Is Real Estate In A Bubble? The Only Chart You Need

When the economy busted out in 2009 everybody noticed how much real estate prices plummeted around the country. You probably heard at least a few horror stories about people who owed more on their mortgage than their homes were worth (underwater)Now, the majority of Americans have recovered enough to be able to try to buy a home or an upgrade from their current one. The problem is that those bust out prices set a precedent. People love seeing on the news that economy is strong “MAGA derrrrrrrp!” but don’t want to pay strong economy prices. They want the income of “things going well”, but the home prices of “the economy is in the shitter”. So in the interest of pulling the veil back of where housing stands it then makes sense to compare how much money people are making vs. how much homes actually cost.

The National Association of Homebuilders/Wells Fargo publish a study called the Housing Opportunity Index, which pits income and home prices against each other.

Infographic: Soaring House Prices Hurt Home Affordability | Statista

You can see that the yellow Opportunity line doesn’t deviate a huge deal from its average. It typically hangs right around 60. When that line dropped to 40 in Mid 2006 is when we got in trouble. What the number is showing you is the percentage of households with a median* income that can afford to buy a median priced home. The key is that the number doesn’t have to move very much to have a huge impact. Just think that if it moves from 60 to 40 that means approximately 20% less of the population can afford to buy a home.

Now here is the catch to that chart. Its really damn hard to average out costs when you include places like San Francisco and Bumf*ck, Mississippi. This is why you need to go local and look at your closest metro area. The easiest way to go about it is to just google something like “Los Angeles Housing Opportunity Index”. With that search we can find the most recent LA housing opportunity numbers.

california 2018 3rd quarter housing.JPG

This tells us that right now 30% of people in the Los Angeles metro area can buy a home and that the household minimum income to qualify for a mortgage is $112,200. San Fran you need to make over $200k. Over 3.5x the national average. Bummer, right?

Here’s the thing though, real estate doesn’t just “crash” locally. The LA opportunity number is less than half of the current national number of 56.4 from the the NAHB/Wells Fargo study**. Some areas will always run at a premium because of where they are and what they offer, but we have to look at the big picture. So…

Real Estate might be ungodly overpriced in your area, but nationally we are far from a bubble. Homes are just slightly above the historical average pricing. With a National average of 56.4% of households in the US able to afford a home, it appears people holding out for a crash to buy a home in LA, NY, San Francisco, etc may have to wait quite a while.

If you want all the data for the NAHB/Wells Fargo Opportunity Index, including metro areas and histories, you can get it all here in nerdy little excel spreadsheets. Otherwise, Google is your friend…

BONUS TRIVIA: A commonly sited rule of thumb is that in healthy economic conditions the cost of your home should be no more than 2.6 years of Household Income.

Household Income x 2.6 = Home Price

Stay Tuned to learn about what we can learn about real estate from two guys named Case and Shiller!!

More info to digest:

Housing in the US is too expensive, too cheap, and just right. 

75 percent of LA residents can’t afford to buy in LA

*For those that don’t remember, median means middle. It’s not the average, but it’s halfway between most and least of something.
**Yes, we realize on the CA opportunity numbers, their US average is a little lower. Likely due to timing and data sources of the studies/calculations but it’s close enough for our purposes.