Historically, median home prices and median incomes have always shared a close relationship. From the mid-1970s to 2001, the historical ratio of median housing value vs. median household income was consistently between 2.6 and 3.0.'' -- A decent metric for home prices. Another one is rents. They use rents to calculate housing's contribution to inflation, but they don't use it to calculate housing's true value?
What this essentially means is that median home prices were (on average) 2.8x the median household income for the last 30 years. Using this 2.8 formula, it is very easy to estimate what median home prices would be if the most recent bubble never happened.
U.S. Median Home Prices
Current Median* What the Median Should Be % Difference
$208,400 ---------- $134,692 ------------------ 35%
Median household income information is not yet available for 2007, so we will be using
median household income data for 2006 in this example and in the following examples. It should make very little difference since household incomes increased by 4 percent at the most (and that's a very generous estimate) in 2007.
The median U.S. household income is $48,201, according to the U.S. Census Bureau. When we multiply that number by 2.8, we get $134,692. That's what the U.S. median home price should be right now. The actual median home price is about 35 percent higher that that.
California Median Home Prices
Current Median* What the Median Should Be % Difference
$402,000 -------------- $158,606 ------------ 61%
Prices have already fallen by six percent nationally and by more than 11 percent in the West in a year over year comparison. Home prices must continue to fall for the average American to be able to afford a home.
The real question is: how long will it take?
The more the government intervenes to prop up prices, the longer it will take for the adjustment to bring prices back to affordable levels and with unintended consequences.
