How to use the Case Shiller Absolute House Price vs Median Household Income tool
Jonness - 2/7/2010
The absolute price vs household income tool provides a wealth of information but takes a little getting used to. This tutorial provides a quick walkthrough.
1) Use the dropdown box provided on the webpage for the tool to select the AZ-Phoenix metro region. Hit the submit button.
2) When the chart is finished drawing, mouse over a data point on the yellow home price/ median household income line. A popup is displayed showing the metro region, the date, and the ratio of absolute house price to median household income multiplied by 100,000. (Multiplying the ratio by 100,000 results in a more readable display.)
In the example, the number 526,604 represents a true ratio of 5.26604. This means for the month of November 2005, the median house in the Phoenix metro region cost about 5.2 times median household income. (For our purpose, Case-Shiller absolute house price can be thought of as median house price.)
You can clearly see that the most recent data points have a way lower ratio than prior data points. This indicates house prices in the Phoenix metro region are currently quite low compared to incomes. It's important to note this does not mean house prices can not go lower. Prices are heavily influenced by market fundamentals, such as the number of foreclosures in the pipeline and how much support the government will contribute to prop up prices beyond what true market fundamentals allow. Also, prices are highly localized. Prices in some areas of a particular metro area can decline considerably more than other areas of the region.
3) The blue line represents the Case-Shiller absolute (median) house price for the Phoenix metro region. Keep in mind prices are highly localized. For instance, prices in the city are often higher than prices in an outer metro region..
As shown in the next figure, mousing over the data point for November 2005 shows the median price for the Phoenix metro region was $265,003.00.
4) Phoenix is in Maricopa county. The green line represents the county-wide median household income for Maricopa county mulitpied by 3. Multiplying by 3 displays the data better and provides a frame of reference to visually compare median house price with. In the next figure, you can easily see that median house prices have recently dropped well below past relationships to incomes in the Phoenix metro region.
5) To see the exact county-wide median household income, mouse over the data point in the red line.
6) Now go back and repeat the entire process for other available cities. As you can see, some cities have corrected much more than than others.
7) Find other interesting tools to perform further analysis.