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.

Read:

The US Housing Bubble Has Been Fully Reflated

US House Prices Have Climbed Upwards But So Have Incomes

The US Housing Bubble Has Been Fully Reflated

Last week, I came across this chart from Barry Ritholtz's BloombergView column "Confusion About the Financial Crisis Won't Die":





According to Barry Ritholtz:

"the ratio of home prices to income began to tick up in the early 2000s. By 2002, it was approaching its 1980s highs. It was a standard deviation away from the norm by 2004, and it reached at 2 1/2 times the norm in 2005. Housing, as a few of us observed long before the financial crisis bloomed, was a debacle about to happen.

 The housing boom drove employment in construction, mortgage brokerage, home furnishings and durable goods. We even had a bull market in real-estate agents. People pulled cash out of their homes at furious rates to fund renovations at first, then big-screen televisions, automobiles and vacations. The broader way to understand this is that wages were stagnant, inflation was starting to rise and rather than accept a drop in living standards, people used home equity to maintain consumption."

I noticed that the chart from Ned Davis Research only covered the period from 1977 to 2010. Home Prices, as indicated by the S&P/Case-Shiller 20-City Composite Home Price Index, have increased substantially since then.

So what does an updated version of the Ned Davis Research Chart look like right now? It looks like this:

The ratio of Median New Home Prices to Median Household Income has surpassed the highs of the last housing bubble and is once again more than two standard deviations above the norm - clearly unsustainable.  Housing is once again a debacle waiting to happen.