Tuesday, December 16, 2014

Is the Housing Market Signalling a Top?

With house prices rising across many markets in the United States, it's starting to look like the housing market is on the path to healing.  Unfortunately, when we look at one metric, it's also starting to look like the housing bubble is back.  Please keep in mind that I am using national statistics for the purpose of this posting; each market will have its own variables with some remaining very affordable and some markets being extremely unaffordable when measured in terms of household income.

Here is a chart showing the median selling price of a new home since 1963:

Other than the blip during the Great Recession, it certainly appears like housing prices have been on a  climbing trend since most of us had the summers off from elementary school.

Let's focus on the period from the mid-1980s to the present:

At $305,000 in October 2014, the median selling price of a new home is now up $42,400 from its pre-Great Recession peak of $262,600 in March 2007 and up $100,800 from its post-Great Recession low of $204,200 in October 2010.  That's an increase of 49.4 percent in just four years.

Now, let's look at the other component in this equation.  Here is a chart showing what has happened to median household income since 1984:

Unfortunately, we don't yet have median household income for 2014 from the Federal Reserve but, according to Sentier Research, in July 2014, median household income was $54,045, a number that I will use in the next graph.

Now, let's look at housing affordability, using the definition coined by Demographia who define housing affordability using the median multiple which is the median price of a home divided by the median household income.  As the median multiple rises, housing becomes increasingly unaffordable as shown on this table:

Here is what has happened to the median multiple of new family homes in the United States since 1984:

As you can see, nationwide statistics show that housing became increasingly unaffordable in the late 1980s, rising from a median multiple of 3.4 in 1984 to 4.4 in 1988 and 4.2 in 1990.  There was a slight downward readjustment after the recession in 1990 and during the period between 1991 and 2000, housing remained relatively affordable with the median multiple remaining between 3.7 and 3.9.  This is largely because median household income kept pace with rises in the value of homes.  This began to change during the first decade of the new millennium; increases in median housing prices outpaced increases in median household income, resulting in the median multiple rising to 5.1 in both 2006 and 2007.  According to Demographia, the national market for new family homes would be considered severely unaffordable at this level.

As we all know, housing prices readjusted significantly downward during and after the Great Recession, with the multiple hitting a low of 4.2 in 2009.  Since then, save for 2012, the national median multiple has continued to rise, hitting the highest level that it has been at in two decades during 2014 when it hit 5.2 in July 2014.

Demographia's analysis of the median multiple suggests that these high multiples are unsustainable; families simply cannot afford to continue to buy homes in markets where price increases substantially outstrip growth in household income.  The Great Recession proved this as median house prices fell to more affordable levels.  Interestingly, it looks like housing market history is repeating itself, an issue that could be a substantial problem when interest rates on mortgages begin to rise in this post-QE environment.  Only time will tell whether the housing market gains over the past few years are sustainable or whether the housing market will retrace its steps to a level that is more affordable for a median American household.


  1. Housing prices will come down. I have already seen it on the eastcoast. You can try to sell at any amount but for houses in the 150-100k price range listed they actually sell for 80-110k after sitting on the market for over 200 days on average.

  2. In much of America's Midwest many houses remain empty or under leased. In 2005 and 2006 prior to the housing collapse many people were looking at second homes, for investments or as a vacation getaway. Today many of those people have shed the extra homes and some have doubled up with family or friends reducing the need for housing.

    In many areas of America we are pushing on a string and calling it demand when someone who can barely pay the rent is encouraged by the government to buy a house they can neither afford or maintain. We have a shortage of "qualified" buyers and renters. More on this subject in the article below.