Monday, January 28, 2008

California: 61% above historic norm

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.

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.

Median Home Prices by Region

Region Current Median* What the Median Should Be % Difference
Northeast $258,600 $145,760 44%
Midwest $159,800 $133,941 16%
South $173,400 $122,875 29%
West $309,800 $146,297 53%

It is obvious to most people that we are in the midst of a national housing bubble. Nevertheless, there are still plenty of naysayers who are telling anyone who will listen that there are local bubbles only.

Using the 2.8 formula, it is clear that local bubbles aren't the problem. Median home prices are inflated in every U.S. region. In the West, where the median household income is $52,249, median home prices are more than double what they should be. The situation is similar in the Northeast, where the median household income is $52,057.

Median home prices are not quite as high in the South and the Midwest, where median household incomes are $43,884 and $47,836 respectively. Even so, prices are still 30 percent higher than what they should be in the South and 16 percent higher than what they should be in the Midwest.

California Median Home Prices

Current Median* What the Median Should Be % Difference
$402,000 $158,606 61%

There is no doubt about it. California was hit hardest by the housing bubble. Although prices have always been slightly elevated in the state, they grew by leaps and bounds during the housing boom.

The result is that home prices are 61 percent higher than they should be given California's media household income of $56,645. In some areas of the state, such as San Francisco and Oakland, median home prices are so inflated that they are more than 11 times the median household income.

From: What if housing bubble did not happen


Anonymous Anonymous said...

Nice post. Seems that the kool aid drinking went out of control. The "Alt-A crisis" will be coming soon to the Bay Area.

10:11 AM  
Anonymous Anonymous said...

Thanks for the post. Would be interesting to see what kind of premium over that 2.8X average that various parts of the Bay Area have had historically. Might give us a local sense of how long and how much of a correction needs to happen.

12:56 PM  
Anonymous Anonymous said...

The Bay Area housing bubble has just begun to burst. Right now, the market is still in the denial stage, where overall prices are still way out of line with market fundamentals. That's why inventories are through the roof and nothing is selling. Sellers are still clinging to the belief that this region is in a separate paradigm from the rest of the state, and the inflated prices here are based on fundamentals unique to this region. Once that mindset is shattered prices will drop like a runaway elevator.

4:55 AM  
Blogger Ethan Himadri Ish said...

This comment has been removed by the author.

1:28 PM  
Anonymous Anonymous said...

uuh..not going to happen
the latest stimulus package and conforming loan limit increase will make sure of that

1:29 PM  
Anonymous Anonymous said...

Nice post. And from a 'common sense' perspective this should happen. You need to make an insane amount of money to afford a decent home in the Bay Area. It doesn't FEEL right. We shouldn't be working this hard for so little. I'm hopeful that the market will correct, but there are so many interests wanting to both coddle instant gratification Americans as well as the continuing greed of banks and financial institutions.

The thing is, more buyers need to get educated and say NO until the prices really do drop.

7:16 PM  
Anonymous Themblues said...

"Uh, not going to happen..." Yeah Bush is REAL Savior. Idiot.

I do agree with the comment that said "just say no" to high home prices. I don't care what anyone says, home prices are still way too high. I mean at the peak some nimrod paid $577K for a 1087 s.f. 3/1 shack on a small lot in a mediocre part of the east bay, Pleasant Hill. I am actually glad that these idiots are getting spanked. I can't really afford anyhing over $375K and I make $75K a year. That would be 5x income, almost double the 2.8x average before 2001. I say let the housing market crash fully with no help so we can get back to where we need to be.

12:11 PM  
Anonymous Anonymous said...

Wake up everyone. We are in a lending crisis and have been all along. Had shady loans not been available, the housing market would not have spun out of control. The realestate industry is the only industry that I know of that has a higher percentage of interest tied to a higher dollar value. In all other industries the higher the sales value the lower the percentage. The banks should have a staggered interest rate depending on the amount of money being borrowed along with better qualifying criteria. Not to mention realestate agents and lenders need to start being more realistic about the percentage they charge. The reality is that home prices dropping won't change anything if you can't qualify for a loan and investors don't invest. Most americans don't qualify for the little amount of money that is out there because they don't save. People need to stop panicking and go back to basics. GET AN EDUCATION, GET A JOB AND LEARN HOW TO SAVE.

9:36 AM  

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