Author Topic: Question Regarding Ratio of Median House Price to Median Income  (Read 298 times)

cysewr

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I have been watching the local housing market where I live for the past few years as I save for a down payment. A question that has come to mind recently is whether there is any useful interpretation of the ratio of median house price to median income. For example, in the city I am looking to buy (Spokane Valley, WA), the median house price is ~$280k, while the median income is ~$51k, for a ratio of about 5.5. However, somewhere like Cincinnati has a ratio closer to 3.2, and Seattle appears to be >10.

Are these ratios useful for gaining a sense of whether a given RE market may be in a bubble? My gut instinct is that the answer is "not really," judging by the history of prices in places like Seattle and SF, and the fact that rental prices are missing in this analysis (EDIT: as well as mortgage interest rates). But seeing the stark contrast between Cincinnati and Spokane Valley (despite a very similar median income) made me wonder.
« Last Edit: August 18, 2020, 01:11:32 PM by cysewr »

abstractartifact

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Re: Question Regarding Ratio of Median House Price to Median Income
« Reply #1 on: August 18, 2020, 02:53:13 PM »
these ratios can tell you something if you're looking for a place to buy investment property. if you're looking for a home in a specific market, i don't think it's going to tell you much.

conventional logic is that a rent/mortgage should be no more than 1/3 of your income. if median home prices are more than 1/3 median income (obviously need to do the math on P&I, take home salary relative to "income") then you're likely to find more renters. if salaries look big relative to home prices, you could use this as a reason to support adding value to a home/rental.

in the end, averages are just that, averages. plenty of people above and below. you obviously don't want a rental that few people in your market can afford. beyond that the specifics of a given property/neighborhood will be a lot more useful to you.

hope that helps.

AMandM

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Re: Question Regarding Ratio of Median House Price to Median Income
« Reply #2 on: August 19, 2020, 07:26:28 AM »
I think the ratio doesn't tell you whether market A is in a bubble, it just tells you that market A is relatively more expensive than market B.  I guess it does tell you where you should look to buy if you can keep your job and choose your location.

Abe

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Re: Question Regarding Ratio of Median House Price to Median Income
« Reply #3 on: August 19, 2020, 11:28:08 PM »
I think city-wide data iOS too coarse to answer your question. If the median home price is going up because a bunch of new McMansions are being made in an expensive new subdivision, but youíre looking at a normal house and that sector hasnít budged, then for you housing isnít in a bubble.

vand

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Re: Question Regarding Ratio of Median House Price to Median Income
« Reply #4 on: August 20, 2020, 06:06:54 AM »
I don't think you should be expecting any sort of parity between different areas... that's part of what makes a HCOLA a HCOLA.. and vice versa. 

Also, the sticker price is not the only consideration - different areas have different tax rates and a few other costs that are associated with home ownership.

clarkfan1979

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Re: Question Regarding Ratio of Median House Price to Median Income
« Reply #5 on: August 20, 2020, 06:25:54 AM »
I don't think this metric provides any insight into a bubble, it just identifies HCOL and LCOL areas. In a HCOL area, it is very common for people to spend 50% of their income on housing because they really enjoy living in the area.