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Inexpensive Houses Based on Price / Income Ratio

By - 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 incomes grow.

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:

Expensive:

Honolulu, Hawaii
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:

Cheap:

Detroit, Michigan
Saginaw, Michigan
Decatur, Illinois

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 under $20,000)..

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 $30,000.

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 them).


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Houses Under Fifty Thousand | Price/Income Ratio