This chart plots the Case Shiller Weiss Home Price Index (blue) versus the U.S. Bureau of Economic Analysis figures for per-capita income (red). Both are calculated using nominal (unadjusted for inflation) figures, but each benchmarked so that the values in the first quarter of 2000 are considered “1.0”, and all values for each series before and after are relative to the benchmark date’s value.
Where the blue line is above the red, home prices are less affordable relative to per-capita income. Where the blue line is below the red, home prices are more affordable compared to per-capita income. Over long periods, home prices will temporarily fluctuate above and below income growth but in general track linearly to income.
A.) This area represents the home price boom prior to the S&L crisis. Home values peaked at 0.80 relative to Q1-2000, in Q3-1989.
B.) This area represents the home price bust and the period of the S&L bailout. Home values bottomed out in mid-1994.
C.) The drop in income (red line) and the slowdown in home prices (blue line) are the result of the combined effects of the tech bust and 9/11. Subsequent lowering of Fed rates and loosening of underwriting standard drove the boom through late 2005.
D.) The housing boom peaked in Q2-2006 at a Home Price Index of 2.21 relative to Q1-2000, meaning that homes had risen by 121% in six years. Income had risen to an index of 1.27 relative to Q1-2000, indicating a 27% increase over the same period.
E.) The dotted lines indicate one potential path which home prices may follow in order to realign with income growth. Home values would have to drop between 17% and 26% from current levels to reach this equilibrium.