Saturday, November 15, 2008
How far out of whack did prices get?
How far out of whack did prices get? And how far do they still need to fall?
I've posted many charts and graphs in the last year showing how far out of whack prices got. Those charts all show the median priced home was between 2.3 and 3.2 times the median income over the last 40 year. Today I did a little number crunching using the NAR's median price numbers and the California franchise tax boards numbers.
In 2001 the median family income in the IE was $51,036 according to the tax man. The NAR data shows the median priced home in the IE was $135,940 in 2001. That gives a ratio of 2.66x the median income. That's right in the middle of the average long term range. If only it had stayed there!.
2002 was when things became unhinged and 2003/2004 was when it really went off the charts. By 2006 the median priced home in the IE was $415k but the median income had only risen to $53,508. Bringing the ratio to 7.75x the median income. Riverside was actually higher than that. Our median peaked at about $465k putting Riverside closer to 9x the median income.
Currently the median priced home is around $225k for the IE. The median income is probably less now than it was in 2007 due to all the job losses. But using the 2007 number we still get a ratio of 4.20x the median income. That's still about 36% higher than in 2001.
You can see why I believe homes will come down to 2001 prices. That's where we fall back into the traditional ratios. Prices are very likely to overshoot on the way down. They may fall back to 1999 prices. Who knows for sure. When it comes to the future we are all just guessing.