5 ms·

I wonder if this is due to stagnant wages, excessive home price inflation, or both.

vonmoltke 7y ago
They're comparing the median price houses sold for with the overall median income for the area. It may be the case, in some areas, that people below the median income are renting rather than buying, or staying in already-purchased houses as the real estate market heats up. Seeing the ratio of median house price to median home buyer's income would be interesting.
- thundergolfer 7y ago
  This is also interesting though, isn't it? If more and more below-median-income people are renting because they can't afford to buy, that's definitely important and interesting.
  - vonmoltke 7y ago
    Yes, but not in isolation.
RugnirViking 7y ago
A bit of both, and also a sprinkle of the interest rates going from almost 20% at points in the 80s, to essentially 0% today, meaning people can afford to borrow a lot more at once, and home sellers profiteering off this.
- fiter 7y ago
  Just to give an example: a 30 year mortgage for $300,000 at 4% is about $1400 per month where a 30 year mortgage for $100,000 at 17% is about $1400 per month. That can explain a 3x multiplier in the home price to income ratio assuming that people purchase based on what they can afford monthly.
ianai 7y ago
Don’t forget about interest only ARM mortgages and other factors making higher ratios possible (at least in the short term).
mdasen 7y ago
Housing supply has been increasing at far lower levels recently than it has historically. Lots of good jobs have been flooding certain cities and which means people with the money to bid up the existing stock. Since people are coming for the jobs and they have money and there isn't new housing to soak up that demand, those people end up bidding up what supply exists.
- zik 7y ago
  I don't think it's as simple as that. In Australia we've had a massive housing boom and consequently the market has been flooded with houses. Strangely this hasn't led to lower house prices. There's a large amount of housing which is purchased and is sitting empty, mostly investment properties which people bought with the intention of re-selling at a much higher price so they're not concerned about renting them out. This has led to a perverse situation where very expensive houses are being built and left empty and prices continue to rise to support this.
  - imtringued 7y ago
    Why does that matter? If no one can afford the property then the current property owner will make a huge loss.
  - mdasen 7y ago
    That can happen for a time. Investors might sit on things hoping that it will appreciate in value. However, many times there's a myth of "empty houses" used to justify not building more. Some people have cited non-owner-occupied condos as "empty" when they're merely rented. When a large new property comes on the market, often the owners take time selling off units so as not to flood the market and drive down their investment (just as one doesn't want to unload shares all at once and overwhelm demand). There's always a certain level of vacancies and a lot of the time when people think there are a lot of vacancies, it's not actually high. They just notice a couple fancy buildings that aren't full. Prices are also sticky. If you bought a home at $X, you're going to psychologically want to get that back when selling. If you're a buyer, you've seen prices at X and you've become accustomed to thinking it costs that. And a lot of people say that there's been a "massive housing boom" when production is a tiny fraction of historical levels. This can be understandable. If your area used to increase housing by 1% per year from 1920-2007 and then shrunk down to 0% per year from 2007-2015, increases of 0.5% per year might seem like a boom. However, it's below historical levels and might be coming after a near decade of under-creation. As such, there can be huge pent-up demand combined with a level of building that's still well below normal (but seems high compared to post-mortgage-crisis levels). EDIT: https://twitter.com/TweetBenMax/status/1218712012114538497/photo/1 https://twitter.com/TweetBenMax/status/1218712012114538497/p... This isn't the best graph because housing production had already dropped off by the 90s, but it's still pretty clear. Everyone in expensive US cities thinks we're building lots of housing. However, when you look at it we're just not. Compared to the dip after the mortgage crisis, we're definitely building more. However, these expensive cities are also seeing historic levels of high-income job growth and migration towards them while having building at lower than historical levels. Maybe Australia is different, but it's probably just a comparison with post-mortgage-crisis lows and not actually a building boom. Even with new stock coming in, it can take years (think 5-15) to settle.
12xo 7y ago
The other aspects of prices is the replacement cost for an existing or the build cost for new. Its a min of $500 a sqft to build in CA these days. Double and triple that for a high end home. Building codes, permits, zoning, materials and labor have all increased dramatically over the last 40 years.Those add significant costs to housing.

They're comparing the median price houses sold for with the overall median income for the area. It may be the case, in some areas, that people below the median income are renting rather than buying, or staying in already-purchased houses as the real estate market heats up. Seeing the ratio of median house price to median home buyer's income would be interesting.

thundergolfer 7y ago
This is also interesting though, isn't it? If more and more below-median-income people are renting because they can't afford to buy, that's definitely important and interesting.
- vonmoltke 7y ago
  Yes, but not in isolation.

RugnirViking 7y ago

A bit of both, and also a sprinkle of the interest rates going from almost 20% at points in the 80s, to essentially 0% today, meaning people can afford to borrow a lot more at once, and home sellers profiteering off this.

fiter 7y ago
Just to give an example: a 30 year mortgage for $300,000 at 4% is about $1400 per month where a 30 year mortgage for $100,000 at 17% is about $1400 per month. That can explain a 3x multiplier in the home price to income ratio assuming that people purchase based on what they can afford monthly.

ianai 7y ago

Don’t forget about interest only ARM mortgages and other factors making higher ratios possible (at least in the short term).

mdasen 7y ago

Housing supply has been increasing at far lower levels recently than it has historically. Lots of good jobs have been flooding certain cities and which means people with the money to bid up the existing stock. Since people are coming for the jobs and they have money and there isn't new housing to soak up that demand, those people end up bidding up what supply exists.

zik 7y ago
I don't think it's as simple as that. In Australia we've had a massive housing boom and consequently the market has been flooded with houses. Strangely this hasn't led to lower house prices. There's a large amount of housing which is purchased and is sitting empty, mostly investment properties which people bought with the intention of re-selling at a much higher price so they're not concerned about renting them out. This has led to a perverse situation where very expensive houses are being built and left empty and prices continue to rise to support this.
- imtringued 7y ago
  Why does that matter? If no one can afford the property then the current property owner will make a huge loss.
- mdasen 7y ago
  That can happen for a time. Investors might sit on things hoping that it will appreciate in value. However, many times there's a myth of "empty houses" used to justify not building more. Some people have cited non-owner-occupied condos as "empty" when they're merely rented. When a large new property comes on the market, often the owners take time selling off units so as not to flood the market and drive down their investment (just as one doesn't want to unload shares all at once and overwhelm demand). There's always a certain level of vacancies and a lot of the time when people think there are a lot of vacancies, it's not actually high. They just notice a couple fancy buildings that aren't full. Prices are also sticky. If you bought a home at $X, you're going to psychologically want to get that back when selling. If you're a buyer, you've seen prices at X and you've become accustomed to thinking it costs that. And a lot of people say that there's been a "massive housing boom" when production is a tiny fraction of historical levels. This can be understandable. If your area used to increase housing by 1% per year from 1920-2007 and then shrunk down to 0% per year from 2007-2015, increases of 0.5% per year might seem like a boom. However, it's below historical levels and might be coming after a near decade of under-creation. As such, there can be huge pent-up demand combined with a level of building that's still well below normal (but seems high compared to post-mortgage-crisis levels). EDIT: https://twitter.com/TweetBenMax/status/1218712012114538497/photo/1 https://twitter.com/TweetBenMax/status/1218712012114538497/p... This isn't the best graph because housing production had already dropped off by the 90s, but it's still pretty clear. Everyone in expensive US cities thinks we're building lots of housing. However, when you look at it we're just not. Compared to the dip after the mortgage crisis, we're definitely building more. However, these expensive cities are also seeing historic levels of high-income job growth and migration towards them while having building at lower than historical levels. Maybe Australia is different, but it's probably just a comparison with post-mortgage-crisis lows and not actually a building boom. Even with new stock coming in, it can take years (think 5-15) to settle.

12xo 7y ago

The other aspects of prices is the replacement cost for an existing or the build cost for new. Its a min of $500 a sqft to build in CA these days. Double and triple that for a high end home. Building codes, permits, zoning, materials and labor have all increased dramatically over the last 40 years.Those add significant costs to housing.