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What Is The Home Price to Income Ratio?
A Home Price to Income Ratio is a real estate indicator describing the affordability of buying a house in a particular area. The ratio is the median price of any given location based on the median household income. At the same time, the indicator also determines the overall health of the housing market.
A typically low ratio means that it is more affordable to buy a house in a specific area compared to a location with a high ratio. Mathematically, it is a straightforward equation that divides the average property price by the annual median household income. By closely analyzing the ratio, the real estate market participants stay informed and keep track of the entire real estate market.
Key Takeaways
- Home Price to Income Ratio is a real estate market indicator calculated by dividing the average house price of a specific location by the annual median income of a household.
- In the US, the range of ratio typically lies between 1 to 10. A low ratio means the area has affordable houses and properties. Conversely, locations with a higher ratio are marked unaffordable.
- Hawaii tops the list of states with the highest ratio, 9.4. On the other hand, West Virginia falls number one in the category of lowest ratio state with 2.5.
- As much as it is crucial, market participants should consider all other economic and personal factors before investing or buying a home or property.
Home Price To Income Ratio Explained
The home price-to-income ratio is a housing market affordability metric. The value determines whether a house at a specific location is affordable or not based on the average house price in the underlying area and the annual median household income of the people living in the exact location. When banks and financial institutions offer home loans, they consider the home price to income ratio to understand whether the property is affordable for the loan seeker or not; more importantly, if not, how is the borrower going to repay the loan?
The home price-to-income ratio is an essential parameter to measure the current affordability of a home in a particular region compared to its historical affordability. So, if the ratio goes up, houses will become unaffordable and vice versa. On the other hand, any market analyst or homebuyer should consider several other factors before investing or buying a home for themselves.
Interestingly, the ratio can be deduced for different regions and locations, so even if an individual is looking to invest internationally, they can assess the home price to income ratio by country to understand the difference and evaluate the housing market dynamics. There is no specific range for the ratio as follows; typically, in the US, it is observed between 1 and 10, but given the inflation, change in income levels, and inflation, it may surpass it as well.
Examples
Here are two examples of home price to income ratio -
Example #1
Suppose Philip has worked in New York for over four years, has accumulated some funds, has stepped up the corporate ladder, and currently earns $89,190 a year. Philip is looking to buy a vacation home in a different US state. He certainly likes Hawaii. To check the affordability of buying a house in Hawaii, he checks the ratio.
He states that the median house price in Hawaii is $777,762, and the median household income there is around $83,102
Upon deriving the ratio = 777762/83102 = 9.359
Although the state has a high home price-to-income ratio, luckily, Philip has accumulated some savings and earns approximately $90,000 annually. This means that his income and savings allow him to buy a vacation home in Hawaii. It is a straightforward example: in case Philip had earned less and had no savings, the 9.35 ratio makes it unaffordable for Philip to buy a place in Hawaii. Also, he must consider every other personal and market factor
Example #2
According to a 2022 article from The Globe And Mail, the wealth gap between homeowners and renters in Canada was widening at a quick pace. The news highlighted that the situation may get worse in the future. Despite a drop in prices, homes are becoming less affordable as the borrowing rate is rising rapidly.
Looking at the home price to income ratio, Canada, which was 2.85 in 1980, increased to 3.61 in 2000 and then almost doubled in 2020, reaching 6.01. In 2021, it was recorded at 8.98. It is becoming challenging for buyers to break into the housing market. New residential projects are getting canceled or postponed as financing is not available. At the same time, the rents are soaring in urban centers.
Top 10 US States With The Highest House-Price-To-Income Ratio
| Rank | State | Ratio | Median home price | Median household income |
|---|---|---|---|---|
| 1 | Hawaii | 9.4 | $777,762 | $83,102 |
| 2 | California | 8.9 | $717,854 | $80,440 |
| 3 | Idaho | 7.2 | $436,922 | $60,999 |
| 4 | Oregan | 7.1 | $474,505 | $67,058 |
| 5 | Washington | 7.0 | $548,280 | $78,687 |
| 6 | Montana | 6.7 | $384,309 | $57,153 |
| 7 | Colorado | 6.7 | $516,875 | $77,127 |
| 8 | Utah | 6.6 | $498,273 | $75,780 |
| 9 | Nevada | 6.3 | $397,226 | $63,376 |
| 10 | Massachusetts | 6.3 | $536,920 | $85,843 |
All figures and rankings are subject to US housing market changes along with other economic factors such as income, inflation, market health, interest rates, and so on.
Top 10 US States With The Lowest House-Price-To-Income Ratio
| Rank | State | Ratio | Median home price | Median household income |
|---|---|---|---|---|
| 1 | West Virginia | 2.5 | $119,694 | $48,850 |
| 2 | Iowa | 2.8 | $171,251 | $61,691 |
| 3 | Oklahoma | 2.9 | $157,331 | $54,449 |
| 4 | Kansas | 3.0 | $184,486 | $62,087 |
| 5 | Mississippi | 3.2 | $146,087 | $45,792 |
| 6 | Arkansas | 3.2 | $156,347 | $48,952 |
| 7 | Ohio | 3.2 | $188,734 | $58,642 |
| 8 | Kentucky | 3.3 | $175,020 | $52,295 |
| 9 | Indiana | 3.4 | $194,174 | $57,603 |
| 10 | Nebraska | 3.4 | $213,607 | $63,229 |
All figures and rankings are subject to US housing market changes along with other economic factors such as income, inflation, market health, interest rates, and so on.
Importance
The importance of the home price to income ratio is -
- A significant housing market indicator and metric to measure affordability and house valuation at different locations.
- Real estate investors can use it to understand and predict future prices and make early investment decisions.
- Since it is not a single metric and varies from location to location, it helps people calculate the home price-to-income ratio by city, state, and country.
- Informs about affordability so that people looking to settle with their home purchases can use it to make final buying decisions.
- Determines the housing market's health and plays a crucial role in positively or negatively impacting the economy.
- As it takes account of the median household or family income, it differs from each individual's perspective depending on their income levels.
Frequently Asked Questions (FAQs)
What is a good home price-to-income ratio?
How can the home price-to-income ratio impact the overall economy?
How can one use the home-price-to-income ratio for decision-making?
