The New Business Cycle: Part 3

The Components of Home Price Deviations

Series Table of Contents:

• Review of 2008 vs Today (free post from 2024)

• Introduction

• Part 1: A Housing Shortage Reduces Cyclicality

• Part 2: What about 2008?

• Part 3: The Components of Home Price Deviations

• Part 4: Migration and the Cycle

The Erdmann Housing Tracker has 3 components: Cyclical, Supply, and Credit.

Comparing price/income ratios across cities and across incomes within cities has been the most effective way for me to highlight and understand the forces driving American home prices. But, sometimes it is helpful to frame housing markets in a different way. Here, I will just use prices and incomes, in a similar way that I previously did in an earlier series.

Using prices as our guide, the 3 components of an urban housing market can be viewed as in Figure 1.

Start with a normal market. In an economy at our level of incomes and development, where there are not binding supply constraints there is a wide-ranging potential for families to make changes in the real housing they consume so that their housing expenditures are comfortable for their incomes. So, in a normal market, prices tend to have a relatively stable multiple to incomes - usually it was somewhere around 3x back in the before times, before housing was broken. Homes in the highest of high tiers still sell at that multiple. In January 2002, when the tracker data starts, the average home at the top end of the market in the 30 metro areas I track sold at a price/income ratio of 3.13x. Today it’s 3.11.

Over the long-term, all the real facets of homes (size, quality, etc.) change in order to get prices and incomes somewhere near that comfortable range.

Figure 1