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The Home-Price-To-Income Ratio Continues To Hit New Record Highs – Showing Fragility 

• With homes costing nearly eight times the median household income, it would take almost eight years of pre-tax income for a household of two or more to afford a home.
• The main reason this gap persists is because of households taking out excessive mortgages - which has masked the underlying income problems.
  

What you need to know: As of late May 2024, the home-price-to-median household-income ratio – aka how expensive a home is relative to income - hit an all-time high of 7.74x¹. This means that, on average, homes now cost nearly eight times a typical household's annual income, pushing homeownership further out of reach for many unless they take on debt.

Why it matters: This ratio matters because it highlights the growing disconnect between home prices and what people actually earn. When homes cost nearly eight times the median household income, it’s a clear sign that most people can't afford to buy a home without taking on significant debt. As housing becomes more expensive relative to income, buyers are increasingly forced to rely on mortgages and loans, often stretching their finances to dangerous levels. This trend not only puts individual households at financial risk but also raises concerns about the overall stability of the housing market and economy.

Now the Dunham Deep Dive: It’s important to note here that this measures home prices to median ‘household’ income – the total pre-tax income earned by all members (two or more) of the household combined.

• Put simply, the data essentially tells us that it would take nearly 8 years of pre-tax income, with every dollar going towards a new home, for a household of two or more people to afford it.

I believe this is unsustainable – especially since it’s far surpassed even the peak during the 2008 housing bubble (of 6.83x).

“But how can prices keep rising so much higher than incomes?”

Well as mentioned above, the only way this could keep going is because households have taken on a large amount of mortgage debt (standing at $12.52 trillion as of Q2-2024)².

But as usual, debt simply masks problems in the economy and increases potential instability. . .

Now, there are essentially only two options for how this ratio can come down:

1. Home prices sink enough relative to incomes.
2. Incomes dramatically rise to catch up

But looking at recent history, it’s likelier than not that home prices will be the one to sink, which of course is a huge problem for households with all that mortgage debt outstanding.

• This can result in ‘negative equity’, where borrowers owe more than their assets are worth, increasing the risk of default and financial instability for both individuals and the broader economy.

I’ll continue to monitor this worrying trend.

Figure 1: LongtermTrends, August 2024

This Little-Known Growth Measure Is Showing Some Serious Issues 

• The growing gap between Gross Domestic Income (GDI) and Gross Domestic Product (GDP) suggests that while the economy is producing more, the income generated from this production isn't keeping pace, raising concerns about income inequality and economic sustainability.
  
• Historically, a significant divergence between GDI and GDP has been a warning sign of potential economic downturns, making this gap an important metric to watch for signs of deeper underlying issues.
  

What you need to know: While many economists focus on the Gross Domestic Product (GDP) report, the lesser-known Gross Domestic Income (GDI) — which measures total income earned from production — continues to lag behind at a troubling level³. This gap indicates that the economy's output is growing faster than the income it generates, signaling some troubling underlying trends.

Why it matters: When Gross Domestic Income falls behind Gross Domestic Product , it means the economy is producing more, but people aren't earning more from that production. This gap can reveal cracks in the system, like growing income inequality, where the wealth isn't shared evenly. It might also show that GDP growth is coming from areas that don't boost incomes, like risky financial deals, instead of solid, income-generating jobs. And it could also mean households are using more debt to spend - which the data implies is true.

Now the Dunham Deep Dive: The spread between the GDI and GDP  is worrying.

• Remember, one person's spending is another person's income, and one person's production is another person's consumption. This fundamental economic relationship is why GDI and GDP should, in theory, always match up. 
  
  Thus, when a gap persists between the two, they can signal deeper issues in the economy, such as income inequality or unsustainable economic growth driven by debt.

More worrying is that the last time this gap was so pronounced was right up before 2008 (see chart below – the red line is GDP and the blue line is GDI).

Now you may be wondering, “Since I’m not an economist, why would I care about this?”

I agree, it's a bit “meta” – but it has real-world implications. See, when real GDP is higher than real GDI, it essentially means the economy is producing more, yet the income from that production isn't keeping up.

This could happen because:

1. Measurement Differences: GDP measures what the economy makes, while GDI measures what people earn from it. They should match, but sometimes they don't because of how the data is collected (a possible scenario but I believe is unlikely).
   
2. Uneven Income Growth: If GDP grows faster than GDI, it might mean businesses are making more money, but workers aren’t seeing the same increase in their wages (a longstanding trend since the 1970s).
   
3. Inventory Build-Up: Businesses might be producing more goods to stockpile than what they’re selling, which boosts GDP without immediately increasing income (likely adding to it).
   
4. Economic Imbalances: The divergence might also indicate an overreliance on debt to fuel GDP growth. As households and businesses take on more debt to sustain consumption and investment, GDP continues to rise, but the corresponding income (GDI) hasn’t kept pace - pointing to an economy increasingly dependent on borrowing rather than sustainable income growth (very likely).

Thus, these gaps can point to deeper issues in the economy that might cause trouble later on. Furthermore, there’s some evidence that GDI is a better indicator for potential recessions⁴.

Something to keep in mind.

Figure 2: St. Louis Federal Reserve, August 2024

More Warning Signs for the U.S. Job Market: Manufacturing Woes Deepen 

• Factory payrolls are shrinking, with hours worked hitting new lows in key regions. 
  
• The slowdown in manufacturing raises red flags for broader job market stability, prompting a potential shift in Fed policy. 

What you need to know: Recent regional Federal Reserve surveys – via Bloomberg - highlight growing risks to the U.S. job market, prompting the Fed's shift toward interest-rate cuts. August indexes from five regional manufacturing reports show declining factory payrolls and reduced employment in service sectors, with hours worked also slipping⁵.

Why this matters: While these surveys reflect industry sentiment rather than actual employment changes, they underscore the labor market's slowdown, which has become a key focus for policymakers, especially after weak July job growth and significant downward revisions in March payroll data.

Now the Dunham Deep Dive: I wrote to you last week about the deteriorating labor market – with the U.S. government revising job numbers down by 818,000 for the year through March – marking the largest decline since 2009⁶. And why the mainstream media had underestimated this risk.

Now, recent data shows it may continue to get worse, with all five major manufacturing regions either falling further or remaining in contraction.

• For instance, the Kansas City Fed’s index has recorded three consecutive months of contracting employment, a trend not seen since mid-2020. Meanwhile, the Richmond Fed’s employment gauge is at its weakest since 2009, excluding the pandemic period.

These indicators reflect deepening challenges in the manufacturing sector, contributing to broader concerns about the U.S. labor market.

Worse is that factory workers are working less and less. In New York, they’re working the least they have in over a year. The same thing is happening in Texas, Philadelphia, and Kansas City. When workers don’t work as much, it’s like a warning. First, the hours go down, and if things don’t get better, the jobs might go away too.

It’s like when a factory isn’t making as many toys, and so the workers only work half the time. If it keeps happening, they might not need as many workers. That’s why this is important. Because when people work less, they have less money, and that can make things hard for everyone.

 Figure 3: Bloomberg, August 2024

Anyways, who knows what will happen? Maybe this is just noisy data.

As usual, just some food for thought.

Have a great rest of your Holiday weekend.

Sources:

1. Home Price to Income Ratio - Updated Chart | Longtermtrends
2. Household Debt and Credit Report - FEDERAL RESERVE BANK of NEW YORK (newyorkfed.org)
3. Real gross domestic income (A261RX1Q020SBEA) | FRED | St. Louis Fed (stlouisfed.org)
4. Gross domestic income, a GDP alternative, warns of possible recession (usatoday.com)
5. Risks to US Job Market Start to Emerge in Regional Fed Surveys - Bloomberg
6. Are We Already in a Recession? Labor Market Signals an Economic Downturn | Dunham

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