The Commerce Department, along with President Obama’s State of the Union speech last night, missed two key statistics in their assessments of the economy: the difference between the median household income in the U.S. versus the median cost of a new home.
While data issued by the U.S. Department of Commerce this morning showed that sales of new homes in the U.S. rose in December from a month ago, it does not show the division between the cost of a new home and the median household income in the U.S.
The absolute difference between the two and the ratio between them are key economic indicators of an oncoming recession, and also serve as two of the indicators of the growing divisions between the wealthy and the middle class.
The Census Bureau showed that the median cost of a new home in the U.S. in 2009 was $265,700, compared to the median household income (gross, non-inflation-adjusted), which was $49,777, or a ratio of 4.35.
Recent history shows that the ratio almost always has been high in the year or two preceding a recession, and a high difference between the two also is an indicator of how attainable the “American dream” (that President Obama spoke about in his address to the nation last night) really is.
In 2005 and 2006, the ratio of the median cost of a new home in the U.S. and the median household income hit all-time highs of 5.20 and 5.11, respectively, since 1975.
In 2007, the ratio dropped to 4.31. The average ratio over that period was also 4.31. In 2008, the year the housing market collapsed, it was at 4.61, and dropped to 4.35 in 2009.
“The fact that the ratio of new home cost to median income was over 5 in 2005 and 2006 was in fact one of the main reasons why the housing market collapsed,” said David Crowe, chief economist at the National Association of Home Builders.
“The historical data does tell us that ratio was unusually high in the few years preceding a recession,” he added.
Additionally, unemployment began hovering around 10 percent in 2008, when the ratio began to drop to its average level, while the Dow Jones Industrial Average dropped to below 11,000 points in 2008 from more than 13,000 points in 2007.
Crowe added that historically, the average ratio has been 3.2, meaning that the average person in the U.S. must spend three years of his or her salary in order to pay for their home.
“I can’t say that 3.2 is optimal, but that seems to be the sustainable number,” he said.
In 1988 and 1989, the two years preceding the recession beginning in 1990, which, in large part, resulted in President George H.W. Bush losing the election in 1992, the ratio was 5.08 and 5.15, respectively.
During a period of economic prosperity such as the tech bubble period in 1996 to 1999, the ratio was below 4, before climbing in to the 4-to-4.5 range between 2000 and 2004.