check out Rich’s Bubble Primer on the top of the home page. Look for the charts on home price/per capita income, and rent/income.
Housing prices are dependent on
1) WAGES, ie. how much people can afford to pay, and is typically 2-2.5x your household income if you get a 30 year fixed rate mortgage at 6-7%.
So a city’s median wage is a proxy for the prices that city can have on housing. High wage cities like San Francisco have higher housing prices, because the higher demand drives prices up. In San Diego, prices are higher than 2-2.5x income, because people are willing to pay a little more of their income to live here (sunshine tax), so the ratio is just a little higher. Thee graphs use per capita income, and with 2.x people per household, you can convert it to household income.
2) RENTS, i.e what an investor would be willing to pay to break even on buying a house and renting it out.
Lately, investors purchased based on appreciation, but traditionally they buy based on cash flow. Similarly, in exhuberant stock markets like today (yes, it is exuberant!), investors don’t care about dividend yields or cash flow because they bet on a stock rising in price. The earnings don’t matter as much as the appreciation.
