Seattle-Area Price to Income Ratio Near Historic Average

Seattle-Area Price to Income Ratio Near Historic Average

It’s been a while since we’ve taken look at how local home prices compare to local incomes, so let’s update those charts.

First, let’s check out the ratio between home prices and per capita income from the BEA:

Seattle Home Price to Income Ratio

Overall the Seattle area is just a little bit above the long-term average, and almost entirely thanks to this year’s price spike. We’re nowhere near where we were during the bubble. As of March (the latest home price data from Case-Shiller) Seattle’s home price to income ratio is about where it was in September 1991 and May 2001.

Note that the income data is only released yearly, so the data between releases is a simple linear interpolation. Also, for the chart above I’m assuming flat per capita income data since the last data release in 2011, even though incomes increased 4.6% between 2010 and 2011. If you assume that incomes have increased at the same rate since 2011, the price-to-income ratio comes in at 6.35—still below the 1990-2001 average.

Here’s a plot of home prices, per capita incomes, and median household incomes each indexed to January 1990 = 100. The light blue line through 2012 and 2013 is where incomes would be if they kept increasing at the 2010-2011 rate.

Seattle Home Prices and Incomes

Median incomes have been out of sync with with home prices since 1997, but outside of the housing bubble years, per capita income and home prices have moved in near lock-step. It’s reasonable to expect that this trend will continue going forward, meaning that home prices will rise at roughly the same rate as local incomes.

  

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.

18 comments:

  1. 1
    Erik says:

    “It’s reasonable to expect that this trend will continue going forward, meaning that home prices will rise at roughly the same rate as local incomes.”

    Sounds like a prediction to me from Tim, someone that has been studying housing data for many years. If you think it’s reasonable, I think it’s reasonable. This means that we have permenently changed our pre-bubble trajectory. We can draw a straight line through the pre 1997 cs housing price. After the bubble our cs housing price line will be the same slope, but shifted up.

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  2. 2
    David Losh says:

    RE: Erik @ 1

    As I said on the other thread this is kind of meaningless data without showing the mix of incomes we have in Seattle.

    It was a couple of years ago when this first came up that I looked at the incomes for Seattle/Bellevue and saw that we have a lot of $100K positions here, and up.

    Incomes also don’t translate into housing prices. No one has to buy a property, and some of those high wage earners are on contracts with Amazon, or Microsoft.

    There’s a lot more to this data than what’s presented in the charts.

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  3. 3

    In the lower chart, Seattle area Home Prices and Incomes, there appears to be a fourth line starting in around mid 2011. Am I hallucinating that, and if not, what is it?

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  4. 4
    SG says:

    RE: Ira Sacharoff @ 3
    As Tim mentioned, the last data point for the income data was 2011. Beyond that you can consider incomes to be flat or do a linear extrapolation. Giving you the 6.84 and 6.35 ratios.

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  5. 5

    RE: SG @ 4
    Thanks.

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  6. 6
    Macro Investor says:

    Obviously, incomes do not spike up and down, but prices do. So it’s kind of silly to think incomes have a direct relationship with price.

    What causes bubbles are wild swings in interest rates, and the investor/consumer psychology that comes with that. Interest rates were well into double digits in the early 80s. That crushed affordability and held prices down. For 25 years rates marched down, and affordability rose. Finally banks went nuts and made loans to anybody who could fog a mirror. The housing market partied like never before.

    WHEN rates bottom (as they must), the party is over and buyers will be disappointed with their $500k shabby wooden boxes. Few people seem to “get” this. Newcomers have no chance with charts that don’t go back far enough and focus on the wrong stats. I feel sorry for them. Losing your financial future is a tough lesson.

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  7. 7
    Jonness says:

    “Median incomes have been out of sync with with home prices since 1997, but outside of the housing bubble years, per capita income and home prices have moved in near lock-step. It’s reasonable to expect that this trend will continue going forward, meaning that home prices will rise at roughly the same rate as local incomes.”

    Actually, up until 1997, median incomes were far more in sync with house prices than per capita incomes. Interestingly, in 1997, we began to experience a housing bubble, house prices shot straight up, and nothing has really tracked anything since. Put another way, IMO, it’s dangerous to use indicators that more closely tracked house prices during the bubble run up and subsequent massive government/fed intervention period and expect them to hold while the government/fed increasingly tapers off the sugar.

    If house prices fall all the way back to the same super-tight relationship to median incomes present in 1997, there will be a lot of unhappy campers as prices continue to head lower.

    It’s nice to think that there is has been something normal about the economy these past years, and we got a little out of whack for a few years, and now we are back to normal. But the truth is, from here on out, home prices will most likely have a lot more to do with government and Fed policies than with incomes.

    IMO, despite what Bernanke claims today, expect us to eventually begin QE4. Unless, of course, we get rescued by the coming U.S. energy boom.

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  8. 8
    wreckingbull says:

    RE: Jonness @ 7 – Agreed. Now that we live in a command economy steered by political interests, it becomes much harder to predict the direction of asset prices. Anything can happen. My advice? Stay diversified, including a modest amount in real estate.

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  9. 9
    whatsmyname says:

    By Macro Investor @ 6:

    Interest rates were well into double digits in the early 80s. That crushed affordability and held prices down.

    Didn’t we have this conversation two weeks ago?
    Jan 1980 new home prices: $62,900 median, $72,400 average
    Dec 1989 new home prices $125,200 median, $154,300 average

    http://www.census.gov/const/uspricemon.pdf

    Do you think housing will get “crushed” like that again in the coming decade?

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  10. 10
    Macro Investor says:

    By Jonness @ 7:


    It’s nice to think that there is has been something normal about the economy these past years, and we got a little out of whack for a few years, and now we are back to normal. But the truth is, from here on out, home prices will most likely have a lot more to do with government and Fed policies than with incomes.

    Excellent points by both you and Wreckingbull.

    There is nothing normal about anything since the bubble years. It is unprecedented in history to have so many zero/low down loans, with negative amortization and every other gimmick used to get people into mortgages. Those “loosey goosey” standards only exist because dot gov and the fed are the entire market in loans. If we ever approached lending standards that existed going back decades or even centuries, there would be a world of hurt out there.

    I recommend staying away unless you find a real bargain. The bubble will be unwinding over many more years, but there will be ups and downs that fool a lot of people into thinking it’s over.

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  11. 11
    Blurtman says:

    Interesting data. Also interesting would be a corresponding comparison of average consumer debt loads and also average consumer wealth, e.g., asset values other than the value of the primary residence icluding savings, stocks, etc…

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  12. 12
    Macro Investor says:

    By whatsmyname @ 9:

    By Macro Investor @ 6:

    Do you think housing will get “crushed” like that again in the coming decade?

    I missed your comment before. 10 year bond rates went from roughly 11% in 1980 to 7% in 1990. In 1981, rates peaked at 15.8%.

    So, yes — definitely affordability was very poor in the early 80s… maybe the worst in history. It was much easier to buy in the late 80s. Makes sense that prices sky rocketed, and continued to climb as rates and lending standards got progressively easier until 2007.

    If rates double, do I predict housing prices will collapse another 50%? No. I would expect it to fall a little. Sellers will take their houses off the market and wait for a recovery. We saw that happen in 2009-2012.

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  13. 13
    whatsmyname says:

    By Macro Investor @ 12:

    If rates double, do I predict housing prices will collapse another 50%? No. I would expect it to fall a little. Sellers will take their houses off the market and wait for a recovery. We saw that happen in 2009-2012.

    How do you reconcile this statement with the “bubble will be unwinding over many more years”, and dark hints about “Losing your financial future”.

    And while you’re at it: “another” 50%?

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  14. 14
    erik says:

    RE: Macro Investor @ 6
    I wasn’t able to get super low rates cause my credit was bad at the low point. I got what homeopath offered. 5.25 percent on 87k. Feel free to critisize me.
    I spelled incorrectly previously cause I am still getting use to this kindle.

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  15. 15
    erik says:

    RE: wreckingbull @ 8
    Ha ha ha. I tried your technique of saying nothing so I can get thumbs ups in comment 1 and I got 8 thumbs down from your goon squad. You said diversifying is good, which basically adds nothing as you do every week and the goon squad lavishes you with thumbs up. You must be their boss or something. Makes no sense. I am not saying you are wrong or not smart. I can’t tell cause you never say anything. You paraphrase tim and you make very basic General statements. Please make state something like a prediction of some sort next post.

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  16. 16
    mike says:

    RE: erik @ 14 – I thought I got screwed at 3.625% conventional 20% down.

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  17. 17
    Erik says:

    RE: mike @ 16
    I got 5.25% and paid 5% down. If I had 20% down, I’m sure I could have gotten a much better rate. It was on $87k, so it doesn’t dramatically change the payment with a better rate. My payment, insurance, and taxes are $635/mo. Not too worried about a better rate. It would be nice to pay less though.
    Plus if I sell it here soon, there really is no reason to refinance. I hope Marco Investor is correct and there are highs and lows to come. My plan is to sell soon and pocket $100k. After that I will keep reading this website and wait for another low and pay all cash this next time and have no mortgage. That’s why I read this, so I can play the highs and lows. Being mortgage free at my age would be pretty nice.
    Without these turbulent times i’d still be paying a huge mortgage. Seems foolish to pay so much for a place to live.

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  18. 18
    Roger says:

    Hey Eric:

    Your Homepath loan has lender paid mortgage insurance. It will not fall away, like some mortgage insurance does, but someday you may be able to profitably refi out of it. As you note, it’s a small loan, and it may not pencil out, seems hard to envision you losing money on an $87K purchase. Best of luck.

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