Nerdvana chart of the day: Homes prices and income

Nerdvana: This graph, courtesy of Credit Suisse, shows the historical ratio of median existing single-family home prices to median family income in the United States. It suggests that, if the previous historical ratio of prices to income is meaningful, and lasting, home prices will continue to decline until late 2009 or early 2010. Those are big "ifs." I'll have more shortly on the accompanying Credit Suisse report.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles.

Comments

[SMRR]

Why are the big ifs? If you're comparing the likelyhood of returning to an historical trend (the graph above), to the likelyhood that the historical anomaly (the bubble) will have some long term staying power - or permanent impact - why would the return to historical trend be the bigger if? Just be more bearish, Peter. Play to your audience and make me happy.

[E]

I believe that due to the disparity of income in our country, some areas will "appear" to be lower than the 2.8-3x median whereas the upper tier neighborhoods will fall more into the 5-6x median. Using a nationwide approach includes too many variables just as trying to use it in as diverse a city as Los Angeles.

[Cal]

This is a national chart and you can see that the historical ratio is right near 2.8-2.9 times income is the price generally people pay.

In Los Angeles this ratio is more around 4.5x reflecting the fact that many cannot buy, during the boom that left hand axis would have to go up to around 10-11 times income to reflect how badly things bubbled locally.

The possible overshooting to the downside risks include:
Future Demand was pulled forward during the boom.
Economic downturn could magnify the downside.
Psychological shift in consumption and willingness to stretch for a home.
Lack of down payment savings would require greater price drop.
If no economic downturn then inflation risks would necessitate interest rates increase.

Possible upside risk:
Lenders modifying loans en masse, keeping people in homes and prices higher. Sales volume would drop dramatically.
Interest rates drop keeping monthly payments more affordable.
Financing is still very loose. Higher DTI and front end ratios still are the norm. Conforming limit is higher. If people are willing to stretch the lenders are still allowing them to a higher level than ever before in history except the the boom. If there isn't a psychological shift back to a more conservative financial mentality or if Fannie/Freddie or FHA don't tighten further there is a possibility of prices staying higher than historical norms.

The chart is median price to median income, it should be median monthly payment to median monthly income to remove interest rate variability.

[inaweofE]

E,
Dude?!? What does that even mean? Please don't tell me that you are changing your tune and refraining from the colorful comments. Where's the panache'...the style...the unrelenting analysis on why most homeowners are suckers.

Please, say it isn't so...I need the old E back. You must be an impostor. Who are you and what did you do with our beloved E!?!?

[inaweofE]

Come on E...just one...for old times sake.

You can do it...I know it's still in you.

Why Lord!?!? Why have you foresaken this blog!?!? Give us back our E!!!

[Rational Renter]

Yeah, why are those big "ifs", Pete? The only way that historical income to price values won't be necessary in the future is if banks start lending willy-nilly again soon. And considering that banks small and large almost committed suicide with those kinds of practices, I don't expect them to return to that behavior within a decade.

[Nelcisco]

E, you have a fan.......or is it a stocker, sounds like that character Rose on Two & a half Men who's in love w/ Charlie

[inaweofe]

Nelcisco,

Stay out of this man! What kind of name is Nelcisco anyway? What are you like half cookie? This is between me and the E-meister. he has all the answers and doesn't have to be nice about it like Cal.

[inaweofE]

P.S. It's spelled Stalker...cookie boy!

[Nick]

Great chart. This one statistic will probably be the most referenced in the future when defining exactly what the bubble was. The projection would indicate a further ~15% drop in national median price to get back to "normal", which meshes almost exactly with the general unbiased predictions.

I'd love to see the chart for LA, and see what it predicts for future drop in prices here. I'd guess ~25% (based on a ~30% drop so far, not sure what the most recent drop number is).

[Milla]

as E so wisely proclaimed, "what goes around comes around." he's been obsessively stalking me for so long that is seems fitting he should get his due. keep it up, inaweofE! you're a crackup!

[inaweofE]

Milla,
This isn't funny, what if something happened to E? What if some crazy underwater homeowner ninja-loan zombies broke into his house...err apartment and are impersonating him at this very moment? He could be in serious peril!!!

E, if you are there and it's really you...just tap the asterisk and hit enter...come on man, no one gets left behind on this mission..everybody goes home..I mean to the apartment complex...you know what I mean!

[dutchtrader]

Milla,

I checked out your blog, nice remodel.

[inaweofE]

Milla,

What dutchtrader said...ditto.

[Milla]

thanks, guys! i couldn't have done that in my old apartment.
:-D

[Nelcisco]

lol, ok inaweofe, you got me!! thanx for correcting me on the stalker word, I know better than that.
But if you want to know where my name came from, it's the 1st cylabal of my name and the last silibal of a cat I once owned, who's name was cisco, cisco the kid cisco the cat get it? a play on words

[peteviles]

OK, I'm officially sick and tired of the whole E/Milla/inaweofE stuff. It was funny for a minute or two. Doesn't work for me any more. Done. Sorry.

[Yearning For Home]

I second Nick's comment: I'd love to see a chart like this for Los Angeles County, or the L.A. metropolitan area. My understanding is that from 1980 to 2006, the median home price-to-household income ratio for the Los Angeles-Long Beach-Santa Ana metropolitan area was 4.6. (It peaked at an amazing 10.0 in 2006!) Unfortunately, I was not able to find the median home price for that same area and that same time period, so I can't generate a comparison.

Assuming there's no unusual growth in household income, I would dare posit that the only real question is this: will the price-to-income ratio fall back to its 26-year historical median, or has something now fundamentally changed that will allow for that ratio to stick at a higher level? Fundamental change could mean certain types of government intervention/support not seen beforey, or new types of mortgage products (40+ year mortgages, anyone?) that allow for people to buy more expensive homes than has been seen historically.

I have always thought the the historical price-to-income ratio is absolutely the strongest evidence for arguing that L.A. home prices must fall further.

[sunsetbeachguy]

Good call Pete.

That was horrifically contaminating an interesting thread.

Thank goodness this blog is still moderated.

Back on topic, this is the kind of analysis bubble bloggers were doing in 2004, 2005 and 2006. It is finally going mainstream 2-4 years later and after any cost-effective intervention could have taken place.

I am with H.L Mencken on this one.

Democracy is the theory that the common people know what they want, and deserve to get it good and hard.
H. L. Mencken

[Laker]

Cal wrote: "...The chart is median price to median income, it should be median monthly payment to median monthly income to remove interest rate variability...."

Cal,
I totally agree.When most people go to the dealership to buy/lease a car, the 1st and most important question they are asked is how much they can afford to pay (a month)....
that is what people see and feel.
In the case of a car, the salesman can stick it to the buyer buy giving the payment exactly that the buyer wants, buy pushing another year or two on the loan...say if the deal was a good one, it should have been a $400 per month for 5 years...however, the sleazy dealer get the buyer "exactly" what he wants by giving him a $400 a month payment but for 72 months....

Taking it back to housing, the last bubble is a beautiful proof that the price of a house means nothing other then numbers...Buyers in 2002-2007 didn't care sh** if it was $700,000, $1.2M or whatever, sure the lender did not care. All that was important is to have an "affordable monthly. So they use IO or Option ARM to get nice monthly payment...Still if you compare this payment to the payment that as paid in 1999 (most likely fixed rate), it would not be much larger. So Cal is correct, if you plot it against the actual monthly payment, you will get true cost. If you think about it, it would not be that dramatic...But, sure more affordable...

[S]

As a long time long term homeowner from the age of 19. I made $7.50 / hour and partnered up on a house. My half of the payment was $430 or so. It took nearly all of the money I made, fortunately I worked ALOT of OT. I had a dream and I was willing to sacrifice for it. I lived in the converted garage bedroom until the law kicked me out of it. Two years later I was bought out by my partner/friend. I turned around in 89 and bought a house of my own. Yup peak market. Within 6 months I lost an estimated $30K+. My whole down pymt gone. I went to inverted equity. A year later I lost my live in renter and my fiancee. I still wasn't making over $10 / hr. I lost my job and was standing in a bad place. I was thinking of giving up the house. I didn't want to. I struggled on and landed a job that could pay the mortgage all by myself. I stayed and live there today. I have to tell ya something. These drops in prices you all are praying for and enjoying are causing me to think of walking on my house. Why because the banks will not lend to buyers. They drag them through the mud and hold off until the last minute and say oh you don't qualify unless you can come up with the difference (THEY DON'T WANT TO SELL LOANS RIGHT NOW THEY WANT TO SELL FORCLOSURES AND REO'S). Quess what we are almost back at where I bought my house. I am to assume my house with a new addition fully fixed up did not earn ANY equity value in nearly 20 years? I live near Burbank and Glendale, I don't live in San Diego,Las Vegas,Florida, or some remote DESERT cookie cutter. If I walk not many will stay the course(UPSIDE DOWN) and you can kiss buying a home goodbye because the US will be headed for the dark ages. You wont have a job and food will cost 10X what it does today. I will never invest another red cent into anything again. You bitch about homeowners and say nothing about the GREEDY controling stock market and over paid corp. CEO's and other board members. For example I invest a life savings for retirement into a stock that could do no wrong. I researched for 6 months and took the plunge. I invested $2,500 and the stock tanked in 3 months. The company held the stock at just a dollar to keep it out of penny stocks and lose all standing investors. This company has sold some use rights to patents and now their stock hovers between $13-$30. Dot com implosions,mutual fund schemes, inflated stock prices,over priced cars with low MPG, and you bitch about retired people's nest eggs. I know 65+ retired folks that have to work at McFAST FOODS to pay their bills because they lost everything in the stock market and every bit of equity and then some in their houses. This blanket drop approach is like an inverted equity bubble and you are fanning those flames. I am not saying the 400 sq ft dog house down the street is worth $400,000 but the median homes need a return to at least 80% of their equity. We need to share the pain let the doghouses go to the auction block and save the middle ones to save the economy. Otherwise ALL taxpayers will be paying the $57 TRILLION plus from their pockets. Don't you want something for your money? This does not include a failure with Fanny Mae or Freddy Mac. Make a police report on that one after a visit to the hospital. Get Wiser folks! I agree it should have never got to this.

[es]

that graph is a waste of time...the graph needs to be adjusted for mortgage rates,..or as others have suggested, some ratio of average mortgage payment to income.
a 5% mortgage today vs an 8% average mortgage rate creats about 35% more buying power. I think todays adjusted price to income ratio would be about 2.5

[Gman]

The last time I checked, the laws of "economic gravity" apply equally around the U.S. (though folks in California seem to feel differently). You've "gotten away" with higher than normal home price/income ratios for decades - seemingly until now; "economic gravity" is going to pull you painfully back down to earth. Supporting home price/income ratios above 3 is ultimately unsustainable for most folks. You constantly need an "endless" "supply of greater fools" who are willing to utilize a far greater percentage of their income in order to maintain these ratios, as well as the use of ever more "creative" mortgage products. Guess what? The endless "supply of greater fools" has now run out. You don't get "life everlasting" when you "live in California" and have a 10:1 home price/income ratio mortgage folks!

But not to worry mates. Just "reinflate" the housing bubble to even greater heights - the "California Way." You only need to "import" Japanese-style "three-generation, 100 year mortgages" as you've done with their automobiles in order to support your "home price/income target ratios" of ten or greater!
Problem solved......... (You're welcome)...... :)