Home Affordability: Prices (Nationally) Still out of Whack?

According to the old truism, the only arbiter of price is what a buyer is willing to pay. But when it comes to a home -- there's another time-tested way to reckon fair value: the home's cost divided by the buyer's income. This ratio is a broad measure of home affordability. 

The average house price in 1975 was $39,500. Using the Bureau of Labor Statistics inflation calculator, we find that comes to $158,000 in 2008 dollars.

The average (mean) house price in December 2008 was $301,200 -- almost twice the 1975 cost. To be exact, 90.7% higher. In other words, in an "apples to apples" comparison adjusted for inflation, homes cost almost twice as much as they did in 1975.

But can we afford them?

* 1975: Home price/income ratio: 3.46

* 2008: Home price/income ratio: 4.87

The fact is that the national ratio of average home costs to average income is far higher than historical norms.

As for the balance of supply and demand, the Census Bureau recently counted a staggering 18.8 million vacant homes in the U.S. (almost 15% of the nation's housing stock) suggesting a massive oversupply, which in classic free-market economic theory should depress prices to the point that demand rises to meet supply.

If average house prices were to return to the 1975 ratio of approximately 3 times average household income, the average (National) price would drop from $290,000 to around $195,000.