In a RealEstateJournal.com (published by Wall Street Journal March 14th 2008) article titled Mind the Gap: Home-Price Downside,  Scott Patterson and Mark Gongloff  talk about the relationship between Home prices and household income.  They put forth the idea that home prices should rise and fall roughly in pace with household income. 

This is a bit of an over simplification and does not take into account many other demands put on housing prices such as population increase in a given area, size (average home size was 983sqft in 1950’s, 1,500sqft in 1970’s, 2,080sqft in 1990’s and in 2004 it was up to 2,349sqft according to National Association of Home Builders, Housing Facts, Figures and Trends from March 2006)  and quality of homes being built,  zoning restrictions, Chicago has down-zoned many areas limiting many lots to 3 units where before 4 had been allowed, mortgage products bringing down monthly payments, even the FHA looking to extend amortization periods out to 50 years.  This all adds to house values.   You might even call it artificial appreciation.  (See Behind the Ever-Expanding American Dream House by Margot Adler for NPR.org)

We also need to look to see if they are talking about median or average, so when people start cashing in they are not usually spending their money on an “average” home, they are splurging on one that has whole house surround sound, in floor heating, 20k worth of refrigerators in the kitchen.   This also explains the real estate market lagging behind the stock markets by about six months and may also explain the spike in prices in the spring in highly desirable areas as a result of traders receiving yearly bonuses in january and then they go shopping armed with large down payments.  The home they buy when they have extra cash to splurge is not your average home but it does skew the average up. 

I would consider the fact that this is the tail wagging the dog.  If you were to look at the resale value of one property overtime that has not had extensive renovation work done it would not follow the highs and lows of that average home price index has overtime but would have a steady growth similar to the growth in median income.  The media has a tendency to focus on the extreme, it makes it more entertaining to consume.  You won’t see extended coverage of mild weather but if a hurricane hits even if it only affects a small coastal area it will be on non stop coverage.   My point is Chicago is not an extreme market, it is very conservative in both it’s highs and lows.

I have compiled median house prices vs. median house hold income stats for several of the “Hot Markets”  Stats from 2007 www.city-data.com.  Notice that Chicago was just above 5 times median income for median home value.

Please take a look:

Questions?

email shannon@moderealty.com