Inexpensive Houses Based on Price / Income Ratio
By Steve Gillman - July, 2013
What makes a good housing value? It isn't price alone. In
fact, one of the most important factors, and one that home owners
often ignore, is the relationship between home prices and wages
in an area, expressed as the price/income ratio. If houses in
a city cost four times what the average income where is the room
for appreciation? Further price increases are unlikely unless
The median home price in the U.S. was 1.92 times median household
income from 1988 to 2003. Then came the boom years, when that
figure went to 2.77 for a variety of reasons. As you might imagine,
when prices are twice as high in relation to incomes, there can
be problems. Thus we suddenly had more foreclosures than ever
and falling prices across the country.
But not all areas were so over-priced to begin with. And in
some areas of the country prices have fallen back to reasonable
levels. So where are the deals now?
NPR recently had a good piece summarizing the ratio
of home prices to household income in various places. The
database includes 385 towns and cities in the United States.
By this criteria the most expensive places to buy a home are
in Hawaii and California, and include these three cities at the
top of the list:
San Francisco, California
Santa Barbara, California
In these locales you'll pay 4 or 5 times the average household
income for the average home. For the country as a whole the average
home costs around 1.75 times the average income at the moment.
Where are the cheapest cities by these criteria? Here are the
top three on that list:
In these cheap locales the ratio is between .5 and .75, meaning
you can buy a home for as little as half of the average annual
household income. But would you want to? This is a basic measurement
that does not take into account the condition of the "average"
house, or other costs of living, or the actual availability of
jobs. Finally, and importantly, it does not take into account
the quality of life in these cities. That's somewhat of a personal
measure for each of us, but certainly there are cities that most
people would prefer over others.
Inexpensive Towns Based on Home Price / Income Ratio
Here are a few more examples of towns that have relatively
inexpensive homes based on prices and incomes. For the "starting
prices" I searched Realtor.com for 3-bedroom, 2-bath homes
and ignored the 20 listings with the lowest prices, on the assumption
that these are usually fixer uppers or "problem homes"
in some other respect.
Fort Worth/Arlington, Texas
The price-to-income ratio here was a high 3.95 in the fourth
quarter of 2005. By this year it had fallen all the way down
to 1.30. That's even below the average for the 1990s. Three bedroom
homes start around $60,000 here.
Fayetteville, North Carolina
The boom never really came to town here, and homes remain
affordable at a price-to-income ratio of 1.10, but because of
low incomes. With a previous ratio of 1.52 for the 15 years ending
in 2003, it seems likely that prices will go up from the current
levels. Decent homes start at about $40,000 here (and fixer uppers
Las Cruces, New Mexico
In the first months of 2006 the price-to-income ratio was
a very high 3.03, and has now fallen to about the national average.
This doesn't mean that prices have fallen by much though. Remember
that this is a ratio, and part of the change can come from rising
income. The latter bodes well for the future, of course. Homes
start at about $80,000.
Cincinnati, Ohio: Price-to-income ratio of 1.25 versus
an average of 1.46 from 1988 to 2003. You can buy a home for
under $20,000 here.
Mobile, Alabama: Price-to-income ratio of 1.32 versus
an average of 2.18 from 1988 to 2003. While there are fixer uppers
under $10,000 here, the better houses seem to start at about
Memphis, Tennessee: Price-to-income ratio of 1.20 versus
an average of 2.13 from 1988 to 2003. This is another city where
houses can be bought for under $20,000 9and there are a lot of