The magical 2.2 housing ratio between median nationwide home prices and household income – Nationwide home prices still inflated by 30 percent based on 50 years of household data.
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The typical American family is facing the biggest economic uncertainty since the Great Depression and must feel like their lives are in a washer spin cycle. Many unemployed Americans are now entering a stage where unemployment insurance is being cut off which will send tens of thousands of people into the street. The mainstream media won’t cover this because they rather gossip about the next tan face to drink themselves into a gutter at a nightclub. 43 million Americans are receiving some kind of food assistance yet this is some kind of recovery? Many are wondering how banks can produce such large profits without actually producing anything real or of substance in the economy. Yet banks are largely casinos that now operate to siphon off real wealth from the economy through bailouts, frauds, and other activities that harm the overall economy. In a decade where banks were unleashed to do what they may with limited regulation and a cozy Fed, we are now left with an economy in tatters but a banking sector that is still healthy based on oversized bonuses. I wanted to gather data over the last 60 years and measure how most Americans are now fairing. The data shows a largely underwater nation.
Let us look at the data carefully:
Back in 1950 the median home price cost a little above 2 times the annual median household income:
1950:Â Â Â $7354 / $3,319 =2.2
In 1960 the ratio remained roughly the same:
1960:Â Â Â Â $11,900 / $5,620 = 2.1
In fact, over this ten year period the typical household gained buying power when it came to housing. Even in 1970 the ratio became more favorable to US households:
1970:Â $17,000 / $9,867 =1.7
This was the lowest point at the start of any decade in modern history. After this point, with all the push for deregulation and allowing Wall Street to run rampant prices remained fairly stable only because of the two income household (that is until we hit 2000):
1980:Â Â Â Â $47,200 / $21,023 = 2.2
1990:Â Â Â $79,100 / $35,353 = 2.2
2000:Â Â Â $119,600 / $50,732 = 2.3
This was sustained via the two income household:
After this point, things went haywire. Incomes went stagnant or dropped yet home prices sky rocketed. Even today after the severe correction the ratio is still out of sync with 50 years of data:
2010:Â Â Â $170,500 / $50,221 = 3.3
In fact, given the current income levels the median nationwide home price should be down to $119,000 (a 30% drop from current levels). Some will argue that we should factor in for inflation. This would only be the case if we also saw wage growth. For the first time in modern history did we see wages stagnant for an entire decade. So the average American family is still looking at inflated assets and that is why we have millions of people sitting in underwater homes:
Just think of what negative equity represents. It represents a household that has over paid for a home. I don’t think the desire to own a home has dramatically gone up or down in the last fifty years. Homeownership has always been a big part of the American Dream. But what happened over the last ten years is that banks were able to get their grubby hands on mortgages and convert them into another commodity where they could place large bets and ultimately push losses to taxpayers. People that over paid are paying via foreclosure. What is the penalty that banks are paying? That is why now that banks have raided and had their way with housing, they are looking for other markets to gamble in (with taxpayer money). The above chart shows the millions of homeowners who hold mortgages that are worth more than the homes they are in. Any thinking person realizes that the only way home prices are justified at current levels would be if incomes shot up to make the ratio closer to 2.2. Over half a century of data and never did we have a housing bubble on a nationwide level. All of a sudden Glass-Steagall is repealed in 1999 and a housing bubble takes off with banks leading the way because the line between investment and commercial banking was blurred. Only those who want to deceive themselves would place blame elsewhere.
The average American is going to struggle throughout the next decade. It is hard to see how wages will go up so it is likely that home prices will adjust lower given the magnitude of foreclosures in the pipeline. People might be jumping up and down about the recent job growth but they are occurring in lower paying sectors. So this does nothing to justify current prices. Low mortgage rates are merely a gimmick so banks can use cheap money to speculate on a global scale. Even with mortgage rates at levels we’ve never seen the housing market remains stalled like an old car. Why? Because the actual sticker price is still inflated based on income levels.
We need to reform the banking system, break up investment and commercial banks, and finally restore sanity in the market. There is a reason the metrics are all off but nothing has been done to change this so we are only a short ways away from another crisis. Ireland for example can be likened to a homeowner that took on too much debt with too little income. So the international banking sector idea of a solution is to extend them a credit line? What they should do is tell the IMF and Euro to shove it, default, and start from scratch and learn from their mistake. Otherwise, they’ll be in the same position as Americans who bailed out their corrupt banking sector.
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Don Levit said:
This post says quite a bit about the plight of the so-called middle class.
Not only home prices, but prices for health insurance and college have skyrocketed way past the median household incomes.
If group health insurance for a family costs $13,000 per year, and median household income (many which have 2 earners and fewer kids than 50 years ago), is $50,000 – that is over 25% of the median income. It’s like a second mortgage on top of an already expensive mortgage.
Don LevitDecember 2nd, 2010 at 11:02 am -
Factsnews said:
Soon, I will have to look for a second wife, to introduce a 3rd income into our household. 😛
December 22nd, 2010 at 9:37 am -
taz said:
the housing bubble started in 1997, not 1999.
March 8th, 2011 at 11:57 am -
Ellie said:
excellent article. thanks
March 10th, 2011 at 1:56 pm -
Thomas Blankenhorn said:
I studied the house price per income, using median for each and to be consistent with the past, looking at per person income and not per household.
Unfortunately the Census statistics are lacking for the median income prior to 1967 so I am having to estimate.
What I noticed in California is that one could buy a house on a SINGLE PERSON’S INCOME and at about only about 1.5 year’s of work. I saw that ratio hit about 20 in San Francisco at the peak of the recent bubble which was insane. Still, today the ratio is about 10 which is still far too high.
On my site I used the income for a worker, not per capita income, though I may alter it to reflect per capita income. Per this usage, I say a ratio of under 3 must be maintained and currently it’s around 4 which is well over 100% too high relative to 1960 ad about 35% too high relative to 1990. If I use per capita income, that ratio might be about 4.5 in which case anything over shows bubble pricing and below it, a healthy market.
It’s so sad that a large number of people have been brainwashed into thinking higher home prices are better. Explain that to someone who wants to buy a home. Would they rather pay $100K or $800K? Like anything else, including food and fuel, lower prices are better for the majority, though there is still that minority on the other side of the equation that benefits from the opposite and that’s what Bernanke is doing with his ANTI-STIMULUS. So surprising that in hurting the economy and when the economy isn’t recovering, Bernanke thinks hurting the economy more will help. Doesn’t that sound illogical? He increases the wealth divide via unlawful stock market manipulation, hijacks earning of bank interest and forces high inflation. If you try to regain what Bernanke took away by rightfully shorting the overpriced stock market he will make you lose even more. When you know PE ratios are out of whack for a depressed economy, you would need to short the market if needing an income, and NOT be gambling by going long hoping for more QE that is not based on fundamentals.
Bernanke is purposely pushing this country into a third world status and accordingly he should be tried on TREASON along with his unlawful stock market manipulation that is crushing our country and its economy.
October 31st, 2013 at 8:21 pm -
Thomas Blankenhorn said:
The 1.5X income to buy a house was for 1960.
October 31st, 2013 at 8:23 pm -
Kevin Perera said:
I’m curious how the quality differences in houses are taken into account with this calculation. I’ve seen many 1960’s era houses – small, poorly built, minimal amenities – this was truly a low point in American architecture. Houses today are at least 50 percent bigger on average, even though the average household size has gone down. Current houses are also built to much higher code standards, and come with more amenities, typically. Extensive kitchens, double-panned windows, better insulation and more bathrooms etc. We spend a larger portion of our income on our houses today because we’re getting more house.
When the annual CPI is calculated, particuar items are judged not just on price increases, but on quality increases as well. A black and white 19 inch TV from 1960 is not the eguivelent product as a 40 inch high definition plasma of today, even though they cost roughly the same.
February 4th, 2014 at 8:33 am -
CJ said:
Kevin Perera, great comment. Would be interesting to see $/sqft in that table and see how that tracks with income.
March 25th, 2014 at 4:57 pm -
Papplebeast said:
While I agree that the lack of regulation of Wall Street banks has had a serious negative impact on the economy over the last few decades, I disagree with some of the points the author has made to support his/her argument. Primarily, the comparison of median home value to median income ignores three important factors:
1. Mortgage interest rates
Mortgage interest rates were higher in the 70s (getting as high as 18.45% in the early 80s). Those high interest rates exerted a downward pressure on home values because fewer people were able to afford them (reduced demand). If mortgage interest rates instantaneously jumped to 10% or higher, we would see a drop in home values. We might even see a crash.
2. Home square footage
Homes are much larger today than they were in 1970. The average home is approximately 2600 sq ft in 2018. In 1970, the average home was approximately 1400 sq ft. That’s almost double the size and that’s happened while the average household size has shrunk (from 3.14 to 2.54). So what we have is people living in bigger houses, with fewer people.
3. Land is finite
Unless we start building islands, we won’t increase the amount of buildable land in any appreciable way. So the amount of buildable land is static while the population has increased. Not only that, but the fact that household size has shrunk means that more dwellings are needed per capita. Most people want short commutes/live in good neighborhoods/etc, so land values in high demand areas have skyrocketed. And the value of a residential home is equal to value of the land plus the value of the improvement.
As I said before, the lack of regulation of Wall Street banks is a serious issue, but I don’t think this blog post does a good job of explaining why that is the case.
April 25th, 2018 at 6:00 am