Real Estate Prices vs. Income

Posted by Samuel A. Kiburz on Mar 30, 2022 1:23:26 PM

Share this blog post

    

Real estate is unique since humans need a physical place to live and work. Economics says the price of those physical places is constrained by the cost of the physical labor to build them.

In the past, an average house in the U.S. cost five times the yearly household income (aka our labor). As of November 2021, that ratio was 7.5 times, exceeding the record set in 2006 at 7.0 times.

The past is no predictor of the future, but in the physical world, we know that the ratio has a limit. So, what is that limit? Is it the 7.5, which results in a the current median family income of $62,000 paying $465,000 for a house? Can it go to 10 times and $620,000 for a house, or 15 times and $930,000 for a house? Most likely not. And the higher the ratio goes, the more “perfect” our economy has to be to sustain the record high house prices.