U.S. Real Estate is Affordable

Contrary to popular belief, the U.S. housing market is one of the cheapest in the world. I’ve many people tell me that real estate is about to crash, and that the bubble is about to pop. However, any mention of this so called “bubble” has been anecdotes. No one has been able to provide empirical evidence of which to base their theory. So I decided to comb through the International House Price Database produced by the Federal Reserve Bank of Dallas and below are my findings:

Mack, A., and E. Martínez-García. 2011. "A Cross-Country Quarterly Database of Real House Prices: A Methodological Note." Globalization and Monetary Policy Institute Working Paper No. 99, Federal Reserve Bank of Dallas.

The Tiffany Blue line is personal disposable income expressed in real terms (RPDI). The black line is the house price index expressed in real terms (RHPI) for the U.S. between 1975 to 2021. When the Tiffany Blue line is above the black line, housing is affordable.

Now peep Canada. The cost to buy a home with respect to their citizens’ disposable income is roughly 75% more expensive than the U.S. The dreaded feeling you get when trying to save for a $1 million dollar California home feels like having to save $1.75 million for Canadians with respect to their income. U.S. real estate looks like a bargain in comparison.

Why it matters: The chart for the U.S. housing market looks normal. There is no bubble. If you or anyone you know is wondering when to buy a home or investment property, the best time and every time for the foreseeable future is yesterday.

Key takeaways:

• One could argue the data shows the U.S. housing market is about 10% underpriced.

• When it comes to comparing real estate prices between generations and globally, don’t forget the income side of the equation. Strong labor market, wage inflation.

• From a global/international perspective, only South Africa is more affordable with the info available.

• Despite all the issues and imperfections, Americans are still considered to be lucky to live in the land of opportunity.