Home Price to Income Ratio

Interpretation

Historically, a home in the US cost around 5 times the yearly median household income. However, during the housing bubble of 2006, this ratio exceeded 7. In other words, a typical single-family house in the United States cost more than 7 times the US median annual household income.
The home price shown in the chart is derived from the S&P/Case-Shiller Home Price Index, a widely recognized measure developed by Robert J. Shiller and Karl E. Case. It tracks the price changes of existing single-family homes using a "repeat-sales" method to provide a quality-controlled view of the market. Since the Case-Shiller is an index (with a base of 100 in Jan 2000), it is multiplied by a constant of 1800 to approximate the Average Sales Price of Houses Sold.
When assessing affordability, it's essential to consider not only the price but also mortgage rates. The average 30-year mortgage rate in the US peaked in 1981 at 18.63% and declined over the following 40 years. However, in early 2022, yields began to rise again, making homes less affordable and subsequently leading to a decline in real home prices.

Data Sources

• Recent data
• Federal Reserve Bank of St. Louis: S&P/Case-Shiller US National Home Price Index
• Federal Reserve Bank of St. Louis: Median Income since 1983
• Historical data
• census.gov Median Income from 1947 until 1965 (page 877)
• census.gov Median Household Income from 1967 until 1983 (Table D-1)
• Online Data Robert Shiller: Historical US Home prices until 1983

Further Information

• TradingView Chart: Average Sales Price of Houses Sold / Median Household Income in the United States
• LongtermTrends: The Real Home Price
• LongtermTrends: Stocks vs. Real Estate
• LongtermTrends: Real Estate to Gold Ratio
• LongtermTrends: Yields for Mortgages, Corporate Bonds, and Treasury Bonds

Interpretation

Rather than dividing home prices by the median household income (see first chart), this chart divides the Case-Shiller Home Price Index by the average personal income. It is important to note the distinction between median household income and average personal income when considering affordability. Median household income represents the income level that falls exactly in the middle when all households are ranked from lowest to highest income. This measure provides a more representative view of the typical income within a population, as it is less affected by extreme values or outliers. On the other hand, average personal income calculates the total income earned by individuals and divides it by the total number of individuals, regardless of household size or composition. While average personal income provides an overall average, it can be influenced by a small number of individuals with very high incomes, potentially skewing the perception of income levels for the majority.

Data Sources

• Federal Reserve Bank of St. Louis: Personal income per capita

Interpretation

This chart gives a different view of the data from the chart above, comparing the percentage change between the estimated home price (Case‑Shiller Index × 1800) and both the Median Household Income in the US and the Average Personal Income in the US over time.