Here is a simple ratio chart of Home price/Household Income, YOY rate of change overlaid with plain home prices. A few things we can learn from this chart.
1. A 4 to 5 X ratio used to be the bottom and top for home prices relative to household income. the ratio in 2000 after decades of stability rose to 6X income. Today we have spiked to 7.7X income. Clearly, homes have gotten much more expensive over time.
2. However a good time to buy has been around 5X income. Not necessarily a drop in home prices. It helps to understand VALUE as a Ratio rather than price. Most typically think of an arbitrary number and miss out on a great opportunity to buy bc it did not hit their magic number.
5. YOY spike in home prices/income ratio gives a nice ballpark idea of when the ratio is topping out.
4. Prices can rise over time and still end up with a great buying opportunity if people better understand VALUE as a ratio rather than price.
Obviously, there are many more factors to consider when buying or investing in RE. I am no real estate expert. But there is much to learn from this chart as to how to think about VALUE in general.
Having said all that, I am willing to guess that home prices relative to income have peaked and will likely start to reverse here in the near future.
Comment
⋅
As expected down 8% from the last reading.
Home prices relative to household income have peaked and rolled over in a dramatic fashion
I believe by the way you have this phrased, you mean home prices will start to come down. However, I'm just asking for clarification's sake.
Do you believe it will be driven by a drop in home prices, an increase in income, or a combination of the two?
RealMacro
⋅
@bill062d1c6dfd2c4145, Hello. Yes. Home prices don't have to come down it's a ratio. Wages could rise. Right? But unlikely So the ratio may be Peaking with a bias home prices may fall faster.
Do you believe it will be driven by a drop in home prices, an increase in income, or a combination of the two?