Housing Prices and Income

My son sent me this interesting graph, demonstrating the historical relationship between housing prices and income...



It is thought that the fundamental relationship between income and housing prices broke down in the recent housing boom. The graph shows this. During the period between 1985 and 2000 (when mortgage rates were generally stable), this ratio averaged 3.4. In this cycle, the ratio peaked at the end of 2005 at 4.8, before falling housing prices began to bring it down. The current ratio is 3.8.

According to the information that went along with this chart (from National Association of Realtors, Bureau of Census, Moody’s Economy)If this long-term average ratio of 3.4 is applied to today’s national median income, it results in a “correct” national median housing price of $174,000. The National Association of Realtors reports a median home price today of $195,000, implying further declines of nearly 11%. This assumes that nominal incomes remain flat in the near term, which is similar to income performance in the last two recessions.