One of the very first posts that I did on the blog took a look at the current prices versus the traditional average prices. I thought I would take a look back for the benefit of our newer readers and see how close we are now. The data comes from the Nation Association of Realtors.
The first chart shows the median price from 1980 through 2006. As you can see the prices fluctuated a little bit. You can clearly see the early 90's bubble and the mid 90's correction. Compared to this bubble the last one was just a speed bump. I put the red line on the chart, starting in 1980 and continuing through the peak of the last bubble out to today. Using that as a trend line, median prices today would be about $240K. But that trend line is through the peak of the last bubble. A very optimistic trend line. If you were to draw that line through the trough in the mid 90's the median price would only be about $150K. That's probably on the pessimistic side so if we split the middle the median should be around $200K. At the current rate of decline we should hit that in about 6 months. Currently we are at $247k and dropping at about 5% per month.
The second chart shows the ratio of median price to median income. As you can clearly see the ratio of median income to median home price stayed primarily between 2X and 3X, even through the last bubble it just barely broke 3X. But in this bubble it peaked at something like 8X the median income. If my data is correct the median income for Riverside County is currently around $54K. Oh look, we end up at that $150k number again.
I hear a lot of people saying that prices will never fall that low. I don't know why they think that. These ratios have been the same for many many years. Much farther back that these charts show. Has anything changed in the last 10 years? Contrary to Realtor spin, we are not running out of land, you could build millions of homes in the IE on all the vacant land. It sure not the weather. It's not like we live at the beach, half the year it's hotter the hell here. There's not a great job market, the pay sucks out here, which is why 1/2 the population commutes to LA. The air quality is on par with post explosion Chernobyl most of the year. So why would anyone think prices are not going to fall back to traditional ratios. The only thing that is not factored in is the size of the homes. Maybe we should add at least 10% to the median price for the increase in the home sizes over the last few years.
Do you believe that the prices will fall back to traditional levels? If not what is your reasoning?