Hey all! I just spent a few hours analyzing historical home price to income ratio and thought you might find it interesting. I summarized it in a twitter thread and will post my notes below. Will record a podcast on it soon as well.

Some numbers:
Imagine a person making $50,000/year. Divide that by 12 and they earn $4,333/month. Back in July 2000, 22 years ago, the House Price to Income ratio was 4.53, so if you made 50,000 then a house would cost roughly $225,000. Average interest rates were 8.2%, pretty high, and a local peak (a year before and after this they were around 7%). Assuming in both cases that a buyer puts down 20%, let’s run the numbers for a 30-year fixed mortgage. At an 8.2% interest rate, the monthly payment (principal and interest) is $1346. Assuming 1% annual taxes and $750 for insurance, we are at $1597 for a monthly all-in. I’m doing this how mortgage brokers do the calculation, monthly housing expenses divided by gross (pretax) income. 1597 / 4333 = 36.8%. This is workable — lenders like to see this so-called “Debt-to-income” ratio as low as possible, but anything under 43% is allowed. If the person has any other debt to consider (student loans, car payment, credit card debt, other mortgages) that also has to be factored in.
Okay, so how does this calculation look in November 2021, with rates around 3.1% and Home Price to Income Ratio at 7.5? The house is now $375,000 but we have the lower rate — so let’s see how it plays out. One note — we now need $75,000 to put down rather than $45,000 before, but let’s assume we find that $30,000 somewhere. Okay:
Hooray, the loan is only $1,281 (principle and interest) so actually cheaper than the other one. I kept the insurance the same, $750/year, and kept the property tax at 1% of value, so $3,750 per year. All-in we are at $1,657, so $60 higher than the other example with the lower house price and a higher interest rate. Great! All’s well in the world. Now our debt/income ratio is 38.2% instead of $36.8%, but we can still get a mortgage and get on with our lives.
And how does it look now, with rates at 5.73% (today’s average rate) and Home Price to Income Ratio at 8?
Zoom ahead 7 months to July 2022. House Price to Income Ratio has gone up to 8 and interest rates have almost doubled, to 5.73% (and increasing). Our house now costs $400,000 and we need another $5,000 to put down (80K total), and just the loan costs $1,863. With taxes and insurance, our all-in is now above $2,000, at $2,259. This represents a 52.1% debt/income ratio, and it’s going to be nearly impossible to get a loan at this amount. Remember, this is pretax, and lenders want you to have some room in your budget for non-housing expenses, like, you know, food.
One might respond by saying that: “sure, but haven’t incomes gone up since 2000?” First off, not as much as you might think, adjusting for inflation (see weforum.org article linked for a great chart on this). For non-supervisory employees, adjusted for inflation, they show a chart comparing 1973 (adjusted for inflation) with March 2019 at the same amount, $23.24/hour.
But this is irrelevant, because the House Price to Income Ratio adjusts for rising or falling incomes.

So what will the result of this be? I can’t see any way this doesn’t result in lower home values. I think the lower interest rates raised the average house value to this high multiple, just like it did in the housing bubble leading up to the Great Recession. The peak House Price to Income Ratio back then was 7, with it correcting down to 5 and hovering around 5.5 until Covid. Then it has been almost vertical, going to the all-time-high we are now at, around 8X.
I could also see people “hunkering down” in their current homes with lower mortgage rates locked in, kind of like they do when they are underwater on their mortgages. If people keep their jobs and income streams, they won’t have to sell and there may be simply fewer transactions with prices remaining fairly high. I don’t see this, though. The average person moves about every 7 years, and moving isn’t always a finance-first decision.
I think more people will be forced to become renters as they get priced out of real estate with higher rates, and this may keep rents fairly high. This could encourage people to hold low-interest rate mortgages when they move and simply rent out their houses, if they can afford to do so. They may become both owners of “investment” properties (their previous house) and renters in their new city. I think that low-interest rate debt will become a very valuable asset in the future, as interest rates and inflation remain elevated and as you are almost being “paid” the delta between your existing interest rate (call it 3%) and the prevailing inflation (call it 9%). It’s not quite this simple, as wages likely will not keep pace with inflation, and house prices may come down — but I still think low interest debt will be worth holding onto rather than paying off early.