37 ms·

Home Price to Income Ratio

544 points by hncurious 5y ago

deleted 5y ago
[deleted]
keltex 5y ago
A more accurate measure of affordability change might be home payment to income ratio: https://www.corelogic.com/intelligence/comparing-two-home-price-booms-fifteen-years-apart/ https://www.corelogic.com/intelligence/comparing-two-home-pr...
peterlk 5y ago
I think there's a pretty critical piece of analysis missing here: inflation. An alternative explanation might be that housing prices are being driven up by inflation, and wages haven't caught up yet. There are two ways to lower the home value/income ratio: 1. Decrease housing prices 2. Increase wages We haven't seen meaningful wage increases for a long time now, so perhaps it is time. Maybe this is just a symptom of wages not tracking with inflation, and the solution is to pay people more.
- teagee 5y ago
  Add our current low interest rates to the mix as well and the picture changes dramatically
  - 88913527 5y ago
    100%. Though, interest rate based appreciation is likely at its apex, presuming zero is the floor. If we find ourselves with negative rates (after taxes and fees; there was one case of negative rates in Europe, but net inclusive of fees, it was still positive) -- then we're in truly uncharted territory. At this juncture, it seems most appreciation will arise from supply issues, which aren't new to the post-2008 world. And while we do have lots of unoccupied housing nationally, we don't have it stock in areas where it's most needed: e.g, job centers. You can easily find a $10k home in Detroit if you wish. The graph would be helpful it broke out metro versus rural areas, in addition to factoring interest rates.
- newaccount2021 5y ago
  3. raise interest rates
- sorenn111 5y ago
  I agree that wage growth is stagnant but I think the changes over the last 20 years of real median wages is definitely meaningful. Look at the changes from peaks in 2000, 2007 and also from a deep trough in 2012: https://fred.stlouisfed.org/series/MEHOINUSA672N https://fred.stlouisfed.org/series/MEHOINUSA672N
- bserge 5y ago
  Why pay them more when they're content with what they get now?
  - MathMonkeyMan 5y ago
    I upvoted your comment because it clicked with me, but now I'm thinking about it more. _I'm_ content with my pay now, perhaps others aren't and there is little they can do about it. How might we even define "content" for a cohort as large as "anyone buying a house"?
    - bserge 5y ago
      No, trust me, people are content with renting a room and living month to month. There's nothing to worry about.
      - HeyLaughingBoy 5y ago
        I'm starting a business selling guillotine insurance...
  - kevinventullo 5y ago
    I don’t think I would characterize most millennials as “content” with their income level.
- reducesuffering 5y ago
  With increased wages come increased housing prices, as long as there is a supply mismatch to the baseline demand of housing to survive.
- b9a2cab5 5y ago
  An increase in wages (real or nominal) without any increase in housing supply just leads to more money chasing the same supply which means higher rents. We are seeing this play out as we speak in every major city in the U.S. The solution is not to pay people more, it's to increase the supply of housing to the point that people can pay drastically less for housing. Look at China: apartment towers on every street, each 30+ floors easily. Where is that kind of density in the U.S.?
standardUser 5y ago
Some very clever and influential people better start finding and implementing real solutions to housing prices right now. If they don't, expect overwhelming support from Millennials for massive expansions to public housing and rent control, if not even more draconian measures.
- ido 5y ago
  Why do you consider the 2 examples you gave “draconian”?
  - standardUser 5y ago
    Draconian is a strong word (but cool-sounding) and what I really mean is "antiquated". But they are also somewhat blunt instruments and have historically lead to unwanted consequence. We already have more modern, market-oriented solutions, like vouchers and tax-credit housing, but those have problems too. My bigger point was, Millennials tend to react big when specific issues rise to the forefront, and if there aren't better solution than what is already on the table, we risk people clinging to whatever ideas do exist, which in the realm of housing, are mostly shit ideas.
    - beepbooptheory 5y ago
      Its interesting how often on HN the main problem always ends up being how people will "feel" about the next crisis, and the danger of that feeling itself. It's a weird kind of proxy self-consciousness older generations have on behalf of the economy. Always and forever: "no no, it's not that bad, really!" meanwhile people are very much homeless, whether they are millenials or not, whether they react strongly or not.
  - mrfusion 5y ago
    Rent control really doesn’t make sense. If we could make things cheaper by passing a law we’d do it for everything. Rent control won’t work for the same reason a price control for food or cars won’t work. https://freakonomics.com/podcast/rent-control/ https://freakonomics.com/podcast/rent-control/
AndrewDucker 5y ago
Copying a link from a mysteriously dead comment below: https://www.corelogic.com/intelligence/comparing-two-home-price-booms-fifteen-years-apart/ https://www.corelogic.com/intelligence/comparing-two-home-pr... You have to take interest rates into account. The amount you pay, monthly, for a mortgage of the same size is very different at different interest levels. What people care about is their monthly mortgage payment - that's what makes a home affordable or not. (Which isn't to discount that downpayments are a percentage of home cost, and that's pricing people out of being able to buy anything at all, even something they can easily make repayments on.)
- zargon 5y ago
  Does this mean that when interest rates go up, home values may drop, leaving people underwater?
  - AndrewDucker 5y ago
    Absolutely. Although it's more likely that they'll just remain stagnant, which would be just fine.
    - nwiswell 5y ago
      People being underwater happens to mean that the banks have bad loans. We have seen that movie before. Interest rates will not be allowed to increase faster than the property market can absorb. You can count on that; the political imperative could not be more clear. The next crisis will probably be some novel flavor of financial recklessness.
      - KingMachiavelli 5y ago
        Exactly and the market is confident the the government would intervene to prevent another housing market collapse which just compounds the effect further.
RcouF1uZ4gsC 5y ago
One thing this ignores is interest rates and availability of credit. The biggest determinant of homes people buy is not the total price, but rather how much cash do they need for down payment, and what will the monthly payment be. With low interest rates and increased credit availability ( you don’t need 20% down payment in many cases now), people on the same income are actually able to buy a more expensive home. I think looking at monthly mortgage payments to income ratio over the long term might actually be more informative.
- rektide 5y ago
  Agreed. As much as any other factor, that anyone with a bit of money can now buy an expensive house feels like the thing making the housing prices go up. (As well as our general inability to build.)
- leetcrew 5y ago
  > The biggest determinant of homes people buy is not the total price, but rather how much cash do they need for down payment, and what will the monthly payment be. I agree this is mostly how people decide, but it's not necessarily a good idea. buying a very expensive home at historically low interest rates is a significant risk. there's a good chance you get upside-down on that loan over a 15-30 year period. better hope you don't get divorced, lose your job, or need to relocate during that period.
lastofthemojito 5y ago
I've heard 3x income as a rule of thumb for how much house one can afford, but it looks like that's never been widely followed. It also doesn't make a whole heck of a lot of sense as interest rates have varied so widely - a better rule of thumb might be a ratio between the total amount of payments over the life of a mortgage and one's income.
- clipradiowallet 5y ago
  The 3x income rule is usually mentioned by your loan officer, and your real estate agent. They will present you with houses costing 3x your income as a baseline of what you can afford.
  - Fire-Dragon-DoL 5y ago
    That's funny, you need to earn 250000/year to be able to afford _something_ in Vancouver by following that rule.
    - __turbobrew__ 5y ago
      or 600000/year for a starter home
- zzleeper 5y ago
  Agree. From experience, people look into how much they would pay monthly and their income. This then begs the question: what will happen once rates go up even a bit, and houses suddenly require a 50% larger monthly payment.
  - throwaway6734 5y ago
    Most mortgages haves fixed rates
    - zzleeper 5y ago
      Of course. But buyers still need to be able to afford houses they purchase. With higher rates that might not be true.
clipradiowallet 5y ago
This bears repeating: http://www.iedu.com/Documents/Manifesto1892.html http://www.iedu.com/Documents/Manifesto1892.html That is a link to the banker's manifesto. The ideal scenario [in the manifesto] is for home prices to far eclipse yearly income, and for houses to be owned by banks instead of occupants. Everything old is new again...
mint2 5y ago
I’d be interested in seeing the total cost after accounting for interest in the loans, or monthly cost compared to monthly income. Most people don’t pay cash, and they pay more than the asking price due to interest. So high interest rate periods look artificially lower because they ignore a substantial amount of the price
- thehappypm 5y ago
  Very true. The 2008 housing bubble did not have low interest rates. 30 year average was around 6%. Now it's under 3%. That 3% makes a HUGE difference in purchasing power.
- gruez 5y ago
  Exactly. https://awealthofcommonsense.com/wp-content/uploads/2021/03/Screenshot-2021-03-20-101503-1024x741.jpg https://awealthofcommonsense.com/wp-content/uploads/2021/03/... That said, it doesn't do much for down payment.
  - SubiculumCode 5y ago
    This is very interesting but I wonder if the housing crisis is not reflected in that chart because it's an average of presumably average American mortgage rates. What about California mortgage rates? I'd love to see that last chart restricted to California where the prices have skyrocketed.
    - SubiculumCode 5y ago
      https://www.corelogic.com/wp-content/uploads/sites/4/2021/06/lepage_mtg_fig3_large.png https://www.corelogic.com/wp-content/uploads/sites/4/2021/06... Here is the same chart but for California regions
      - rossdavidh 5y ago
        Interesting, but that chart appears to end in 2016?
bushbaba 5y ago
Simple the 50 year or 100 year mortgage. But really covid was the perfect opportunity to let the housing market collapse and reset buying us an additional decade. Wasted opportunity by bailing out landlords.
- deleted 5y ago
  [deleted]
refurb 5y ago
Now adjust that chart for interest rates and monthly payments.
dpierce9 5y ago
Pay is not gaussian so comparing median salary to average home price is confused (average salary is 45% more than median salary in the US with wide regional variation). Case Schiller also only looks at single family housing stock so it won’t capture anything higher density (apartment like condos, duplexes, etc).
vessenes 5y ago
These charts are not very useful without taking interest rates and inflation into account; in fact you could almost use them to discuss interest rates and inflation, they are so intimately tied to housing prices and income. If housing interest rates stay low or drop, prices will keep rising. Absent wage inflation that ratio will go up. If inflation flows through to wages as it seems to be in process of doing, the ratio will stabilize or drop.
gp 5y ago
While it doesn't directly affect the average person's purchasing power, the same dramatic increase is happening in other asset values as well. [0] One interesting thing to note is that 2019 EV / EBITDA values were already "high," before the coronavirus was spreading. I suspect these two phenomena have different causes overall, but low interest rates are a common factor that cause all asset prices to increase. On the housing side, I suspect consumers purchase the house that their cashflow can comfortably support, not necessarily the one where they believe it is correctly valued, because the assumption that house values only increase means purchasing a well constructed house is almost never a "bad deal." I'm not sure what the "solution," is, but knowing that voters hate when their home values fall does not give me confidence that prices will decrease in the long term. [0] https://www.statista.com/statistics/953641/sandp-500-ev-to-ebitda-multiples/ https://www.statista.com/statistics/953641/sandp-500-ev-to-e...
- pfisherman 5y ago
  This jibes with my experience of buying a house about 6 months ago. My reasoning was that we were experiencing rapid asset inflation fueled by low interest rates and COVID stimulus, and our cash was losing its value relative to housing by the month. I figured that this propping up of asset prices is likely to continue, as any administration that lets housing / 401k values collapse will get massacred in elections.
  - splistud 5y ago
    People are working, unemployment has been falling like a stone since 2017. That money is going to go somewhere (and for most that is not 'the bank'). It's going to get spent or put into investments. We're going to continue to see strong commodity prices (and most of these have been rising into the headwind of a stronger dollar) until unemployment creeps up, or real wages falls too far behind inflation rate. I think the increased commodity supply that would normally rebalance pricing before demand does is going to be delayed. Why? Though interest rates are low, loans aren't going into commodity capital projects (because risk and returns ratios don't look good to lenders when compared to inflation rate? not sure).
xnx 5y ago
I appreciate this effort since this gets closer than reporting on house prices alone. As other's have pointed out there are a lot of significant factors being left out (e.g. interest rates). One of my favorite analysis is the historical chart on how many hours you had to work for an hour of artificial (candle, lamp, electric, etc.) light. I'd love to see this applied to housing, though housing is extra difficult because the quality has also changed immensely (indoor plumbing, electricity, etc.).
- gruez 5y ago
  >As other's have pointed out there are a lot of significant factors being left out (e.g. interest rates). >though housing is extra difficult because the quality has also changed immensely (indoor plumbing, electricity, etc.). This blog goes over both those points. https://awealthofcommonsense.com/2021/03/what-if-housing-prices-arent-as-high-as-they-appear/ https://awealthofcommonsense.com/2021/03/what-if-housing-pri... tl;dr: 1. inflation adjusted mortgage payments are actually down 2. houses have gotten much better since a few decades ago.
  - xnx 5y ago
    Great analysis! Thank for sharing that link. > 2. houses have gotten much better since a few decades ago. I'm sometimes reminded of this when I see old footage of shows like "Lifestyles of the Rich and Famous". Many mansions from the 1980's kind of look like dumps.
  - Valakas_ 5y ago
    Just wanted to correct that no.2 is irrelevant. Things being much better has only to do with technology and productivity. If you had told me "Houses have gotten much better, but the cost to manufacture the things that make them much better remains the same" then you'd have a point. I see this argument over and over. "You're so much better off than your parents, what are you complaining about?! For example in my time we couldn't even fly, and now with your "low wage" you can! Proof that the wage is not so bad!" Well BS argument. For example, now we don't fly in fully manually built airplanes, that were designed on paper, with hand calculators.
tqi 5y ago
Given that the median household income trend is (relatively) linear over time, is this ratio telling us much more than median home prices alone?
marcodiego 5y ago
Are we close to another housing bubble like in 2008?
- m_ke 5y ago
  We're in an everything bubble that's about to pop. Evergrande is about to take it all down.
  - TameAntelope 5y ago
    How long will you and your Reddit pals keep saying this before you realize how untrue it is? Last prediction I heard was that everything was going to crash today. Now it's next week. Next week will it be November? 2022? 2024? 2030? Over and over again, I see newly minted retail investors discover the only hard part about investing; actually knowing when things will happen. If you can't say when the MOASS (or whatever the "bad thing" is this time) will actually happen, it's useless to keep doomsaying about it in the meantime.
    - m_ke 5y ago
      I don't hold a single share of public stock nor crypto and have never posted on any investing forums. Evergrande could end up tanking the Chinese real estate market and a take bunch of banks down in the process unless the CCP steps in and nationalizes it.
      - TameAntelope 5y ago
        It could indeed do that highly unlikely and globally catastrophic thing, or it could be mitigated substantially by the amount of time and resources that "bunch of banks" have now that this has been going on for some weeks. Ever since Taleb wrote about "Black Swan events", it feels like people are falling over themselves to identify the next one at every opportunity, and when (through random chance) some group or person gets it right, it's going to be paraded about as some kind of indication of their sage wisdom.
  - 5y ago
BooneJS 5y ago
How is this true? I think our home was 2x our family income. It’s been paid off for a while.
- wheelinsupial 5y ago
  What’s hard to believe about this? Do you think the analysis is wrong? Since you’ve given an anecdote, I’ll share mine. I make more than the median income where I live. The closest place that matches 2x my income is more than 100km away from me and it’s a mobile home. My current apartment is 3.5 times what I earn, but that’s because I bought it 5 years ago when it was 4.3 times what I earned. If I sold this apartment today, then someone earning the median income would be paying at least 7.5 times their income. 30+ years ago my parents bought a house for less than what I paid for my apartment. They also earned more than 2x what I earn now. So they might have been in a similar situation to you had they not gotten divorced. People buying that same house now have to pay 10-12 times income if they make what my parents did. Closer to 20 times income if they earn a median income.
MrFlibbles 5y ago
Affordability is limited by lending requirements. Start with home price of $250k for example. If you can manage a 5% down payment (arguable) then the loan is for $237.5k. With a 30 year loan at 3.5%, the principal and interest is $1,066.48 per month. Gross this up by 0.7 for taxes and insurance to get $1,523.54/month. Lenders will typically allow your payment to be as much as 28.0% of your gross income. This get us to income of $5,441.23/month or $65,294.76/year. The multiple now if $65.3k income to $250.0k of house or roughly 3.83X.
- zzleeper 5y ago
  I just got a 15yr fixed rate at 2% (!) which made me think a lot about what's behind your comment. In particular, what will happen once rates go back up: 1) Right now we are at zero short term rates, and moreover mortgage rates are propped due to Fed purchases of Agency MBS 2) Say rates go up 2% (not crazy) in parallel. So now your 3.5% becomes 5.5% which is still historically moderate. However, the 5441 required monthly income from your formula is now 6877! 26% increase. 3) What then? Prices go down?
  - kipchak 5y ago
    Regarding 3 I would figure either prices would have to come down, financial assistance comes from somewhere, or the house winds up being rented after being purchased by a management group.
  - lbotos 5y ago
    House price is inversely correlated to interest rates BECAUSE most buyers are getting a mortgage. So the price of the house "will drop" (hard and fast estimate here not a law) if interest rates rise because people are paying for house+interest = total_cost_able_to_pay. I watched this play out in real time as I purchased my home. Rates dropped, prices went up to fill the gap. Owner got a bit more money vs the bank instead. Basically I gave my money to a different person, but the "all in" was about the same.
steveBK123 5y ago
Probably need a 3rd time series that takes interest rates into account to provide a monthly-cost view. Given sufficient savings, the price range for home shoppers is controlled by the monthly outlay which is driven by interest rates. Sub-3% interest rates in 2021 means that the same monthly cost drives the headline house price a lot higher than 6%+ pre-2008.
6gvONxR4sf7o 5y ago
I’d love to see the same charts in terms of monthly payments on a new mortgage, rather than sticker price. The price itself matters in terms of downpayment, but ultra low interest rates are a huge factor. Right now, interest rates are so low that a huge mortgage has the same payments as a small one years ago would have been. Especially when you take inflation into account.
- patrickthebold 5y ago
  One thing I think people overlook is that there's a hidden cost to buying at low interest rates: if rates go up that will eat into your resale value, and it's less likely you can refinance at a lower rate in the future. If you bought at a high interest rate and then rates drop you really make out, and that's less likely to happen to people buying now.
  - deleted 5y ago
    [deleted]
  - cudgy 5y ago
    Also, artificial low rates are causing increased inflation of prices, which means cash buyers and buyers that would pay off their mortgage quicker are at a disadvantage.
    - milkytron 5y ago
      > artificial low rates What do you mean by artificial here?
      - cudgy 5y ago
        For example, Interest rates are so low that the traditional alternatives of stock investments are no longer present. Traditionally, a bond would include a rate that is beyond inflation. Nowadays, government bonds return rates below inflation. This is artificially low and creates a bubble in the stock market (and other assets like real estate) since the traditional option to put money in bonds has been artificially devalued.
cudgy 5y ago
“ an average single family house in the United States cost more than 7 times the U.S. median annual household income. ” Why average numerator divided by median denominator?
jandrese 5y ago
How much of this is a result of our "don't tax the rich" policies that created a staggering amount of wealth at the top that has nowhere else to go? So many ultra rich investors are looking for something, anything, to invest in. Plus there is the feedback loop of massive growth you get as the bubble inflates. Is this a direct result of our fiscal policy? Have we destabilize the economy in order to create the richest muilti-billionaires?
- fake-news 5y ago
  How can we eat the rich when we have no kitchens? Can't blame the capitalists for self-preservation.
- fatnoah 5y ago
  I fully expect that as we tax investment income more and more, we'll see this trend in real estate worsening as it becomes an even more attractive investment vehicle.
- flyinglizard 5y ago
  This is happening outside of the USA, in countries with more progressive taxation too. Canada, UK, Israel - all with much worse house price to income ratio compared to the USA. These homes are not owned by billionaires either. It’s an asset class that’s very broadly distributed by its definition; most people own their homes. I think it’s mostly driven by macroeconomics. Near zero interest, population growth (organic or through immigration) and historical real estate appreciation all fuel this trend.
  - jandrese 5y ago
    It doesn't matter so much if a country is taxing their own rich if they allow rich people from other countries to buy real estate.
    - flyinglizard 5y ago
      I’ve never seen any data showing that housing bubbles are attributed to “the rich”. The housing market is made of tens of millions of individual home owners, not some moguls cornering the market.
Jerry2 5y ago
RIP American Dream.
jdavis703 5y ago
I wouldn’t say we’re in a bubble, even though the numbers look like the last bubble. At least in my local market there’s a small number of home sales being distorted by a handful of people at the top of the income distribution. What we’re seeing is a lack of housing, not middle class people buying up housing they can’t afford.
nickff 5y ago
Why do they use "average" home price (without specifying whether it's mean, median, or modal), with "median" income? It makes these graphs very difficult to interpret.
- kerbs 5y ago
  “Mean” is quite literally the average.
  - nickff 5y ago
    >”Mean” is quite literally the average.” No, median is the average home, mean is the average of homes, and mode is the most common of the homes. They are all “average home prices”, just different averages.
- seanc 5y ago
  Also, I would be willing to wager that the spread of housing prices has increased over time. That prices in the cities have grown much much faster. So nowadays there are many people who want to live in a city but can't afford to, and there are many homeowners in the towns who haven't seen much appreciation of their largest asset. Meanwhile back in the 50's someone could afford a house in the suburbs on a single income (a laughable concept today) because it wasn't many times more expensive than a house in a small town.
p4l4g4 5y ago
My eye was drawn to the graphs. Especially the house price / income graphs. There seems to be a trend in the US graph: if you zoom in far enough, you can see a consistent drop in Januari (every year). The UK graph does not show this trend.. Does someone know the origin of this trend? And why the two countries don't show the same trend?
kipchak 5y ago
My worry as a potential buyer is that rates might remain low and home prices will roll over. While I don't have a super high conviction that will happen, the potential risk of losing more of the value of something then my net worth greatly offsets the probable benefits of getting in now.
jonas21 5y ago
One thing not captured in this chart is that the average house size in the U.S. has nearly tripled since the 1950's.
- nostromo 5y ago
  Not only are the houses much bigger but families are also much smaller. It also ignores interest rates. Unless you're paying cash, the price of a home doesn't really matter -- what matters is your monthly payment. If you bought a house in the 80s, a huge chunk of change every month went to bankers, not to principle. So the fact that you got a "cheap" house doesn't really matter, because you were still paying an arm-and-a-leg for it.
  - slaymaker1907 5y ago
    You are still way better off buying a house during high interest rates. While you can refinance a high interest rate away, the reverse has a lot more risky (overpay during low interest rates and try to recover cost via appreciation).
nullc 5y ago
I wonder if how this can be corrected for the different timing of the numerator and denominator. I assume housing prices are closer to real time while median incomes are lagging by a year.
Rebelgecko 5y ago
I wonder, is there a similar metric that tracks the average monthly mortgage payment over time instead? I think for most people's purposes that's a more relevant number and won't have the confounding factor of interest rates (except to the extent that interest rates influence home prices, so maybe this would end up mirroring the case shiller index?)
forrestthewoods 5y ago
Home price isn’t technically the right metric. “Mortgage payment to income ratio” is. As mortgage interest rates go down home values go up, but mortgage payments might now. No doubt housing is expensive and getting more expensive. But I’ve always wanted to see the mortgage payment plot too.
lvl100 5y ago
I wonder what would happen if we stop financial institutions from “investing” in residential real estate.
- bequanna 5y ago
  Do you mean stop institutions from purchasing residential real estate or are you referring to providing mortgage loan liquidity?
LukeShu 5y ago
NB: The Y axis of the first chart does not start at 0.
- disqard 5y ago
  I missed seeing your comment (you beat me to it by 4 minutes)!
disqard 5y ago
Why does this graph start its y-axis at 3?
game_the0ry 5y ago
A more relevant metric to consider - monthly mortgage payment to monthly income ratio. Average interest rates in 2007 were 6.34% vs ~2.80% today. [1] * 6.34% / $2,000 monthly payment / 20% down (~$65k) >> $328,319 price of home * 2.80% / $2,000 monthly payment / 20% down (~$98k) >> $489,794 price of home Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. When interest rates fall, the home's price goes up but the monthly payment can stay the same. Therefore, increases in home (and other asset, since lower bowering costs can drive institutional investment in assets higher and non-linearly) prices can be driven higher without any change in supply / demand dynamics. Some hypotheticals to consider: * as rates approach and touch 0, what will drive up home prices then? * what happens when rates go up? [1] http://www.freddiemac.com/pmms/pmms30.html http://www.freddiemac.com/pmms/pmms30.html
- throwdecro 5y ago
  > Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. Which is crazy, right? People max out their "borrowing power" at low interest rates and take on huge loans, without considering that the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* and the value of the property declines. *EDIT: To be clear, I mean interest rates on new loans being higher than they were before, not that the loan is variable-rate.
  - pjerem 5y ago
    I don’t know how it works in US but can’t you just opt for fixed interest rates ?
    - mandelbrotwurst 5y ago
      Yes, most people do, it's just that increases in rates have a tendency to cause decreases in homes values because a larger proportion of monthly payments will now have to go towards paying the interest.
    - 5y ago
robterrin 5y ago
Came here to upvote anybody who mentioned Henry George and the land value tax. Can't believe I'm the first one in this thread. Read Progress and Poverty, he predicted it all over 100 years ago, and provided the solution. https://oll.libertyfund.org/title/george-progress-and-poverty https://oll.libertyfund.org/title/george-progress-and-povert...
- tryptophan 5y ago
  He didn't provide a workable solution for how to value land. I love George as much as anyone, but valuing land independently from what is on it is very tricky. Yes, yes, i know there are a bunch of suggestions for how to do this, but none of them seem to work well easily in practice.
- titovodka 5y ago
  I discovered Henry George in one of the previous threads on HN. Read the book review that was posted and felt like a light bulb went on in my head. Over the next 2 months, i awkwardly would try to mention it in conversation to everybody haha. Most people patient enough to listen agree but see that there’s no hope of change because everybody’s lifesavings/nest are tied down to the value of their homes already. One thing it made me realize is I should probably look into buying land more.
mensetmanusman 5y ago
Now it’s good time to mention that ‘The Big Short’ is a good watch.
a_c 5y ago
https://www.numbeo.com/property-investment/ https://www.numbeo.com/property-investment/ Asian cities are way more expensive than american and european ones. Home price with a multiple of 15x to annual income is surely high. > Price to Income Ratio is the basic measure for apartment purchase affordability (lower is better). It is generally calculated as the ratio of median apartment prices to median familial disposable income, expressed as years of income (although variations are used also elsewhere). Hong Kong is having a price to income ratio of 44.69 https://www.numbeo.com/property-investment/country_result.jsp?country=Hong+Kong https://www.numbeo.com/property-investment/country_result.js... with Price per Square Meter to Buy Apartment in City Centre of HK$ 253,655.52 (32k USD) Side question, is the data highly sought after that the website is fetching US$20 to download?
hammock 5y ago
I have in my head the rule of thumb that you can afford a house 3x your annual income (or a mortgage 28% of your monthly[1]). I don't see the line crossing 3 anywhere on that chart. [1]Which translates to 4.2 on a 80/20 loan
- jobigoud 5y ago
  > I don't see the line crossing 3 anywhere on that chart. The chart is for the average house, but the median income. Maybe the higher income are skewing the distribution of house prices.
- SilverRed 5y ago
  Going of the bank calculators, they all say that they will let me borrow 6x my income.
bogomipz 5y ago
Can anyone explain what the cause of the steep cliff drop in the first graph that occurred between 1953 and 1959 might have been? Would this be the postwar suburban building boom driving down prices? Something else?
RoadieRoller 5y ago
Zillow and Open Door are manipulating the home prices in US. https://news.ycombinator.com/item?id=27765536 https://news.ycombinator.com/item?id=27765536 Cheap Loans, surplus cash, and inventory hoarding.
mmaunder 5y ago
IMO we are in an inflationary cycle that is being underreported. Everything is becoming more expensive including you. It’s just that housing is becoming expensive faster than you are. The US has a strong incentive to inflate their way out of debt post Covid. But the optics are catastrophic if they do it overtly. So they’ll keep reporting it low as long as possible. Look around you for reality. If I’m right, you’ll want to take on as much fixed rate low-interest debt as you can stomach. Which explains why housing is getting expensive faster than you are.
- MeinBlutIstBlau 5y ago
  It still boggles my mind. I started working in 2009 when 7.25 became the defacto minimum wage. But since then, I've noticed that the cost of everything has almost doubled faster in just the past 2 years than it did in the preceding 10. It's almost as if limitless government stimulus and inflation is bad for the economy...
autoliteInline 5y ago
Did I miss the part of the article that mentioned the average size of houses over time? The increasing code requirements over time?
rc_mob 5y ago
half the price of house is still more than i paid for it. market has been goofy
ryanSrich 5y ago
The most surprising thing here to me is that a home is 5 times annual income. That seems insane to me. That would mean someone making $250k per year would be able to afford a $1.25m home. I don’t see how that’d work, unless that person has almost no other bills and or lives in a state with extremely low income tax. After taxes and other expenses $250k / 12 is not that much. Certainly not enough to buy a $1.25m home.
unethical_ban 5y ago
Just throwing an idea out there: what if we abolished or heavily penalized long term renting? No more renting a house for years. No more apartments. If you are in a long term contract, you get equity.
qwerty456127 5y ago
To me it feels like home prices are the single most important bug in the economy. If we filter out skilled IT professionals (and other high-paid jobs), fundamentally rich people and also extremely poor (homeless in developed countries and those living in stick/garbage huts in the "3-rd world"), the rest mostly spend almost all their income on paying for their home. We invent new technologies but average homes become neither more affordable nor more perdurable. The fact most of the ordinary people can never afford buying/building a home without taking a loan they will have to pay for decades to come seems outrageously absurd to me.
- SilverRed 5y ago
  Seems to me that there are two problems. As jobs and facilities are becoming more centralized. Cities are expanding and rural towns are shrinking. So even without any population growth, houses that people actually want become more expensive. And the second problem is the expectation that a piece of land near a city will always be more in demand tomorrow than it is today. This is almost certainly true based on the first point and doubled by the fact that populations are still expanding. This expectation means you can buy a house for way more than you believe it is worth since you know it will be worth even more later. The only solution I can possibly see is moving more people from single family houses in to apartment buildings which allows virtually infinite supply within close range to jobs and facilities that people demand.
  - noahtallen 5y ago
    The main problem with that solution is that most young-ish people know that if they ever want to own a house, they need to get into the game early so they can build equity. Besides that, rentals are often way too expensive (matching or exceeding a mortgage payment in big cities) without providing a similar amount of value: - Can’t do what you like to the interior, like painting walls. - Not built with the same sort of layout homes have. For examples, loads of three bed/three bath rentals meant to be split by roommates, but not many with a nice room for a home office. - Often does not provide an important amenity (like AC). - Almost definitely less space. - Likely less peaceful, especially if noise insulation between units is poor. (Getting bothered by a neighbor is a lot easier.) If we want to attract the type of people who want to buy a home to instead rent for the long term, those aspects need to become better. Apartments need to be more desirable than houses. And that means the folks building apartments and the apartment management companies need to offer a lot more for less. And since apartment buildings are also investments, that will never happen, because the ultimate goal is profit. I feel like in both cases, it comes back to the fact that property is an investment. It doesn’t make sense for anyone to loose value on an investment, which means there is an inherent pressure to make prices go up over time
dboreham 5y ago
And people scoff at cryptocurrencies...
wffurr 5y ago
I never learn anything in these threads. It seems like everyone is just talking past each other with their pet theories and no particular way to tell which if any are correct or useful.
- akudha 5y ago
  Economics is a weird subject, even economists get predictions wrong all the time. It is easier to talk about logical subjects like Math or programming, vs something like social issues or economics. I don't know how to have a useful conversation about such topics, I understand your frustration. I suppose everyone has good intentions and is trying to help at the same time by sharing their theories - which could be bad or good, but definitely hard to digest, as a reader
  - mbesto 5y ago
    > Economics is a weird subject, even economists get predictions wrong all the time. It's because economics is seen as a science but ignores (not completely) human behavior. You can't test economic theories with the scientific method because there is simply no way to create a market vacuum to test. This is why behavioral economics is so interesting IMO. It's not definitive but it at least it provides explanations.
    - xyzzyz 5y ago
      > It's because economics is seen as a science but ignores (not completely) human behavior. That does not describe what economics has looked like for a few decades already. These days, it’s all about human behavior. Just look at the sample of newest papers collected at NBER: https://www.nber.org/papers?page=1&perPage=50&sortBy=public_date#listing-77041 https://www.nber.org/papers?page=1&perPage=50&sortBy=public_... If you look at these, it should be clear that most of published economics these days is basically social science done using quantitative methods. The homo economicus has always been a straw man, but these days it is laughably so.
    - dragonwriter 5y ago
      > You can't test economic theories with the scientific method because there is simply no way to create a market vacuum to test. The scientific method doesn't require laboratory controls; statistically controlled experiments are just as consistent with the scientific method. Now, there are branches of economics which are, more of less overtly, not empirical science but essentially theology, the Austrian school being the most well-known, overt example, and they and their practitioners tend not to be distinguished from those of empirical economics when covered by the mainstream media...
anonu 5y ago
https://fred.stlouisfed.org/series/PSAVERT https://fred.stlouisfed.org/series/PSAVERT Personal savings rates are at all time highs. So it's very possible the landscape has shifted under our feet. The past is not prologue to the future...
irrational 5y ago
> Historically, an average house in the U.S. cost around 5 times the yearly household income. I just purchased a house in July for 3.7x my yearly household income. The above fact makes me feel better about the purchase ;-)
blobbers 5y ago
In order to raise home values further, they'll start offering a 40 year product to everyone. This will lower the monthly cost further. It makes sense, as the bank wants to keep the money train rolling. It's actually "good" for everyone; underwriters (lower payment = lower risk), salespeople (continue to close), C-level execs (keep that money train rolling), home-buyers (heck yeah I can afford that 4 quadrillion dollar home). I believe the way they're currently handling "lowering payments" in delinquent loans in the United States is by offering 40 year terms on loans as adjustments. Rather than foreclosing, they offer a more palatable monthly rate by extending the loan for 10 years.
jxramos 5y ago
I haven't seen this commented on, but I find it really intriguing the button at the bottom to buy the data for $19.95 USD. Pretty interesting form of side business.
ZeroGravitas 5y ago
I wonder if it's possible to capture how much money is being made by owning the house. So you'd need to estimate future sales price and then remove that from the monthly mortgage price before comparing to income. I've heard of people in London who's asset appreciation makes them more than their wage each year, but not sure how representative that is. People who happened to own property in a pre-gentrified area would have negative costs. Just holding the asset as prices rise would be worthwhile. In a socialist scheme that owner would be everyone/the government. Meanwhile, someone moving into that same area will be paying more for the already baked in price rise assumption which may entirely cancel out the expected future asset price increase. Who pays and who benefits is random and unrelated to any useful economic input, like building homes people want in areas that need people. But then how do you price in the uncertainty? Maybe the market collapses for several unrelated reasons. Feels like there should be an insurance/socialist answer to this problem, where the risks and rewards of property investment are shared between people with no control over them. Land value tax is one element of this. Normalising renting and having democratic control over the landlord/renter contracts is another. Singapore seems to do well with this, but not sure how translatable this is. Feels like the kind of thing that needs to go very wrong before the sensible approach gets taken. Society generally seems to need to touch the fire to believe it's hot. edit: business idea - private land value tax. You buy into a corporation, that corporation buys lots of buildings in popular locations. You pay a land value tax to the corporation and a market rate 'rent' for the building. As the land value tax rises, you might get priced out and be forced to move to one of their cheaper homes (or cash out) but if the land value tax gets too high for anyone, the corporation can sell the building to someone else at market rate, or if the location is great, knock down the existing building and rebuild more compact apartments to spread the land tax over more owners. Basically the Singapore model, but private. You get to live in cool places, move easily (if the scheme is big enough) and profit from the insane property bubble with hedged risk.
brailsafe 5y ago
Seems like there were a few memory leaks in the last century.
cannabis_sam 5y ago
Our parents really ran this shit into the ground didn’t they?
KETpXDDzR 5y ago
One important change: Funds and investors are allowed to buy single family homes starting 2012. That's one reason for the crazy housing market and makes the price to income ratio less useful. (Src: https://www.theatlantic.com/technology/archive/2019/02/single-family-landlords-wall-street/582394/ https://www.theatlantic.com/technology/archive/2019/02/singl...)

544 points by hncurious 5y ago

deleted 5y ago

[deleted]

A more accurate measure of affordability change might be home payment to income ratio: https://www.corelogic.com/intelligence/comparing-two-home-price-booms-fifteen-years-apart/ https://www.corelogic.com/intelligence/comparing-two-home-pr...

peterlk 5y ago

I think there's a pretty critical piece of analysis missing here: inflation. An alternative explanation might be that housing prices are being driven up by inflation, and wages haven't caught up yet. There are two ways to lower the home value/income ratio: 1. Decrease housing prices 2. Increase wages We haven't seen meaningful wage increases for a long time now, so perhaps it is time. Maybe this is just a symptom of wages not tracking with inflation, and the solution is to pay people more.

teagee 5y ago
Add our current low interest rates to the mix as well and the picture changes dramatically
- 88913527 5y ago
  100%. Though, interest rate based appreciation is likely at its apex, presuming zero is the floor. If we find ourselves with negative rates (after taxes and fees; there was one case of negative rates in Europe, but net inclusive of fees, it was still positive) -- then we're in truly uncharted territory. At this juncture, it seems most appreciation will arise from supply issues, which aren't new to the post-2008 world. And while we do have lots of unoccupied housing nationally, we don't have it stock in areas where it's most needed: e.g, job centers. You can easily find a $10k home in Detroit if you wish. The graph would be helpful it broke out metro versus rural areas, in addition to factoring interest rates.
newaccount2021 5y ago
3. raise interest rates
sorenn111 5y ago
I agree that wage growth is stagnant but I think the changes over the last 20 years of real median wages is definitely meaningful. Look at the changes from peaks in 2000, 2007 and also from a deep trough in 2012: https://fred.stlouisfed.org/series/MEHOINUSA672N https://fred.stlouisfed.org/series/MEHOINUSA672N
bserge 5y ago
Why pay them more when they're content with what they get now?
- MathMonkeyMan 5y ago
  I upvoted your comment because it clicked with me, but now I'm thinking about it more. _I'm_ content with my pay now, perhaps others aren't and there is little they can do about it. How might we even define "content" for a cohort as large as "anyone buying a house"?
  - bserge 5y ago
    No, trust me, people are content with renting a room and living month to month. There's nothing to worry about.
    - HeyLaughingBoy 5y ago
      I'm starting a business selling guillotine insurance...
- kevinventullo 5y ago
  I don’t think I would characterize most millennials as “content” with their income level.
reducesuffering 5y ago
With increased wages come increased housing prices, as long as there is a supply mismatch to the baseline demand of housing to survive.
b9a2cab5 5y ago
An increase in wages (real or nominal) without any increase in housing supply just leads to more money chasing the same supply which means higher rents. We are seeing this play out as we speak in every major city in the U.S. The solution is not to pay people more, it's to increase the supply of housing to the point that people can pay drastically less for housing. Look at China: apartment towers on every street, each 30+ floors easily. Where is that kind of density in the U.S.?

standardUser 5y ago

Some very clever and influential people better start finding and implementing real solutions to housing prices right now. If they don't, expect overwhelming support from Millennials for massive expansions to public housing and rent control, if not even more draconian measures.

ido 5y ago
Why do you consider the 2 examples you gave “draconian”?
- standardUser 5y ago
  Draconian is a strong word (but cool-sounding) and what I really mean is "antiquated". But they are also somewhat blunt instruments and have historically lead to unwanted consequence. We already have more modern, market-oriented solutions, like vouchers and tax-credit housing, but those have problems too. My bigger point was, Millennials tend to react big when specific issues rise to the forefront, and if there aren't better solution than what is already on the table, we risk people clinging to whatever ideas do exist, which in the realm of housing, are mostly shit ideas.
  - beepbooptheory 5y ago
    Its interesting how often on HN the main problem always ends up being how people will "feel" about the next crisis, and the danger of that feeling itself. It's a weird kind of proxy self-consciousness older generations have on behalf of the economy. Always and forever: "no no, it's not that bad, really!" meanwhile people are very much homeless, whether they are millenials or not, whether they react strongly or not.
- mrfusion 5y ago
  Rent control really doesn’t make sense. If we could make things cheaper by passing a law we’d do it for everything. Rent control won’t work for the same reason a price control for food or cars won’t work. https://freakonomics.com/podcast/rent-control/ https://freakonomics.com/podcast/rent-control/

AndrewDucker 5y ago

Copying a link from a mysteriously dead comment below: https://www.corelogic.com/intelligence/comparing-two-home-price-booms-fifteen-years-apart/ https://www.corelogic.com/intelligence/comparing-two-home-pr... You have to take interest rates into account. The amount you pay, monthly, for a mortgage of the same size is very different at different interest levels. What people care about is their monthly mortgage payment - that's what makes a home affordable or not. (Which isn't to discount that downpayments are a percentage of home cost, and that's pricing people out of being able to buy anything at all, even something they can easily make repayments on.)

zargon 5y ago
Does this mean that when interest rates go up, home values may drop, leaving people underwater?
- AndrewDucker 5y ago
  Absolutely. Although it's more likely that they'll just remain stagnant, which would be just fine.
  - nwiswell 5y ago
    People being underwater happens to mean that the banks have bad loans. We have seen that movie before. Interest rates will not be allowed to increase faster than the property market can absorb. You can count on that; the political imperative could not be more clear. The next crisis will probably be some novel flavor of financial recklessness.
    - KingMachiavelli 5y ago
      Exactly and the market is confident the the government would intervene to prevent another housing market collapse which just compounds the effect further.

RcouF1uZ4gsC 5y ago

One thing this ignores is interest rates and availability of credit. The biggest determinant of homes people buy is not the total price, but rather how much cash do they need for down payment, and what will the monthly payment be. With low interest rates and increased credit availability ( you don’t need 20% down payment in many cases now), people on the same income are actually able to buy a more expensive home. I think looking at monthly mortgage payments to income ratio over the long term might actually be more informative.

rektide 5y ago
Agreed. As much as any other factor, that anyone with a bit of money can now buy an expensive house feels like the thing making the housing prices go up. (As well as our general inability to build.)
leetcrew 5y ago
> The biggest determinant of homes people buy is not the total price, but rather how much cash do they need for down payment, and what will the monthly payment be. I agree this is mostly how people decide, but it's not necessarily a good idea. buying a very expensive home at historically low interest rates is a significant risk. there's a good chance you get upside-down on that loan over a 15-30 year period. better hope you don't get divorced, lose your job, or need to relocate during that period.

lastofthemojito 5y ago

I've heard 3x income as a rule of thumb for how much house one can afford, but it looks like that's never been widely followed. It also doesn't make a whole heck of a lot of sense as interest rates have varied so widely - a better rule of thumb might be a ratio between the total amount of payments over the life of a mortgage and one's income.

clipradiowallet 5y ago
The 3x income rule is usually mentioned by your loan officer, and your real estate agent. They will present you with houses costing 3x your income as a baseline of what you can afford.
- Fire-Dragon-DoL 5y ago
  That's funny, you need to earn 250000/year to be able to afford _something_ in Vancouver by following that rule.
  - __turbobrew__ 5y ago
    or 600000/year for a starter home
zzleeper 5y ago
Agree. From experience, people look into how much they would pay monthly and their income. This then begs the question: what will happen once rates go up even a bit, and houses suddenly require a 50% larger monthly payment.
- throwaway6734 5y ago
  Most mortgages haves fixed rates
  - zzleeper 5y ago
    Of course. But buyers still need to be able to afford houses they purchase. With higher rates that might not be true.

clipradiowallet 5y ago

This bears repeating: http://www.iedu.com/Documents/Manifesto1892.html http://www.iedu.com/Documents/Manifesto1892.html That is a link to the banker's manifesto. The ideal scenario [in the manifesto] is for home prices to far eclipse yearly income, and for houses to be owned by banks instead of occupants. Everything old is new again...

mint2 5y ago

I’d be interested in seeing the total cost after accounting for interest in the loans, or monthly cost compared to monthly income. Most people don’t pay cash, and they pay more than the asking price due to interest. So high interest rate periods look artificially lower because they ignore a substantial amount of the price

thehappypm 5y ago
Very true. The 2008 housing bubble did not have low interest rates. 30 year average was around 6%. Now it's under 3%. That 3% makes a HUGE difference in purchasing power.
gruez 5y ago
Exactly. https://awealthofcommonsense.com/wp-content/uploads/2021/03/Screenshot-2021-03-20-101503-1024x741.jpg https://awealthofcommonsense.com/wp-content/uploads/2021/03/... That said, it doesn't do much for down payment.
- SubiculumCode 5y ago
  This is very interesting but I wonder if the housing crisis is not reflected in that chart because it's an average of presumably average American mortgage rates. What about California mortgage rates? I'd love to see that last chart restricted to California where the prices have skyrocketed.
  - SubiculumCode 5y ago
    https://www.corelogic.com/wp-content/uploads/sites/4/2021/06/lepage_mtg_fig3_large.png https://www.corelogic.com/wp-content/uploads/sites/4/2021/06... Here is the same chart but for California regions
    - rossdavidh 5y ago
      Interesting, but that chart appears to end in 2016?

bushbaba 5y ago

Simple the 50 year or 100 year mortgage. But really covid was the perfect opportunity to let the housing market collapse and reset buying us an additional decade. Wasted opportunity by bailing out landlords.

deleted 5y ago
[deleted]

refurb 5y ago

Now adjust that chart for interest rates and monthly payments.

dpierce9 5y ago

Pay is not gaussian so comparing median salary to average home price is confused (average salary is 45% more than median salary in the US with wide regional variation). Case Schiller also only looks at single family housing stock so it won’t capture anything higher density (apartment like condos, duplexes, etc).

vessenes 5y ago

These charts are not very useful without taking interest rates and inflation into account; in fact you could almost use them to discuss interest rates and inflation, they are so intimately tied to housing prices and income. If housing interest rates stay low or drop, prices will keep rising. Absent wage inflation that ratio will go up. If inflation flows through to wages as it seems to be in process of doing, the ratio will stabilize or drop.

gp 5y ago

While it doesn't directly affect the average person's purchasing power, the same dramatic increase is happening in other asset values as well. [0] One interesting thing to note is that 2019 EV / EBITDA values were already "high," before the coronavirus was spreading. I suspect these two phenomena have different causes overall, but low interest rates are a common factor that cause all asset prices to increase. On the housing side, I suspect consumers purchase the house that their cashflow can comfortably support, not necessarily the one where they believe it is correctly valued, because the assumption that house values only increase means purchasing a well constructed house is almost never a "bad deal." I'm not sure what the "solution," is, but knowing that voters hate when their home values fall does not give me confidence that prices will decrease in the long term. [0] https://www.statista.com/statistics/953641/sandp-500-ev-to-ebitda-multiples/ https://www.statista.com/statistics/953641/sandp-500-ev-to-e...

pfisherman 5y ago
This jibes with my experience of buying a house about 6 months ago. My reasoning was that we were experiencing rapid asset inflation fueled by low interest rates and COVID stimulus, and our cash was losing its value relative to housing by the month. I figured that this propping up of asset prices is likely to continue, as any administration that lets housing / 401k values collapse will get massacred in elections.
- splistud 5y ago
  People are working, unemployment has been falling like a stone since 2017. That money is going to go somewhere (and for most that is not 'the bank'). It's going to get spent or put into investments. We're going to continue to see strong commodity prices (and most of these have been rising into the headwind of a stronger dollar) until unemployment creeps up, or real wages falls too far behind inflation rate. I think the increased commodity supply that would normally rebalance pricing before demand does is going to be delayed. Why? Though interest rates are low, loans aren't going into commodity capital projects (because risk and returns ratios don't look good to lenders when compared to inflation rate? not sure).

xnx 5y ago

I appreciate this effort since this gets closer than reporting on house prices alone. As other's have pointed out there are a lot of significant factors being left out (e.g. interest rates). One of my favorite analysis is the historical chart on how many hours you had to work for an hour of artificial (candle, lamp, electric, etc.) light. I'd love to see this applied to housing, though housing is extra difficult because the quality has also changed immensely (indoor plumbing, electricity, etc.).

gruez 5y ago
>As other's have pointed out there are a lot of significant factors being left out (e.g. interest rates). >though housing is extra difficult because the quality has also changed immensely (indoor plumbing, electricity, etc.). This blog goes over both those points. https://awealthofcommonsense.com/2021/03/what-if-housing-prices-arent-as-high-as-they-appear/ https://awealthofcommonsense.com/2021/03/what-if-housing-pri... tl;dr: 1. inflation adjusted mortgage payments are actually down 2. houses have gotten much better since a few decades ago.
- xnx 5y ago
  Great analysis! Thank for sharing that link. > 2. houses have gotten much better since a few decades ago. I'm sometimes reminded of this when I see old footage of shows like "Lifestyles of the Rich and Famous". Many mansions from the 1980's kind of look like dumps.
- Valakas_ 5y ago
  Just wanted to correct that no.2 is irrelevant. Things being much better has only to do with technology and productivity. If you had told me "Houses have gotten much better, but the cost to manufacture the things that make them much better remains the same" then you'd have a point. I see this argument over and over. "You're so much better off than your parents, what are you complaining about?! For example in my time we couldn't even fly, and now with your "low wage" you can! Proof that the wage is not so bad!" Well BS argument. For example, now we don't fly in fully manually built airplanes, that were designed on paper, with hand calculators.

tqi 5y ago

Given that the median household income trend is (relatively) linear over time, is this ratio telling us much more than median home prices alone?

marcodiego 5y ago

Are we close to another housing bubble like in 2008?

m_ke 5y ago
We're in an everything bubble that's about to pop. Evergrande is about to take it all down.
- TameAntelope 5y ago
  How long will you and your Reddit pals keep saying this before you realize how untrue it is? Last prediction I heard was that everything was going to crash today. Now it's next week. Next week will it be November? 2022? 2024? 2030? Over and over again, I see newly minted retail investors discover the only hard part about investing; actually knowing when things will happen. If you can't say when the MOASS (or whatever the "bad thing" is this time) will actually happen, it's useless to keep doomsaying about it in the meantime.
  - m_ke 5y ago
    I don't hold a single share of public stock nor crypto and have never posted on any investing forums. Evergrande could end up tanking the Chinese real estate market and a take bunch of banks down in the process unless the CCP steps in and nationalizes it.
    - TameAntelope 5y ago
      It could indeed do that highly unlikely and globally catastrophic thing, or it could be mitigated substantially by the amount of time and resources that "bunch of banks" have now that this has been going on for some weeks. Ever since Taleb wrote about "Black Swan events", it feels like people are falling over themselves to identify the next one at every opportunity, and when (through random chance) some group or person gets it right, it's going to be paraded about as some kind of indication of their sage wisdom.
- 5y ago

BooneJS 5y ago

How is this true? I think our home was 2x our family income. It’s been paid off for a while.

wheelinsupial 5y ago
What’s hard to believe about this? Do you think the analysis is wrong? Since you’ve given an anecdote, I’ll share mine. I make more than the median income where I live. The closest place that matches 2x my income is more than 100km away from me and it’s a mobile home. My current apartment is 3.5 times what I earn, but that’s because I bought it 5 years ago when it was 4.3 times what I earned. If I sold this apartment today, then someone earning the median income would be paying at least 7.5 times their income. 30+ years ago my parents bought a house for less than what I paid for my apartment. They also earned more than 2x what I earn now. So they might have been in a similar situation to you had they not gotten divorced. People buying that same house now have to pay 10-12 times income if they make what my parents did. Closer to 20 times income if they earn a median income.

MrFlibbles 5y ago

Affordability is limited by lending requirements. Start with home price of $250k for example. If you can manage a 5% down payment (arguable) then the loan is for $237.5k. With a 30 year loan at 3.5%, the principal and interest is $1,066.48 per month. Gross this up by 0.7 for taxes and insurance to get $1,523.54/month. Lenders will typically allow your payment to be as much as 28.0% of your gross income. This get us to income of $5,441.23/month or $65,294.76/year. The multiple now if $65.3k income to $250.0k of house or roughly 3.83X.

zzleeper 5y ago
I just got a 15yr fixed rate at 2% (!) which made me think a lot about what's behind your comment. In particular, what will happen once rates go back up: 1) Right now we are at zero short term rates, and moreover mortgage rates are propped due to Fed purchases of Agency MBS 2) Say rates go up 2% (not crazy) in parallel. So now your 3.5% becomes 5.5% which is still historically moderate. However, the 5441 required monthly income from your formula is now 6877! 26% increase. 3) What then? Prices go down?
- kipchak 5y ago
  Regarding 3 I would figure either prices would have to come down, financial assistance comes from somewhere, or the house winds up being rented after being purchased by a management group.
- lbotos 5y ago
  House price is inversely correlated to interest rates BECAUSE most buyers are getting a mortgage. So the price of the house "will drop" (hard and fast estimate here not a law) if interest rates rise because people are paying for house+interest = total_cost_able_to_pay. I watched this play out in real time as I purchased my home. Rates dropped, prices went up to fill the gap. Owner got a bit more money vs the bank instead. Basically I gave my money to a different person, but the "all in" was about the same.

steveBK123 5y ago

Probably need a 3rd time series that takes interest rates into account to provide a monthly-cost view. Given sufficient savings, the price range for home shoppers is controlled by the monthly outlay which is driven by interest rates. Sub-3% interest rates in 2021 means that the same monthly cost drives the headline house price a lot higher than 6%+ pre-2008.

6gvONxR4sf7o 5y ago

I’d love to see the same charts in terms of monthly payments on a new mortgage, rather than sticker price. The price itself matters in terms of downpayment, but ultra low interest rates are a huge factor. Right now, interest rates are so low that a huge mortgage has the same payments as a small one years ago would have been. Especially when you take inflation into account.

patrickthebold 5y ago
One thing I think people overlook is that there's a hidden cost to buying at low interest rates: if rates go up that will eat into your resale value, and it's less likely you can refinance at a lower rate in the future. If you bought at a high interest rate and then rates drop you really make out, and that's less likely to happen to people buying now.
- deleted 5y ago
  [deleted]
- cudgy 5y ago
  Also, artificial low rates are causing increased inflation of prices, which means cash buyers and buyers that would pay off their mortgage quicker are at a disadvantage.
  - milkytron 5y ago
    > artificial low rates What do you mean by artificial here?
    - cudgy 5y ago
      For example, Interest rates are so low that the traditional alternatives of stock investments are no longer present. Traditionally, a bond would include a rate that is beyond inflation. Nowadays, government bonds return rates below inflation. This is artificially low and creates a bubble in the stock market (and other assets like real estate) since the traditional option to put money in bonds has been artificially devalued.

cudgy 5y ago

“ an average single family house in the United States cost more than 7 times the U.S. median annual household income. ” Why average numerator divided by median denominator?

jandrese 5y ago

How much of this is a result of our "don't tax the rich" policies that created a staggering amount of wealth at the top that has nowhere else to go? So many ultra rich investors are looking for something, anything, to invest in. Plus there is the feedback loop of massive growth you get as the bubble inflates. Is this a direct result of our fiscal policy? Have we destabilize the economy in order to create the richest muilti-billionaires?

fake-news 5y ago
How can we eat the rich when we have no kitchens? Can't blame the capitalists for self-preservation.
fatnoah 5y ago
I fully expect that as we tax investment income more and more, we'll see this trend in real estate worsening as it becomes an even more attractive investment vehicle.
flyinglizard 5y ago
This is happening outside of the USA, in countries with more progressive taxation too. Canada, UK, Israel - all with much worse house price to income ratio compared to the USA. These homes are not owned by billionaires either. It’s an asset class that’s very broadly distributed by its definition; most people own their homes. I think it’s mostly driven by macroeconomics. Near zero interest, population growth (organic or through immigration) and historical real estate appreciation all fuel this trend.
- jandrese 5y ago
  It doesn't matter so much if a country is taxing their own rich if they allow rich people from other countries to buy real estate.
  - flyinglizard 5y ago
    I’ve never seen any data showing that housing bubbles are attributed to “the rich”. The housing market is made of tens of millions of individual home owners, not some moguls cornering the market.

Jerry2 5y ago

RIP American Dream.

jdavis703 5y ago

I wouldn’t say we’re in a bubble, even though the numbers look like the last bubble. At least in my local market there’s a small number of home sales being distorted by a handful of people at the top of the income distribution. What we’re seeing is a lack of housing, not middle class people buying up housing they can’t afford.

nickff 5y ago

Why do they use "average" home price (without specifying whether it's mean, median, or modal), with "median" income? It makes these graphs very difficult to interpret.

kerbs 5y ago
“Mean” is quite literally the average.
- nickff 5y ago
  >”Mean” is quite literally the average.” No, median is the average home, mean is the average of homes, and mode is the most common of the homes. They are all “average home prices”, just different averages.
seanc 5y ago
Also, I would be willing to wager that the spread of housing prices has increased over time. That prices in the cities have grown much much faster. So nowadays there are many people who want to live in a city but can't afford to, and there are many homeowners in the towns who haven't seen much appreciation of their largest asset. Meanwhile back in the 50's someone could afford a house in the suburbs on a single income (a laughable concept today) because it wasn't many times more expensive than a house in a small town.

p4l4g4 5y ago

My eye was drawn to the graphs. Especially the house price / income graphs. There seems to be a trend in the US graph: if you zoom in far enough, you can see a consistent drop in Januari (every year). The UK graph does not show this trend.. Does someone know the origin of this trend? And why the two countries don't show the same trend?

kipchak 5y ago

My worry as a potential buyer is that rates might remain low and home prices will roll over. While I don't have a super high conviction that will happen, the potential risk of losing more of the value of something then my net worth greatly offsets the probable benefits of getting in now.

jonas21 5y ago

One thing not captured in this chart is that the average house size in the U.S. has nearly tripled since the 1950's.

nostromo 5y ago
Not only are the houses much bigger but families are also much smaller. It also ignores interest rates. Unless you're paying cash, the price of a home doesn't really matter -- what matters is your monthly payment. If you bought a house in the 80s, a huge chunk of change every month went to bankers, not to principle. So the fact that you got a "cheap" house doesn't really matter, because you were still paying an arm-and-a-leg for it.
- slaymaker1907 5y ago
  You are still way better off buying a house during high interest rates. While you can refinance a high interest rate away, the reverse has a lot more risky (overpay during low interest rates and try to recover cost via appreciation).

nullc 5y ago

I wonder if how this can be corrected for the different timing of the numerator and denominator. I assume housing prices are closer to real time while median incomes are lagging by a year.

Rebelgecko 5y ago

I wonder, is there a similar metric that tracks the average monthly mortgage payment over time instead? I think for most people's purposes that's a more relevant number and won't have the confounding factor of interest rates (except to the extent that interest rates influence home prices, so maybe this would end up mirroring the case shiller index?)

forrestthewoods 5y ago

Home price isn’t technically the right metric. “Mortgage payment to income ratio” is. As mortgage interest rates go down home values go up, but mortgage payments might now. No doubt housing is expensive and getting more expensive. But I’ve always wanted to see the mortgage payment plot too.

lvl100 5y ago

I wonder what would happen if we stop financial institutions from “investing” in residential real estate.

bequanna 5y ago
Do you mean stop institutions from purchasing residential real estate or are you referring to providing mortgage loan liquidity?

LukeShu 5y ago

NB: The Y axis of the first chart does not start at 0.

disqard 5y ago
I missed seeing your comment (you beat me to it by 4 minutes)!

disqard 5y ago

Why does this graph start its y-axis at 3?

game_the0ry 5y ago

A more relevant metric to consider - monthly mortgage payment to monthly income ratio. Average interest rates in 2007 were 6.34% vs ~2.80% today. [1] * 6.34% / $2,000 monthly payment / 20% down (~$65k) >> $328,319 price of home * 2.80% / $2,000 monthly payment / 20% down (~$98k) >> $489,794 price of home Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. When interest rates fall, the home's price goes up but the monthly payment can stay the same. Therefore, increases in home (and other asset, since lower bowering costs can drive institutional investment in assets higher and non-linearly) prices can be driven higher without any change in supply / demand dynamics. Some hypotheticals to consider: * as rates approach and touch 0, what will drive up home prices then? * what happens when rates go up? [1] http://www.freddiemac.com/pmms/pmms30.html http://www.freddiemac.com/pmms/pmms30.html

throwdecro 5y ago
> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. Which is crazy, right? People max out their "borrowing power" at low interest rates and take on huge loans, without considering that the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* and the value of the property declines. *EDIT: To be clear, I mean interest rates on new loans being higher than they were before, not that the loan is variable-rate.
- pjerem 5y ago
  I don’t know how it works in US but can’t you just opt for fixed interest rates ?
  - mandelbrotwurst 5y ago
    Yes, most people do, it's just that increases in rates have a tendency to cause decreases in homes values because a larger proportion of monthly payments will now have to go towards paying the interest.
  - 5y ago

robterrin 5y ago

Came here to upvote anybody who mentioned Henry George and the land value tax. Can't believe I'm the first one in this thread. Read Progress and Poverty, he predicted it all over 100 years ago, and provided the solution. https://oll.libertyfund.org/title/george-progress-and-poverty https://oll.libertyfund.org/title/george-progress-and-povert...

tryptophan 5y ago
He didn't provide a workable solution for how to value land. I love George as much as anyone, but valuing land independently from what is on it is very tricky. Yes, yes, i know there are a bunch of suggestions for how to do this, but none of them seem to work well easily in practice.
titovodka 5y ago
I discovered Henry George in one of the previous threads on HN. Read the book review that was posted and felt like a light bulb went on in my head. Over the next 2 months, i awkwardly would try to mention it in conversation to everybody haha. Most people patient enough to listen agree but see that there’s no hope of change because everybody’s lifesavings/nest are tied down to the value of their homes already. One thing it made me realize is I should probably look into buying land more.

mensetmanusman 5y ago

Now it’s good time to mention that ‘The Big Short’ is a good watch.

a_c 5y ago

https://www.numbeo.com/property-investment/ https://www.numbeo.com/property-investment/ Asian cities are way more expensive than american and european ones. Home price with a multiple of 15x to annual income is surely high. > Price to Income Ratio is the basic measure for apartment purchase affordability (lower is better). It is generally calculated as the ratio of median apartment prices to median familial disposable income, expressed as years of income (although variations are used also elsewhere). Hong Kong is having a price to income ratio of 44.69 https://www.numbeo.com/property-investment/country_result.jsp?country=Hong+Kong https://www.numbeo.com/property-investment/country_result.js... with Price per Square Meter to Buy Apartment in City Centre of HK$ 253,655.52 (32k USD) Side question, is the data highly sought after that the website is fetching US$20 to download?

hammock 5y ago

I have in my head the rule of thumb that you can afford a house 3x your annual income (or a mortgage 28% of your monthly[1]). I don't see the line crossing 3 anywhere on that chart. [1]Which translates to 4.2 on a 80/20 loan

jobigoud 5y ago
> I don't see the line crossing 3 anywhere on that chart. The chart is for the average house, but the median income. Maybe the higher income are skewing the distribution of house prices.
SilverRed 5y ago
Going of the bank calculators, they all say that they will let me borrow 6x my income.

bogomipz 5y ago

Can anyone explain what the cause of the steep cliff drop in the first graph that occurred between 1953 and 1959 might have been? Would this be the postwar suburban building boom driving down prices? Something else?

RoadieRoller 5y ago

Zillow and Open Door are manipulating the home prices in US. https://news.ycombinator.com/item?id=27765536 https://news.ycombinator.com/item?id=27765536 Cheap Loans, surplus cash, and inventory hoarding.

mmaunder 5y ago

IMO we are in an inflationary cycle that is being underreported. Everything is becoming more expensive including you. It’s just that housing is becoming expensive faster than you are. The US has a strong incentive to inflate their way out of debt post Covid. But the optics are catastrophic if they do it overtly. So they’ll keep reporting it low as long as possible. Look around you for reality. If I’m right, you’ll want to take on as much fixed rate low-interest debt as you can stomach. Which explains why housing is getting expensive faster than you are.

MeinBlutIstBlau 5y ago
It still boggles my mind. I started working in 2009 when 7.25 became the defacto minimum wage. But since then, I've noticed that the cost of everything has almost doubled faster in just the past 2 years than it did in the preceding 10. It's almost as if limitless government stimulus and inflation is bad for the economy...

autoliteInline 5y ago

Did I miss the part of the article that mentioned the average size of houses over time? The increasing code requirements over time?

rc_mob 5y ago

half the price of house is still more than i paid for it. market has been goofy

ryanSrich 5y ago

The most surprising thing here to me is that a home is 5 times annual income. That seems insane to me. That would mean someone making $250k per year would be able to afford a $1.25m home. I don’t see how that’d work, unless that person has almost no other bills and or lives in a state with extremely low income tax. After taxes and other expenses $250k / 12 is not that much. Certainly not enough to buy a $1.25m home.

unethical_ban 5y ago

Just throwing an idea out there: what if we abolished or heavily penalized long term renting? No more renting a house for years. No more apartments. If you are in a long term contract, you get equity.

qwerty456127 5y ago

To me it feels like home prices are the single most important bug in the economy. If we filter out skilled IT professionals (and other high-paid jobs), fundamentally rich people and also extremely poor (homeless in developed countries and those living in stick/garbage huts in the "3-rd world"), the rest mostly spend almost all their income on paying for their home. We invent new technologies but average homes become neither more affordable nor more perdurable. The fact most of the ordinary people can never afford buying/building a home without taking a loan they will have to pay for decades to come seems outrageously absurd to me.

SilverRed 5y ago
Seems to me that there are two problems. As jobs and facilities are becoming more centralized. Cities are expanding and rural towns are shrinking. So even without any population growth, houses that people actually want become more expensive. And the second problem is the expectation that a piece of land near a city will always be more in demand tomorrow than it is today. This is almost certainly true based on the first point and doubled by the fact that populations are still expanding. This expectation means you can buy a house for way more than you believe it is worth since you know it will be worth even more later. The only solution I can possibly see is moving more people from single family houses in to apartment buildings which allows virtually infinite supply within close range to jobs and facilities that people demand.
- noahtallen 5y ago
  The main problem with that solution is that most young-ish people know that if they ever want to own a house, they need to get into the game early so they can build equity. Besides that, rentals are often way too expensive (matching or exceeding a mortgage payment in big cities) without providing a similar amount of value: - Can’t do what you like to the interior, like painting walls. - Not built with the same sort of layout homes have. For examples, loads of three bed/three bath rentals meant to be split by roommates, but not many with a nice room for a home office. - Often does not provide an important amenity (like AC). - Almost definitely less space. - Likely less peaceful, especially if noise insulation between units is poor. (Getting bothered by a neighbor is a lot easier.) If we want to attract the type of people who want to buy a home to instead rent for the long term, those aspects need to become better. Apartments need to be more desirable than houses. And that means the folks building apartments and the apartment management companies need to offer a lot more for less. And since apartment buildings are also investments, that will never happen, because the ultimate goal is profit. I feel like in both cases, it comes back to the fact that property is an investment. It doesn’t make sense for anyone to loose value on an investment, which means there is an inherent pressure to make prices go up over time

dboreham 5y ago

And people scoff at cryptocurrencies...

wffurr 5y ago

I never learn anything in these threads. It seems like everyone is just talking past each other with their pet theories and no particular way to tell which if any are correct or useful.

akudha 5y ago
Economics is a weird subject, even economists get predictions wrong all the time. It is easier to talk about logical subjects like Math or programming, vs something like social issues or economics. I don't know how to have a useful conversation about such topics, I understand your frustration. I suppose everyone has good intentions and is trying to help at the same time by sharing their theories - which could be bad or good, but definitely hard to digest, as a reader
- mbesto 5y ago
  > Economics is a weird subject, even economists get predictions wrong all the time. It's because economics is seen as a science but ignores (not completely) human behavior. You can't test economic theories with the scientific method because there is simply no way to create a market vacuum to test. This is why behavioral economics is so interesting IMO. It's not definitive but it at least it provides explanations.
  - xyzzyz 5y ago
    > It's because economics is seen as a science but ignores (not completely) human behavior. That does not describe what economics has looked like for a few decades already. These days, it’s all about human behavior. Just look at the sample of newest papers collected at NBER: https://www.nber.org/papers?page=1&perPage=50&sortBy=public_date#listing-77041 https://www.nber.org/papers?page=1&perPage=50&sortBy=public_... If you look at these, it should be clear that most of published economics these days is basically social science done using quantitative methods. The homo economicus has always been a straw man, but these days it is laughably so.
  - dragonwriter 5y ago
    > You can't test economic theories with the scientific method because there is simply no way to create a market vacuum to test. The scientific method doesn't require laboratory controls; statistically controlled experiments are just as consistent with the scientific method. Now, there are branches of economics which are, more of less overtly, not empirical science but essentially theology, the Austrian school being the most well-known, overt example, and they and their practitioners tend not to be distinguished from those of empirical economics when covered by the mainstream media...

anonu 5y ago

https://fred.stlouisfed.org/series/PSAVERT https://fred.stlouisfed.org/series/PSAVERT Personal savings rates are at all time highs. So it's very possible the landscape has shifted under our feet. The past is not prologue to the future...

irrational 5y ago

> Historically, an average house in the U.S. cost around 5 times the yearly household income. I just purchased a house in July for 3.7x my yearly household income. The above fact makes me feel better about the purchase ;-)

blobbers 5y ago

In order to raise home values further, they'll start offering a 40 year product to everyone. This will lower the monthly cost further. It makes sense, as the bank wants to keep the money train rolling. It's actually "good" for everyone; underwriters (lower payment = lower risk), salespeople (continue to close), C-level execs (keep that money train rolling), home-buyers (heck yeah I can afford that 4 quadrillion dollar home). I believe the way they're currently handling "lowering payments" in delinquent loans in the United States is by offering 40 year terms on loans as adjustments. Rather than foreclosing, they offer a more palatable monthly rate by extending the loan for 10 years.

jxramos 5y ago

I haven't seen this commented on, but I find it really intriguing the button at the bottom to buy the data for $19.95 USD. Pretty interesting form of side business.

ZeroGravitas 5y ago

I wonder if it's possible to capture how much money is being made by owning the house. So you'd need to estimate future sales price and then remove that from the monthly mortgage price before comparing to income. I've heard of people in London who's asset appreciation makes them more than their wage each year, but not sure how representative that is. People who happened to own property in a pre-gentrified area would have negative costs. Just holding the asset as prices rise would be worthwhile. In a socialist scheme that owner would be everyone/the government. Meanwhile, someone moving into that same area will be paying more for the already baked in price rise assumption which may entirely cancel out the expected future asset price increase. Who pays and who benefits is random and unrelated to any useful economic input, like building homes people want in areas that need people. But then how do you price in the uncertainty? Maybe the market collapses for several unrelated reasons. Feels like there should be an insurance/socialist answer to this problem, where the risks and rewards of property investment are shared between people with no control over them. Land value tax is one element of this. Normalising renting and having democratic control over the landlord/renter contracts is another. Singapore seems to do well with this, but not sure how translatable this is. Feels like the kind of thing that needs to go very wrong before the sensible approach gets taken. Society generally seems to need to touch the fire to believe it's hot. edit: business idea - private land value tax. You buy into a corporation, that corporation buys lots of buildings in popular locations. You pay a land value tax to the corporation and a market rate 'rent' for the building. As the land value tax rises, you might get priced out and be forced to move to one of their cheaper homes (or cash out) but if the land value tax gets too high for anyone, the corporation can sell the building to someone else at market rate, or if the location is great, knock down the existing building and rebuild more compact apartments to spread the land tax over more owners. Basically the Singapore model, but private. You get to live in cool places, move easily (if the scheme is big enough) and profit from the insane property bubble with hedged risk.

brailsafe 5y ago

Seems like there were a few memory leaks in the last century.

cannabis_sam 5y ago

Our parents really ran this shit into the ground didn’t they?

KETpXDDzR 5y ago

One important change: Funds and investors are allowed to buy single family homes starting 2012. That's one reason for the crazy housing market and makes the price to income ratio less useful. (Src: https://www.theatlantic.com/technology/archive/2019/02/single-family-landlords-wall-street/582394/ https://www.theatlantic.com/technology/archive/2019/02/singl...)