Historically, the average cost of a house in the US has been around 5 times the yearly household income. However, during the housing bubble of 2006, this ratio exceeded 7. In other words, the average single-family house in the United States cost more than 7 times the US median annual household income.
The Case-Shiller Home Price Index is a widely recognized measure of the price level of existing single-family homes in the United States. Developed by Robert J. Shiller and Karl E. Case, it is considered the leading indicator of US residential real estate prices. The index is based on a scale of Jan 2000=100 and is multiplied by 1800 to approximate the average sales price of houses sold in the United States.
When assessing the affordability of a house, it's important to consider not only the price but also the interest rates on mortgages. The average 30-year mortgage rate in the US reached its peak in 1981 at 18.63% and gradually declined over the following 40 years. However, in early 2022, yields began to rise again, making homes less affordable, which subsequently led to a decline in real home prices.
Rather than dividing home prices by the median household income (see first chart), this chart divides the Case-Shiller Home Price Index by the average personal income. It is important to note the distinction between median household income and average personal income when considering affordability. Median household income represents the income level that falls exactly in the middle when all households are ranked from lowest to highest income. This measure provides a more representative view of the typical income within a population, as it is less affected by extreme values or outliers. On the other hand, average personal income calculates the total income earned by individuals and divides it by the total number of individuals, regardless of household size or composition. While average personal income provides an overall average, it can be influenced by a small number of individuals with very high incomes, potentially skewing the perception of income levels for the majority.
This chart gives a different view of the data from the chart above, comparing the percentage change between Case-Shiller Home Price Index (multiplied by 1800, as explained above) and Median Household Income in the US and the Personal Average Income in the US over time.
This chart shows the ratio of the average UK house price to average annual income. The ratio declined steadily throughout the late 19th and early 20th centuries until the first world war. This was at a time when the vast majority of British people still rented from private landlords. The ratio fluctuated mostly between 4 and 7.5 through the rest of the 20th century and increased in economic booms and financial bubbles.
This chart gives a different view of the data from the chart above, comparing the percentage change between UK house prices and average incomes over time.
Page extended with data for the UK, by Will Beaufoy
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