Incomes and Housing Prices: Whoa....
Arnold Kling, entrepreneur, Othello tournement player, blogger, and economics professor at George Mason University--among other things-- has a chilling post on his blog. Well, chilling if you live in California, New York, or Miami.
Commenter Jim M. points to Housing Tracker as a source for data on house price to income ratios. Here is a list of the top cities in terms of median house price relative to median income.
- Los Angeles, Ca. 10.5
- San Francisco, Ca. 9.8
- NY, NY. 9.4
- Orange County, Ca. 9.2
- San Jose, Ca. 9.2
- San Diego, Ca. 8.8
- Miami, Fl. 8.5
- Riverside, Ca. 6.7
- Boston, Ma. 5.4
- Sarasota, Fl. 5.4
California has five of the top six. Outside of California, New York City, and Miami, most housing markets may not be far from equilibrium. Remember that my ceiling for a price/income ratio is six, while others peg it at four. But the median price/income ratio might be higher than the ceiling, because median income includes a lot of renters.
Overall, it looks as if prices may have to fall almost 50 percent in the top 7 markets, but in many other markets they don't have to fall at all.
However, I wouldn't take too much comfort from this if you live in a non-coastal metropolitan area. Considering the historic surge in real prices by 44% between 1995 and 2005, even in those markets where the price/income ratio is more reasonable it's likely that residential real estate prices will stagnate for years.
That's still a much better outcome than the 30% to 50% drop that some coastal cities might face. Those percentages are extreme, but they aren't outlandish, either. For instance, LA home prices declined by about a third in real terms in the early '90s with the "peace-dividend" induced real estate bust.