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Tuesday, March 20, 2018

How Elevated Are US Home Prices?

How elevated are US Home Prices?

Try very elevated. But not too much. Yet.

Median New Home Prices in the United States have been registering at more than five times the Median Household Income for the past four years. They are almost two standard deviations away from the mean ratio of 4.19 times income - a level which would place the ratio squarely in bubble territory. Right now, there is only a 3.4% probability that the market could go higher, assuming a normal distribution. These levels are slightly above the 5.06 times income ratio at the peak of the last US housing bubble.

Source: St. Lous Federal Reserve

One reason why this bubble hasn't popped yet is that the phenomenon is largely confined to new homes. The median sales price of existing homes have gone up and its house price to income ratio now stands at an estimated 4.01 times in 2017. Elevated for sure, but not quite the euphoric levels of 4.74 times income registered in 2005. Another reason is that sales volumes for new homes represent only 11% of total home sales.

Source: Federal Reserve

Nevertheless, on a blended basis, the ratio of house prices to income stood at an estimated 4.14 times. In contrast, the peak ratio was 4.81 times income in 2005. So the US real estate market has yet to surpass the unaffordability levels of the last housing bubble.


The US Housing Bubble Has Been Fully Reflated

US House Prices Have Climbed Upwards But So Have Incomes

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