tytler Facebook Page. Not sure why…Check this out:

    “Check out Tim’s highly detailed charts at SeattleBubble.com showing the latest housing stats. Warning: many of the people who comment on that blog are “gloom and doom” types.” Are YOU Tim a Doom and Gloom Type?

    I like this one too:

    “Here in the Puget Sound region I expect to see a “balanced” housing market for the next few years. By that, I mean it wo…n’t be a “buyer’s market” with a surplus of home sellers, nor will it be a “seller’s market” with more buyers looking for homes than than there are homes for sale — it will be a nice “flat” market with very little appreciation or depreciation.”

    Hmmmm….A balanced market? Is this a balanced market Tim?

    Even more curious as to this: Blowing my own horn: SeattleBubble.com says I had the most accurate housing market predictions for 2009. In fact, I have consistently been the most accurate predicter of housing market trends for several years. I based my predictions on a combination of anaylzing the numbers and my “feel” for the current psychology o…f the home buying market. So far so good!”

    This cannot be true……With his predictions of a balanced market? Balanced my butt. I call it a big time buyers market with little or no competition unless your talking REO’s and Short Sales with low ball prices that banks request “highest and best” from the listings repeatedly.
    The rest of the crap just sits.

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  19. 19
    Jonness says:

    By Tim @ 12:

    It seems like the PNW is really starting to crack now. That’s just my opinion being up here in Bham and looking at listings daily for the past year and half.

    I’m seeing the exact same thing in other parts of the Sound. As we head into winter, sellers appear to be getting a bit freaked out. Prices are getting shaved in fairly sizable chunks. Next selling season I foresee sold prices being at about 2004 levels compared to 2005 levels for most of this season (but dropping now).

    The government and Fed are throwing in everything but the kitchen sink to raise prices, and the banks are refusing to foreclose on the majority of non-payers in order to prevent flooding the market. At the surface, things don’t look so bad, but when you lift the covers, you begin to get the idea we are teetering on the brink of disaster.

    My recommendation to all is to strongly consider holding off buying until we at least see prices come back in line with historic fundamentals. Purchasing highly leveraged assets when they are rapidly depreciating is a really good way to wreck your financial future.

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  20. 20
    Jonness says:

    By ray pepper @ 13:

    So far very unimpressed with Vestus and PNWE.

    Agreed. :)

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  21. 21
    Jonness says:

    By ray pepper @ 18:

    Blowing my own horn: SeattleBubble.com says I had the most accurate housing market predictions for 2009. In fact, I have consistently been the most accurate predicter of housing market trends for several years. I based my predictions on a combination of anaylzing the numbers and my “feel” for the current psychology o…f the home buying market. So far so good!”

    Megalomania: A psychopathological condition characterized by delusional fantasies of wealth, power, or omnipotence.

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  22. 22
    Hugh Dominic says:

    RE: Jonness @ 19 – I’m seeing a big round of price cuts going into the Fall season.

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  23. 23
    ChrisM says:

    Down here in Clark county, I’m seeing FNM and FRE putting more reasonable prices on their new listings. Also they seem to drop the prices more frequently — almost monthly. There’s actually some FNM/FRE listings that are below both Zillow and the county’s appraisal!

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  24. 24
    Lurker says:

    Me too. I’m seeing some really good drops myself around the Seattle area. It almost makes me want to jump back in but then I remind myself that we’re probably just starting to see the beginning of it. I’ve waited this long, might as well wait a bit more.

    No buyers, lots of inventory – I also thought that GS prediction was a bit extreme at first but now I’m not so sure any more.

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  25. 25
    drshort says:

    The rather large trend difference between the “medial income” and “per capita income” is important to understanding the housing market in the Seattle area (and other major metro areas). Income disparity has been growing strongly over the last 20 years and this is pushing up housing prices faster than the median income growth would suggest.

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  26. 26
    D. in Ballard says:

    RE: Jonness @ 17 – Completely agree. I think that’s the problem with most houses on the market now. If they are “perfect” they are not selling at a perfect price. And if they’re not perfect, why bother. I’ll just want to move again in a few years. Occasionally I see a good price for a house that mostly fits my needs. Those houses go fast though.

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  27. 27
    vboring says:

    I wonder if it would be informative to look at total regional income (GDP per capita multiplied by population) compared to total residential units.

    It’d give you something like the amount of income looking to be spent on housing.

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  28. 28
    2kt says:

    RE: ray pepper @ 13

    Yeh, spot on. Some of your bubble colleagues are still recovering from GS’s “oil $200″ call. Don’t hear much about their energy picks any more.

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  29. 29

    […] on Seattle BubbleCase-Shiller HPI Rate of IncreaseExamining Home AffordabilityPrice to Rent RatioPrice to Income RatioPosted in Features, Statistics | Tagged big-picture, fundamentals, price-to-rent, rent Posted by: […]

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  30. 30
    Scotsman says:

    We’ve been looking at a number of charts where traditional relationships have diverged over the last several years. Here’s another one- new home sales verses existing home sales- that shows a healthy gap where traditionally they track pretty closely.

    Assuming it returns to a more historically traditional relationship, which will move most- new or existing home sales? My money is on existing home sales heading for the tank. As an aside, I read earlier today that new home sales (new data release) have continued to dive.

    http://calculatedriskimages.blogspot.com/2010/09/home-sales-distressing-gap-august-2010.html

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  31. 31
    hinten says:

    Seems to me most of the indicators are returning to normal and we should be good to be flat again.

    Only problem is that we still have a glut of inventory to work through and that the macro economic factors are having an impact on housing. That in itself will take another 2-3 years to work through.
    Either way, this all indicates to me more ‘normal’ than bubble aftermath. One could argue that the pain we are currently going through in the housing market is similar to the pain we go through any recession. This also means that once the economy returns (which will be very slow) hosign can return to the new normal as well.

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  32. 32
    pfft says:

    By Scotsman @ 30:

    We’ve been looking at a number of charts where traditional relationships have diverged over the last several years. Here’s another one- new home sales verses existing home sales- that shows a healthy gap where traditionally they track pretty closely.

    Assuming it returns to a more historically traditional relationship, which will move most- new or existing home sales? My money is on existing home sales heading for the tank. As an aside, I read earlier today that new home sales (new data release) have continued to dive.

    http://calculatedriskimages.blogspot.com/2010/09/home-sales-distressing-gap-august-2010.html

    you didn’t mention that existing home sales went up 7% in August as reported thursday. this is ex-tax credit.

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  33. 33
    Jonness says:

    By pfft @ 32:

    you didn’t mention that existing home sales went up 7% in August as reported thursday. this is ex-tax credit.

    August sales were 20% lower than June. Prices are absolutely collapsing. I’m seeing some pretty nice houses in outlying areas at about 2002 prices. Not a lot of them, but if you look, you can find them. Ray Pepper is absolutely correct when he says, “they’re all coming back.” IMO, it’s just a matter of time. The bubble died with the HELOC, as did the U.S. economy.

    The beauty of this thing is, if you have been waiting to buy since the bubble peak, as time goes on, you begin to realize you are going to live in a much nicer house than you ever thought possible. A lot of people are unhappy about the bubble, but if you are on the right side of the trade, it represents an unprecedented opportunity to make a lot of very easy money for doing absolutely nothing but waiting.

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  34. 34
    pfft says:

    By Jonness @ 33:

    By pfft @ 32:
    you didn’t mention that existing home sales went up 7% in August as reported thursday. this is ex-tax credit.

    August sales were 20% lower than June. Prices are absolutely collapsing. I’m seeing some pretty nice houses in outlying areas at about 2002 prices. Not a lot of them, but if you look, you can find them. Ray Pepper is absolutely correct when he says, “they’re all coming back.” IMO, it’s just a matter of time. The bubble died with the HELOC, as did the U.S. economy.

    The beauty of this thing is, if you have been waiting to buy since the bubble peak, as time goes on, you begin to realize you are going to live in a much nicer house than you ever thought possible. A lot of people are unhappy about the bubble, but if you are on the right side of the trade, it represents an unprecedented opportunity to make a lot of very easy money for doing absolutely nothing but waiting.

    prices are not collapsing.

    “August sales were 20% lower than June.”

    everyone knew this would happen.

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  35. 35
    Jonness says:

    By pfft @ 34:

    prices are not collapsing.

    Lower prices are the only things selling. If the house isn’t absolutely perfect, it plummets. Most of what I’ve been looking at that was listed this spring has been reduced at least $50K and is still sitting (in my price range). Since prices are sticky on the downside, this can be likened to the bottom falling out. The risk of dramatically lower prices two years out is rapidly increasing.

    None of the bulls have been able to explain where the money is going to come from to pay 25% more for homes than historical relationships to incomes (especially considering the increasingly tightened credit environment, the massive unemployment crisis, and the tapped out consumer problem). Instead, they point out the Case-Shiller has been going up. Unfortunately for them, the new numbers come out on Tuesday.

    I recently offered 20% below a seller’s list price on a home that has sat for a year. Since the seller had previously knocked $50K off the price, he was insulted and pulled the home off the market. That’s good news. when he relists in the Spring, it will provide me with the opportunity to shave another 5% of my offer. In the meantime, I’ll continue to save toward a bigger downpayment.

    As a buyer, you really have to love deflation. As a seller, you must be smart enough to reduce the price enough to sell as early in the deflationary process as possible. Otherwise, it becomes a game of seemingly endless losses. I can’t begin to count the number of sellers I’ve seen who’ve made the mistake of chasing the market down.

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  36. 36
    mike says:

    http://seattlebubble.com/blog/wp-content/uploads/2010/09/Home-Price-to-Income-percapita_2010-06.png

    I like the symmetry of the the Price to Income(Per Capita) graph.

    It’s like a mirror around the 9.29 point.
    Massive rise over 2 years. Massive drop over 2 years.
    If the symmetry holds, then we should see 3 more years before we get to the average 6.5 ratio.

    If you want to be really speculative, maybe another 3 years after that before we hit bottom (although who really knows where bottom will be).

    It does feel right, that we’ll see significant decline for a few more years, then smaller less noticeable declines for a few years after that.

    There even seems to be symmetry around the lowest 6.01 point – although not as nice as the 9.29 point.

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  37. 37

    […] DealBy The Tim on December 22, 2010 | Leave a responseI personally believe that a reasonable analysis of the local economic fundamentals points to another ten to fifteen percent decline in Seattle-area home prices. However, I also […]

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  38. 38

    […] price-to-income ratio remained at a bubble level of 5.7 in Seattle. Despite the national price-to-income ratio falling in the same month to 1.6, matching the lowest […]

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  39. 39

    […] price-to-income ratio remained at a bubble level of 5.7 in Seattle. Despite the national price-to-income ratio falling in the same month to 1.6, matching the lowest […]

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