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My Two Cents

Incomes and Housing Prices: Whoa….

Chris Farrell Dec 16, 2007

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.

  1. Los Angeles, Ca. 10.5
  2. San Francisco, Ca. 9.8
  3. NY, NY. 9.4
  4. Orange County, Ca. 9.2
  5. San Jose, Ca. 9.2
  6. San Diego, Ca. 8.8
  7. Miami, Fl. 8.5
  8. Riverside, Ca. 6.7
  9. Boston, Ma. 5.4
  10. 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.

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