Historic Household Income .vs. Home Prices
After last weeks analysis of minimum wages .vs. congressional wages, I thought it might be interesting to take a look at a similar economic topic, especially one that’s on the minds of a lot of other X-Generation folks out there like myself.
Buying a home
Everyone wants to buy a home, its part of the American dream. But is home ownership more difficult today than it was for our parent’s generation? Logic would seem to say so, with the current house prices in the stratosphere, especially in places like San Francisco (where I live).
But is it really? To answer this question I found it necessary to dig up historic median income and median home pricing data from U.S. Government Census website.
First up, household income. Below is a chart of median household income over the last 38 years. This in itself was very revealing, as you see the top 5% of income earners, as well as the top 5th percentile growing in purchasing power over the last 38 years as compared to the middle and lower classes, adjusted for 2004 dollars.
(This chart was derived from U.S. Census data here).
Next I took a look at the median home prices from the same period (1967 – 2004) again adjusted for 2004 dollars.
(This chart was derived from U.S. Census data here).
The first thing that becomes apparent from the data is that while there have been dips and valleys in the median price of homes in the past 38 years, it’s been on a continual climb. The real cost of ownership has almost doubled from 1967 to 2004, from $125,843 in 1967 to $221,000 in 2004. (Remember these numbers are in 2004 inflation adjusted dollars).
Now let’s overlay that with the household income figures from above, showing the median home price with yearly median salaries for all income levels.
This final chart reveals some pretty startling numbers.
While the lowest 80% of income earners, which includes the middle class, have made slight gains in income over the past 38 years, the percentage of their income needed to purchase the median home has skyrocketed.
The highest fifth has been able to keep pace with the median home price. (But even they have had problems keeping up in the last 2-3 years). Sometime in the mid 1970’s the top 5% of income earners actually passed the threshold of making more in their yearly salary than the median home price, a threshold that widened in the 1990’s and has only recently contracted.
Below is a table showing the income levels and the ratio of a median home price to yearly salary in 1967:
| Income Level | 1967 Salary (2004 Dollars) |
1967 Median Home Price (2004 Dollars) |
Ratio: 1967 Median Home Price To 1967 Median Yearly Salary |
| Lowest Fifth | $7,668 | $125,843 | 16.4 to 1 |
| Second Fifth | $21,246 | $125,843 | 5.9 to 1 |
| Third Fifth | $33,918 | $125,843 | 3.7 to 1 |
| Fourth Fifth | $47,457 | $125,843 | 2.7 to 1 |
| Highest Fifth | $85,406 | $125,843 | 1.5 to 1 |
| Top 5% | $134,722 | $125,843 | 0.9 to 1 |
Here is the same table, showing the data for 2004:
| Income Level | 2004 Salary | 2004 Median Home Price |
Ratio: 2004 Median Home Price To 2004 Median Yearly Salary |
| Lowest Fifth | $10,264 | $221,000 | 21.5 to 1 |
| Second Fifth | $26,241 | $221,000 | 8.4 to 1 |
| Third Fifth | $44,455 | $221,000 | 5.0 to 1 |
| Fourth Fifth | $70,085 | $221,000 | 3.2 to 1 |
| Highest Fifth | $151,593 | $221,000 | 1.5 to 1 |
| Top 5% | $264,387 | $221,000 | 0.8 to 1 |
So what’s the conclusion?
If you’re making the big bucks in 2004 and are in the top 5% ($264,387+) you’re in good shape, even more so than those in your income bracket in 1967. 80% of your yearly salary will cover the the cost of a median home. Mortgage payments for you will be no problem at all.
If you’re in the highest fifth ($151,593+), you’re still in pretty good shape. Just like those in 1967, 150% of your yearly salary will buy a median priced house in 2004.
If you’re in the fourth highest income leve ($70,085+)l, what might be considered upper middle class, you’ll have a slightly tougher time than your 1967 peers. You’ll be paying 320% of your yearly salary for a median home as compared to 270% for your group in 1967.
The middle class ($44,455+) in 2004 has problems, you’ll be paying out the nose compared to the previous generation. 500% of your yearly salary is needed to buy a median home, compared to 370% for those in this salary group in 1967.
The second fifth ($26,241+) has gone from 590% in 1967, to 840% in 2004.
And finally the lowest income level the lowest 20% ($10,264+), or lowest fifth in our nation, will need to spend 2,150% of their yearly salary for a median home in 2004, compared to 1,640% in 1967.
Sources:
penty — On 6-14-2006 at 6:32 pm
very nice. not only on this graph but the congressional one as well.
Your graph doesn’t scale for cost of living in different areas and the “US” as a whole is a bit too big. For instance, in my area the median home price you list ($221,000) would by a VERY LARGE house which makes it a much less ratio for home buyers in the area based on square feet.
paperhat — On 6-14-2006 at 6:58 pm
This doesn’t take into account the differences between 1967’s median home and 2004’s median home. My guess is that the median home in 1967 was less than 1,000 square feet with one bathroom and no central air. Today’s median home is probably over 1,500 square feet with two bathrooms, central air and other amenities not readily available in 1967.
Billy — On 6-14-2006 at 7:12 pm
Did you factor in taxes? After tax income is much more important than income, and taxes have dropped significantly over your time period especially for the top 5%.
Porter — On 6-14-2006 at 7:26 pm
Penty… Thanks! I thoght about making it regional, and in a future version I might, but that was kind of beyond the scope of this current analysis. Paperhat… while a home in 2004 will obviously have more ameneties than one did in 1967 (as one in 1967 was better than one in 1927), the point of it being a median home, regardless of how big it is, or whats it in, is that that its in comparison to the median income. I don’t see a point of comparing the ameneties of the 2004 home .vs. the Brady Bunch home of 1967. There will obviously always be more “stuff” in a home tomororw than today, but the real dollar income is what’s changing. Billy… Nope didnt factor in taxes, that would be an interesting thing to add as well.
George — On 6-14-2006 at 11:08 pm
Yes, home ownership is the new slavery… why rent when you can pay 3 times as much and it all goes to the bank… if a recession hits, you continue to pay for your 300K house, even though its now only
worth $200K…. sign up for your interest-only loan today and insure you will be a member of the newest class bracket in America… the indentured servant class!
Azbola — On 6-15-2006 at 2:25 am
You seem to have not factored in interest rates, ie) the cost of borrowing the money, which will have a huge impact on asset prices. The cheaper it is to borrow money, the more people will borrow and asset prices will inflate to absorb the difference.
What I think you need to use as your cost is not the cost of the house alone but the cost of the house PLUS interets payments on that amount.
Cheers,
Dave.
Kevin — On 6-15-2006 at 4:36 am
Look the graphs being used as a generic example. If you want to get into nitpicky detail then i think Economics (or something along those lines) would be a course to follow. The man has made his point. It’s going back to the old days when there where a few landlords, many paupers and the rent collectors in the middle. Maybe more advanced but basically the same.
Azbola — On 6-15-2006 at 5:31 am
I wasn’t trying to be nitpicky, I agree it’s a joke the price of property - but it does make a massive difference what the interest rate is to how affordable it is.
For instance in 1970 interest rates were anout 9%. In 2004 they were about 2%.
So taking the figure above of about $125,000 in 1970 (well, 1967 but close enough) and $220,000 in 2004; for a 25 year mortgage the monthly payments would roughly be –>
1970: $1,060
2004: $940
So some people could argue that in fact property today is more affordable than it used to be! Of course this ignores the fact that interest rates can (and most likely will) rise again which will see your payments go up. Also when there are high interest rates there is generally high inflation so the amount you have borrowed quickly becomes a small amount compared to what you are then earning which doesn’t tend to happen any more.
The point being it is not that useful to just look at prices vs earnings as this ignores a lot of things that influence affordability.
goldenbb — On 6-15-2006 at 5:46 am
I think this analysis is overly-simplistic. First off, the “upper middle class” is not your highest fifth, it is the top fifth. The “rich” in the US do not rely on a salary as their primary means of income. There’s a big difference in what homes the American elite can afford and the rest can afford. The rich are off the charts, and always have been.
Second, nobody buys a home based on the price being 320% or 500% of their salary. There are standard calculations that determine how much house someone making a particular salary can afford, historically 35% of one’s monthly income (although that metric has been badly abused as of late) should go to the mortgage payment. If you make more, you can afford more house. No big revelations there.
Lastly, houses of 1967 bear little resemblance to the “McMansion” style homes people desire these days. Luxury costs more. Also, please factor in 2+ late model automobiles, pay tv, satellite radio, cell phones, Internet, etc. None of which existed in 1967.
My conclusion is that Americans are far overspent, not because of real estate prices, but because of rampant anomie brought on by an expanded market, better marketing techniques, and a deteriorating culture with very high time preferences.
Real estate speculation of the past few years has not helped at all, but that’s just a market and greed–a few people made it big flipping houses, but by the time “Flip This House” made it to the TLC channel, it was just a sucker’s game.
Urban Planning Guy — On 6-15-2006 at 6:08 am
Great combined graph! You have done what is needed: combine the scattered data and put them in a clearly understandable form.
Instead of median house price, use data on the *distribution* of house prices over time. You can simplify by focusing on the guy in the median and the guy at the lower 25% point. Figure out what price house the median guy is buying–it is less than the median price house because richer people buy more houses and own the rentals. Right now, in middle america, I would say that someone making $50K (approx median) is buying a $100K to $200K house, lower when young and higher when older (with down payment). Also, note the house size and crime statistics of the neighborhood the median guy can afford.
I think you should keep going on these “boil down the data” postings and comparisons. Very cool! Thanks.
Gabe — On 6-15-2006 at 7:41 am
I love the charts, but it might be educational to compare apples to apples: either show the median household income compared to median house price, or break down both income AND housing prices into percentiles/fractions/what-have-you. Neither the lower fifth nor the upper fifth are looking at buying $250,000 houses.
Quitter — On 6-15-2006 at 8:05 am
Agreed goldenbb. People do not spend money on what is essential. It is a world where fashion outweighs necessity. We may be poor and running our credit into the ground but at least we can say we have the latest stereo and mobile phone with “Bluetooth technology”. Therefore, our social standing is elevated. There are times when the old adage “Ignorance is bliss” seems only too true. Having been pushed at school you start to worry about the world you live in but the more you learn the more you realise there isn’t much you can do.
restless — On 6-15-2006 at 8:28 am
For an interesting map of all types of housing available nationwide on craigslist, go to http://www.housingmaps.com/. You can see sort of at a glance how it’s going in other parts of the country. Sadly, no one has done this for Missed Connections yet.
Mike — On 6-15-2006 at 8:57 am
I love the income graphs. The bottom 3/5 didn’t see much of a raise in income over the last 38 years.
The fact that today’s homes are larger and have more amenities is a valid issue. When you look at the median house price, you have to ask, did the price rise or did people get a little nuts trying to keep up with the Joneses.
Imagine tracking the price of a single 1,000 sq. ft. house in 1967. It cost $15,000 (really, you could do that in 1967). In 1975, the owners added a two-car garage. In 1985, the owners installed central air conditioning. In 1990, the owners finished the basement. In 1995, the owners added a 1,500 sq. ft. addition. In 2005, the owners added an outdoor deck. Now, in 2006, the house is worth $450,000. You can look at that and say how high the price of housing has gone because this is the SAME HOUSE we begin watching in 1967, but it isn’t. It bears no relation to the house we started with.
This is akin to owning a 1oz gold coin in 1967 and welding on several more ounces over the next 37 years and complaining how the price of gold coins has gone up, but still claiming that the comparison is valid because all of your friends had welded on more gold too.
I bumped into this same issue when looking at why every household needs two incomes vs the idyllic 1950’s families. It turns out that we DON’T need two incomes. We’re driving nice, relatively new cars and we have 2-4 of them vs the 1 car that our 1950’s families MAY have had. We have computers, cell phones, cable-TV, and high-speed Internet eating $2,500 per year while most people in the 50’s were lucky to have one small television. We fly to our vacations or go to resorts vs the 1950’s vacation which might have involved camping in the woods within driving distance from home. The 1950’s mother made over 1/2 of the clothing. In the 1950’s, families usually ate home-cooked meals and meat was served only once or twice per week. Oh, and the average home was around 1,000 sq. ft.
Sure, the cost of living is a lot higher because we expect more. Now, how much do you need to make to live in a single-income house in a lifestyle like the stereotypical 1950’s family? $45,000-$50,000 if you live near Philadelphia.
Alex — On 6-15-2006 at 10:20 am
This doesn’t make any sense at all. Why would you break income into quantiles but not housing prices? Try it again with quantiles for home prices corresponding to the quantiles for income, and it might be worth looking at.
Interesting — On 6-15-2006 at 6:57 pm
I like the research. I disagree with with it appears to say for a couple main reasons. Off the top of my head:
First of all a median house toady is twice as big as a median house 30 years ago. Maybe a more accurate measure would be price per square foot now vs. then and then compare? Good economic times, low interest rates, and Americans wanting to live it up… have created an increasing demand for larger, newer houses.
Also I don’t prefer to break out income like that. These types of analysis seem to assume that there is a group of people in an income band - just waiting for the overall band to move up so they can get a raise - nope - that’s not how it works in reality. The problem is that we are not trapped in a certain income band. I have moved between your quintiles in different phases in my life. Luckily, it is the US, so you can choose to work hard and move up a band if you want to. So, year to year those income bands are a different group of people.
Kevin — On 6-17-2006 at 7:11 am
Luckily, it is the US, so you can choose to work hard and move up a band if you want to????? LOL. What have you guys been taught? Only in the US of A.
Interesting — On 6-17-2006 at 9:49 am
I personally moved up through several income bands shown here with a lot of hard work - over about a decade. So have have others I know. So, I was not discussing what I have been taught - I was discussing what I have lived and observed outside the classroom.
On this topic, Paul Graham has a great essay called “Inequality and Risk” that I recommend.
http://www.paulgraham.com/inequality.html
He goes through several scenarios on how to have less economic inequality.
GOOFYBLOG » Blog Archive » America’s Middle Class is Disappearing, Gap Between Rich and Poor Grows — On 6-18-2006 at 1:36 am
[…] My analysis on historic home prices .vs. income on Goofyblog from a few weeks ago also goes into this. […]
Researcher — On 8-15-2006 at 3:15 pm
I am curious as to your interest in and qualification for making this analysis because I would like to share it with others and I know they will ask this question! Thank you.
Porter Venn — On 8-15-2006 at 5:36 pm
Hi Researcher. Well my interest was due to the fact that where I live (The San Francisco Bay area), it’s almost impossible to afford a home. My qualifications? Well, I suppose I’m able to do basic research on the U.S. Census website and form a basic analysis?
Feel free to share/link with others.
jolychaly — On 8-21-2006 at 5:53 pm
i like the comparisons. to all the old people who say they had it harder then today were obviously wrong.
to the couple people argueing about some of the numbers, the income is probably closer then the home numbers wich would only make the chart wayyyyy worse. in philadelphia the exact home 4 or 5 yrs ago is almost double today and for penty here for 200k your one step above a crack house. the chart is averages across the usa and im sure it tells a broad story and it is seperating the rich from the poor like a third world country.
jolychaly — On 8-21-2006 at 5:58 pm
one more thing, compare one acre of land from then till now and you will see the chart is correct for all you idiots trying to make the chart apples to oranges.
the fact is (well maybe and opinion) is that most people int he country today could NOT afford to buy there own home if they had to do it again. if feel sorry for a 20 yr old today without any inheritance or hand me downs
jolychaly — On 8-21-2006 at 6:12 pm
mike, because you feel your stuck in 1950, the chart is from 1967 and it happens to be the year my mother bought our house just outside philadelphia in bristol pa. it was 14k the only modification since 1967 except for normal maintainance is central air. the house will sell for 180k to 210k.. it would take all of your 40k salary to pay the mortgage on that house today
homebusinessrules.com » — On 9-12-2006 at 11:12 pm
[…] GOOFYBLOG Blog Archive Historic Household Income .vs. Home After last weeks analysis of minimum wages .vs. congressional wages , I thought it might be interesting to take a look at a similar economic topic, especially one that s on the minds of a lot of […]
Dinocrat » Blog Archive » “Home price drop is largest in 35 years” — not “Homes more affordable now!” — On 10-26-2006 at 10:03 am
[…] That probably sounds scary to some folks (though it looks like welcome news on inflation to us and a reprieve from the rather relentless and unsupportable spike in prices over the last few years). Less featured in the article were that the “sales pace picked up, rising by 5.3 percent to a seasonally adjusted annual rate 1.075 million homes.” And, perhaps most interesting of all was the comparison of the price drop today with that of 1970. The median house price in 1970 was $23,400, while it is $217,100 today. Couldn’t the story have been written, “New housing becomes more affordable for the middle class.” But that would have been positive economic news, and we can’t have any of that. […]
sue haro — On 12-22-2006 at 4:05 pm
Could you tell me what the medium market on 2 bed 1bath 858 sq ft
6100 sq ft lot - year 1998 in Castroville, CA.
or a web site you can inform me of. Thank you!
Ben — On 12-28-2006 at 2:35 pm
Conclusion – Yes, there is greater disparity in income from 1967 to 2004 in the US. While I have no data to support this, but if you think the US is bad you should see the disparity in other countries (its far worse). Houses are bigger and filled with more toys while families are smaller. I think given the choice most would prefer 2004. For those of you who prefer 1967 there is no law that change the title wave of globalization that we have faced and the in pending waves. We need to educate our children to lead in tomorrow’s economy or they will be stupid, angry and bitter.
BT — On 12-29-2006 at 1:19 pm
Excellent writing. What do you think this entails for the future? A housing crash? More people moving to the south and midwest? More people taking time-bomb loans?
BT — On 12-29-2006 at 1:31 pm
Things simply do not look good for the young and middle/lower class. Work is becoming more of a priority and family time is diminishing. Hour+ commutes are becoming the norm. People are eating fast food more than ever because work has become such a priority which leads to more and more people becoming overweight. The divorce rates continue to go up. More and more people are going on antidepressents.
restless — On 12-29-2006 at 1:33 pm
A recent article at calculatedrisk states that “Over the last five years, MEW [Mortgage Equity Withdrawal] has boosted GDP [Gross Domestic Product] by an average of 2.7% per year” thus propping up our otherwise sagging economy to an unprecedented degree. With a housing price slump, MEW would also decline taking GDP down with it. Dovetailing with job loss and general pressure on wages across the board this may equate to a deflation cycle similar to Japan’s, which started in the early 90s.
Ryan Nelson — On 1-4-2007 at 9:59 am
When you use the term household income. Is the number of people, one or two, contributing to the household income. I know that there are more women working today than in 1967.
independent voter — On 2-11-2007 at 10:05 am
Census Data very incorrect. Top 5% income way off!
Check IRS website for AGI (adjusted gross income by return)
top 5% is approx $137,000.00 NOT $250,000.00.
Last IRS DATA available tax year 2004.
Porter Venn — On 2-11-2007 at 10:15 am
It’s census data that comes from (shock) (gasp) The U.S. Census, so take it up with them:
http://www.census.gov/hhes/www/income/histinc/h03ar.html
metalangel — On 3-14-2007 at 9:17 am
I just wanted to add that in the 50’s and 60’s families tend to live together. I grew up in the 60’s and I lived with my uncle, Grandmother, Grandfather, and sometimes my mother would stay there. I also remember my greatgrandmother living there, too! See, nowadays people tend to have less people living with them and more toys.
We had a three bedroom, one bathroom home in Manhattan Beach, NY in the 60’s and that was it! It was only a block from the beach, but imagine having to share three bedrooms and one bathrooms with that many people? Just try sleeping arrangements. I usually slept on a cot in the living room with my Grandpa. How would you like to live like that? But, that was the norm back then as far as I could remember. We weren’t poor either. My Grandfather was highly educated and the Chief of Defense for NJ! I do admit that Manhattan Beach, NY is a pretty ritzy area in general but when that many people share a three-bedroom one bathroom home it does get too close for comfort!
GOOFYBLOG » Blog Archive » So you got Suckered Into an Interest Only Mortgage? — On 4-24-2007 at 9:30 am
[…] Historic Household Income .vs. Home Prices And as it’s people like you, times millions, who have made home ownership an out of reach impossibility for the rest of us, I will shed no tears for you as your over-priced house goes up on the auction block. […]
Jim — On 9-1-2007 at 2:24 pm
The census figures provide an AVERAGE for each income band. You’ve presented then here as the minimum income for each band. When the census data says income for the top 5% is $281K, they mean the AVERAGE income in that band of $281. The minimum income to be in the top 5% of households is significantly less.
Paul — On 2-6-2008 at 7:26 am
Excellent analysis, but it fails to point out that in 1967 most homes were purchased with a single income (one breadwinner in the household). Today we just assume every buyer is a 2-income proposition. My father earned a lower middle class income in 1967, yet could afford a 3 bedroom, 2 bath home and two cars on one income. Today, with a college degree and a supposedly upper middle class income, I couldn’t touch an entry-level home on one salary. Re: goldenbb’s comment on 35% of income as a mortgage standard… The government takes approximately 45% of my gross pay. So 35% would only leave me with 10% for everything else. That’s absurd! Yes, yes, there will be some kick back from the mortgage loan, but it’s not a significant number. I’d buy 35% of your NET pay, but 25% would be more prudent. Those who spend 35% end up with an expensive, oversized home they can’t afford to furnish.