One thing that struck me during the height of the housing boom was how out of wack housing prices were with income. At the time, I owned a modest condo in Dallas with a nominal value equal to a little more than 1.25 of one year’s income for me. I remember thinking: who can afford $300K or $600K notes, particularly for a first home, as folks were doing in places like California and Northern Virginia? In response I’d hear dazzling tales of “interest only” loans, the value of leverage, a “new paradigm,” “free money,” blah blah blah. As much as it was mystifying, it all sounded more than a little fishy and unsustainabe. If for years and years the vast majority of housing values were in the $75-200K range (in real dollars), which was roughly in the 2-4X annual income range for most homeowners, how could it now make sense that homes were valued at 10X or 20X the annual income for the average homeowner?
Well, they didn’t. And, in fact, income/housing price disparity is one of the great predictors of high foreclosure rates:
If you are looking at the worst zip codes in the country for foreclosures, they all tend to share some of the same characteristics. The are slightly below the state averages in terms of value while the income level of the residents are significantly below the state average income levels.
This price/income gap is in my view a very sensible indicator of a potential “bear” local real estate market going forward, including where I now live in Florida. Orlando has an average local income maybe .75 of what was normal in Dallas, but where housing values are probably 1.25X to 2X the Dallas values. Things will bottom out, I believe, at somewhere close to historical levels, which have gotten very out of kilter: