Price-to-Income Ratios Offer Insights
Understanding this market metric could help brokers make better decisions at local levels
By Bohdy Hedgcock, associate, and David J. Lynn, managing director, ING Clarion Partners
With plummeting home
values playing a large role in
the current recession, everyone from individual homeowners to real
estate professionals has a keen interest in
what might happen to home prices going
forward. For residential mortgage brokers,
the question is particularly important,
both in terms of marketing to new clients
and underwriting loans.
Any analysis of the housing market
should consider a combination of demographic, economic, pricing, and supply-and-demand variables to estimate future
performance. One key metric is the relationship between median home prices
and median household incomes — the
price-to-income ratio (PIR) — at national
and local levels.
Understanding the relationship between prices and incomes, along with
other variables, may help inform a forecast for the pace and magnitude of continued price declines, as well as an eventual
housing-market recovery. Having this understanding also can help brokers better
plan when to ramp up their business efforts in specific markets.
700
100
0
600
Indexed to Q1 ’76 = 100
500
400
300
200
Median Home Price (Q1 ’76 = 100)
Median Household Income (Q1 ’76 = 100)
Q1 ’70
Q2 ’71
Q3 ’72
Q4 ’73
Q1 ’75
Q2 ’76
Q3 ’77
Q4 ’78
Q1 ’80
Q2 ’81
Q3 ’82
Q4 ’83
Q1 ’85
Q2 ’86
Q3 ’87
Q4 ’88
Q1 ’90
Q2 ’91
Q3 ’92
Q4 ’93
Q1 ’95
Q2 ’96
Q3 ’97
Q4 ’98
Q1 ’00
Q4 ’08
Q3 ’07
Q2 ’06
Q1 ’05
Q4 ’03
Q3 ’02
Q2 ’01
Sources: ING Clarion Research & Investment Strategy, National Association of Realtors, U.S. Census Bureau, Moody’s Economy.com
the historic hurdles to homeownership
and encouraged speculation in the housing market.
Recently, falling prices have helped
narrow this gap. But with incomes expected to stagnate or decline in response
to various economic pressures, home
prices will need to continue to fall before
a more typical relationship between price
and income returns.
bility and volatility in individual markets.
According to research data, the median
home price in Los Angeles, for example,
historically averaged nearly five times the
median household income and reached a
peak of more than 10 times the median
household income in the first quarter of
2007. The median home price in Phoenix, on the other hand, historically averaged less than three times the median
$700,000
LOWER INCOMES
HIGHER PRICES
San Francisco
HIGHER INCOMES
HIGHER PRICES
$600,000
Median Existing Home Price
$500,000
New York
San Diego
Los Angeles
West Palm Beach, Fla.
Riverside, Calif.
Ft. Lauderdale, Fla.
Las Vegas
Raleigh, N.C.
Orlando, Fla.
Charlotte, N.C. Denver
U.S. AVERAGE Austin, Texas
Phoenix
Jacksonville, Fla.
Dallas
Houston
Orange County, Calif.
$400,000
Boston
Washington, D.C.
$300,000
Miami
$200,000
$100,000
LOWER INCOMES
LOWER PRICES
HIGHER INCOMES
LOWER PRICES
$0
$30,000 $40,000 $50,000 $60,000
Median Income
Sources: ING Clarion Research & Investment Strategy, National Association of Realtors, U.S. Census Bureau
$70,000
$80,000
$90,000
*Data for the fourth quarter of 2008
second-most affordable area historically,
the rapid acceleration of prices relative to
incomes eventually pushed the PIR above
the national figure.
Elsewhere, metropolitan areas in Florida are notable for their generally lower
PIRs. Of five Florida cities studied — Fort
Lauderdale, Jacksonville, Miami, Orlando
and West Palm Beach — all except for
West Palm Beach had long-term-average
PIRs below the U.S. average. Historically,
with West Palm Beach again the exception, these Florida markets have been less
volatile than Southwest markets. Prices
showed relatively steady growth until
the boom that began around 2000. Most
of the Southwest markets, on the other
hand, also saw large price swings in the
1980s and 1990s.
Spreads between long-term-average
PIRs and current PIRs suggest one measure of the potential additional price adjustments necessary to return balance to
the housing market. Areas more in concert with historic PIRs should generally
be expected to hit a pricing trough earlier than markets where the relationship
remains skewed. Because of the earlier
start to the housing downturn in the
Southwest, those markets appear closer
to reaching sustainable PIRs than Florida markets.
Prices past and present
Despite the direct relationship at the
Historically, home-price gains have closely
national level, the relationship between
mirrored household-income gains, both
price and income varies significantly by
nationally and across individual metropoli-
metropolitan area, with housing in some
tan areas. This relationship is evident in the
cities consistently more expensive rela-
correlation between prices and incomes at
tive to local incomes. Looking at the PIR
the national level from 1970 through 2000 in a number of U. S. metropolitan areas
(see chart “Change in Median Home Price relative to the national figure at the end
Vs. Median Household Income”). of 2008 (see chart “Regional Affordabil-
The froth in home prices that began ity Comparison”), some areas tend to be
around 2001 is evident in the large gap that more expensive, with households allocat-developed between incomes and prices. ing a larger portion of income to housing.
It appears that the sharp rise in home Research suggests a variety of reasons for
prices in the early years of this decade the variations, including a combination of
resulted from a variety of factors besides economic and demographic conditions
income growth — including historically (e.g., productivity, in-migration and out-low mortgage rates; a downturn in other migration), amenities (e.g., weather and
asset classes that encouraged investment environmental conditions), and supply
in real estate; and the proliferation of sub- constraints.
prime (aka, nonprime) lending and other On a market level, PIRs have varied
financing options that removed some of through time, affecting relative afforda-
household income and peaked at just more
than five times the median household income in the first quarter of 2006.
Different market stories
Of five Southwest metros studied — Los
Angeles; Phoenix; San Diego; Orange
County, Calif.; and Riverside, Calif. — only
Phoenix was historically more affordable
than the U. S. average, dating from the early
1980s. In Phoenix and in Riverside, the
■ ■ ■
While there has been considerable discussion recently about positive signs in the
housing market, PIR indicators show that
national median home prices will continue
to decline, though at a slower rate, into the
last quarter of this year.
Understanding how prices and incomes
relate may help mortgage brokers time their
activity and plan for the developments of
the next six months and beyond.
Bohdy Hedgcock is an associate in ING Clarion
Partners’ research-and-investment-strategy group. He
holds a master’s in urban planning from the University
of Colorado. David J. Lynn is managing director and
head of the research-and-investment-strategy group.
Lynn earned master’s and doctorate degrees from
the London School of Economics. Reach Hedgcock at
(212) 808-2192 or bohdy.hedgcock@ingclarion.com.
Reach Lynn at (212) 883-2582 or david.lynn@ingclarion.com.
