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Perhaps it’s the two solid years of statistics that I took in college that draws me to numbers.  Or maybe it’s that I have a lot more free time right now to think about things, that I have been so ponderous of late.  To wit, I have spent almost six hours researching and compiling the above-referenced data over the last two days.

Like you, I get asked multiple times per day where I think home prices and interest rates are headed.  Generally speaking, I have about as much certainty to my answer as the questioner would if he/she was answering the question themselves.  I do see long term rates dropping from here.  I think I also see more “relief” for those waiting for “more accommodative” home prices.      

The three graphs here only go back 38 years because that’s the first time that Household Income was tracked.  Prior to that, the emphasis of the BLS was placed on Personal Income.  But the 1970’s era inflation required most households to get anyone who could work out into the labor force, so in the housing industry, we look at household income.

I won’t spend a lot of time on explaining these graphs other than to point out a few statistical observations.

  • Numbers always revert to the mean.  Always.  Sometimes that takes longer than one would expect/hope.  There are some trends that take decades to see corrections.
  • The 34% rise in home values over the last two years is unprecedented.  Literally, over the last 100 years, prices have never risen so much so fast. (see bullet point above)
  • Over decades of data, there is a strong correlation between household income and home prices.
  • There is zero correlation between interest rates and home prices–except over the last five years.
  • Household income has outpaced home values over the most recent four decades, which is great news and means that especially with interest rates dropping over the same time, housing has gotten relatively much more affordable in recent history. 

If prices and interest rates don’t drop, it’s going to take what Steven Covey called a “paradigm shift” to reanimate the housing market.  Households will need to become accustomed to lodging costs being a greater percentage of their income that they have been over the last few decades.