When will home prices realign with income levels?

Since 2021, home prices are sharply higher in every market across the country—so much higher that they’ll have to come back down. Home prices can be out of line with local incomes for a while, as they are right now, but not for long. During the last 50 years, they’ve always come back in line with income levels. But when exactly will that happen? And which markets are at greatest risk?

Local price bubbles usually end when the local economy, whose rapid growth started the bubble in the first place, cools off. One very strong indicator of local economic growth is the rate at which jobs are created in the large business services sector, which provides services that other businesses need (e.g., lawyers, accountants, computer services, temporary help, office cleaning, waste management, and a raft of others). Because it’s strongly entwined with local business activity, the growth of jobs in business services is a marker of local business activity.

Our table shows recent job growth in business services in 12 markets—six with very negative growth, six with very high growth—as well as how much home prices might fall in a sharp economic downturn.

In general, home prices rose less in markets like Memphis, where the local economy wasn’t very strong to begin with. So, even though a drop in prices is likely to come sooner rather than later, the risk of a big drop is low.

In markets where current economic growth remains high, such as Las Vegas, prices won’t drop as soon, but when they do, they’re likely to drop much further.

And, as always, Florida comes up with contradictions: Miami and West Palm Beach aren’t very far apart, but their economic signals are opposite.

The risk of a general recession in 2024 is pretty high, but home price corrections (as always) will be different in different markets.

Categories | Article | Market & Trends
  • Ingo Winzer

    Ingo Winzer is President of Local Market Monitor, and has analyzed real estate markets for more than 30 years. His views on real estate markets are often quoted in the national press. Previously, Ingo was a founder and Executive Vice President of First Research, an industry research company acquired by Dun and Bradstreet in 2007. He is a graduate of MIT and holds an MBA in Finance from Boston University.

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