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How Helpful is the Price-to-Income Ratio in Flagging Bubbles?
Rocio Sanchez-Moyano / Harvard Joint Center for Housing Studies / September 26, 2013
With the continued growth of house prices across the country, talk of a housing bubble is beginning to reappear in the headlines. House price-to-income ratios are often used to indicate a bubble, as prices have historically had a relatively stable relationship with incomes (both mean and median). In the US, nationally, the price-to-income ratio remained relatively stable throughout the 1990s. It began to increase around 2000 and surpassed its long-run average of 3.65 by 2002 (Figure 1). The national price-to-income ratio continued to increase in the mid-2000s, reaching a high of 4.63 in 2006 before rapidly declining in 2007 and 2008 and eventually hitting a low of 3.26 in 2011. The classic bubble shape is clearly visible in this trend. Recent price gains, viewed in this context, do not seem to indicate the return of a bubble; price-to-income ratios today match their early 1990s rates and still have some room for growth before reaching their long-run average. (Click chart to enlarge.)