ReEconomist

Housing on the Slide

As a metric income levels to home prices is most critical when prices get close to or exceed their historical ratio. The reason is as home prices rise they cannot be supported by additional buying as fewer borrowers cannot qualify for a mortgage. Think of the home price to income metric as a limiting fundamental in that it can keep prices from rising because the pool of potential buyers keeps shrinking the higher prices rise.

The maximum home price to income is about 4 times income. When you do the math, using 28% of income as the maximum a responsible lender will loan you'll see that home price at 4 times income works out.

What about the other variables? If home prices are below the maximum home price to income level of 4 to 1, the other factors, supply and demand, job growth, etc. now influence the direction of home prices.

In many areas of the center of the country including Texas, home prices remained at levels less than 4 to1. In these areas, home prices have the potential to rise. It doesn't mean they will rise, only that incomes won't be the limiting factor. Consider the other factors.
You can check out the income level to home price ratios with the Ceiling tool here. UsHousingMeltdown.org/....

The author brings up a good point about the land values. Land is the component of housing that is the most volatile. In high cost areas, land is often the most expensive component of housing and can comprise 60% of the total cost of a house. Building materials and labor are much more stable. The point is, if you want to get an idea of future home prices, look at land costs and the price scenarios of new supply coming to market. If new supply is coming to market at prices lower than comparable properties, expect downward pressure on prices. If new supply is coming to market at prices above comparable properties, prices have potential to rise.

Land prices in bubble areas are down 30-80% from 2006 levels. Meanwhile, the costs of the structure including labor and materials is down about 15% from 2006.

There is a replacement cost tool where you can get the building costs for four different quality levels of houses. Basic, Tract, Custom, McMansion. Add the cost of building the structure to recent land sales and you've got the price scenarios of new supply.
UsHousingmeltdown.org/...