Do Incomes Matter to Home Prices?

posted on November 23rd, 2012 filed under: Financial Responsibility, Real Estate Market Data, Real Estate News

A little dose of reality to put the black in your Black Friday . . .

Price-Income Ratio (NAHB) -- Miami -- Chart, Graph -- 1991-2012

Home prices have stabilized recently, and even gained in some areas.  But this recent price action may face significant headwinds going forward.  The ratio of median home price to median income in the Miami area has once again reached the highest level on record outside of the housing bubble.

The price-income ratio is like the price-earnings ratio of stocks.  When it’s historically high, so is risk.  And when it’s historically low, that’s usually a good opportunity.

The most important factors in the recent bounce in the price-income ratio are probably (1) record-low interest rates that enable buyers to pay more, and (2) continued investment by cash buyers, for whom income is by definition irrelevant.  Perhaps these influences will persist, but rates may not fall much further (having fallen very little since the Federal Reserve announced QEternity), and cash buyers seem like slender support for a major metropolitan area’s housing market.

Of course, it’s a bit late to time the market.  The crash already happened.  And with rock-bottom interest rates, you can’t go too wrong in buying that perfect home if it comes along.  Just be aware of the possibility of detours along the road to recovery.

[Geeks’ note: A few of the data points in the above chart were missing from NAHB statistics, and those gaps were filled by interpolation.]

posted by Tom Landry // This entry was posted on Friday, November 23rd, 2012 at 9:58 pm and is filed under Financial Responsibility, Real Estate Market Data, Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed.

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