In a Wall Street Journal Article dated August 17, 2011, Trulia’s study on the link between people’s income and the cost of housing claimed that Atlanta’s housing market is 8% undervalued. The study is a very interesting one and the ratio of income to home price has been largely ignored since the housing boom started in the US back in 2000.

Some background of the study:

The study compared the “Pre-Boom” period of 1985-2000 to the boom that started in 2000, peaked nationally in 2005 and then compares it to today’s “Post-Boom” (if that’s what we want to call it) housing markets. They derive a ratio of the average income to the average sales price in 130 housing markets across the country and compare the “pre-boom” ratio to today. Nationally, between 1985 and 2000, Americans were spending at 2.9 times their income on their home, so if a family was making $100k per year, they were buying about a $290k home. Nationally, this number peaked at 5.1 in 2005 so that same income earner was buying a $510k home while making the same amount of money.

I think it was obvious to most during those heydays, that if people’s salaries weren’t rising by anywhere close to the rate that housing prices were rising, that this was something that could not be sustained for long. Of course no one wanted to talk about that when they were seeing their home value rise by 30%+ in one year (which was happening in some parts of the country).

Trulia’s study then compared the ratio “pre-boom” then to today’s ratio of income to house-price and found that in about 30% of the 130 housing markets in the US real estate is currently “under-valued” compared to the days before things went crazy. Among that 30% was Atlanta, coming in at 8% under what people were making to spending between 1985-2000.

Let’s look at Atlanta specifically compared to the rest of the country though. In the Trulia study, Atlanta’s income to price ratio during 1985-2000 was 2.284 and it peaked at 3.2 in the third quarter of 2004. Today we have come down to 2.11 which is where they are getting the -8% of the housing values. The study does illustrate the cooling off of the market that we’ve been experiencing and looking at it optimistically, may be an indicator that prices may start to rise in the near future.

The better indicator’s that we know drive pricing in a housing market however are absorption rate (also referred to a ‘Months of Inventory’) and the amount of distressed inventory on the market currently as well as the delinquency rate on mortgages which a large percentage of which will likely result in future foreclosures and short sales. We’ll cover that more in our next article titled The impact of Distressed Properties on Atlanta’s Housing Price Points.