There’s no shortage of ways to measure housing market performance. If home prices are your favorite barometer of market vitality, we encourage you to check out absorption rates, percent of list price received and days on market as well. But there’s also no shortage of ways just to measure home prices. Here at MAAR, we produce monthly price metrics such the median sales price, average sales price, median price per square foot, average price per square foot and we even have our very own Housing Value Index. A slightly less well-known metric is the price to income ratio. The same way price per square foot normalizes prices by dividing out by the square footage of the home, price to income ratios normalize prices by dividing out by the median family (or household/per capita) income. For this particular study, we’re using the median sales price compared to the median family income.
While the median sales price was within 3.5 percent of its all-time high in June of this year, the price to income ratio still has 20.0 percent to go before reaching its previous peak (from 2.5 to 3.0). So what does that tell us? First, this might diminsh some concerns over whether another bubble is forming. Second, and despite consistent price increases, it tells us that consumers are not overstretched. Third, it tells us that the current for-sale inventory could be more affordable than some might have thought, perhaps based on other indicators. Fourth, as incomes rise (even in tandem with prices), this ratio should remain fairly stable, since both sides of the fraction are scaling up together. The ratio of 3:1 is 3. The ratio of 6:2 is also 3. If the numerator and denominator scale together, the relationship can remain the same. It’s also worth noting that several major cities in the U.S. as well as other countries have price to income ratios upwards of 10.0.
At a time when the median and average sales price measures both near their previous highs from 2005/6, it’s important to use other measures to either confirm or challenge this trend. Even as some metrics return to levels not seen for years, it’s important to remember that we currently have extremely low supply levels, traditional market share still isn’t back to where it once was, new construction and condos make up a smaller slice of the sales pie than in the past and multi-decade low interest rates have joined forces with a recovering labor market and tightening rental market to bolster purchase demand. In other words, there are a number of factors that make today’s market different than the last time prices were this high. For that reason, now more than ever, it’s critical to examine market data through a variety of lenses so that we can get a more holistic perspective on what’s really happening given the shifts that have taken place over the last 10-15 years.
Remember: use the data for good, never for evil.
from Minneapolis Area Association of Realtors » Blog http://ift.tt/1LEnJ3x