An article in the Wall Street Journal came out recently entitled Linkage in Income, Home Prices Shift, outlining the correlation between home prices and annual incomes in partnership with Zillow. They determined which real estate markets were currently undervalued and which were overvalued based on comparing current price-to-income ratios to the average of the time period of 1985-2000. Deep inside that article was this terrifying quote.
“Some of the most overvalued housing markets, according to the Zillow analysis, include Virginia Beach, Va.; Honolulu; and Charleston, S.C.”
If you look into the numbers, Charleston’s Price-To-Income-Ratio Compared to Historic Average is 46%. (Meaning that we are 46% above historic levels). So wouldn’t one think that Charleston home prices need to fall another 46% to be ‘normal’?? Terrifying thought indeed.
But have no fear my dear readers!
I am going to tell you why the Wall Street Journal and Zillow are wrong, dead wrong, and frankly irresponsible for publishing such useless, incendiary numbers.
First, a little history lesson is in order…
Charleston’s last economic ‘golden age’ was just prior to the Civil War when Charleston was the hub of the Atlantic trade for the southern colonies, and the wealthiest and largest city south of Philadelphia. The War shattered the prosperity of the city and just as it was on its way to recovery, it was devasted again by the earthquake of 1886. Not having the money to rebuild the 2000 buildings that were destroyed, Charleston languished through the Great Depression up until the 1970s when the quality of life and the economy in Charleston slowly began to improve.
Fast forwarding to the 1980s, we can look closely at the WSJ/Zillow timeline.
You can see that from 1985-2000, Charleston was actually ‘undervalued’ with an average of a 2.2 price-to-income ratio (3 is normal). But why didn’t it have an upward trajectory as the local economy improved?
Two reasons: Hurricane Hugo in 1989 and the closure of the Charleston Naval Base in 1996. Ooompph. Charleston got smacked yet again. The price-to-income ratio after Hugo was 2.1. (I don’t think Zillow has a data point for the Hugo Factor, do you?). Then just as the city was coming back from Hugo, the Naval Base closed, leaving a $4.2 billion impact on the local economy as 48,000 jobs flew out the window. Charleston had to scramble to reinvent itself since the Naval Base was second only to tourism in importance to the region’s economy. The price-to-income ratio then was 1.9.
So after more than a century of struggle, Charleston finally began to shine again in the late 1990s and that has continued through today. Now we are consistently ranked one of the top most desirable places to live in the world. Could we be in the midst of another ‘Golden Age’ of Charleston? It’s possible.
Thus, you can see the correlation in the time line, where from the late 90s up until the last half of 2003, the price-to-income ratio was normal. And then of course the Crazy Time happened and everything got out of whack.
But now it’s 2011, and everything has settled down a bit. So what is our price-to-income ratio now? 3.23. It’s NORMAL. WSJ and Zillow, you cannot compare today to the average during some of Charleston’s tragic and depressive eras. You cannot claim that we are 46% overvalued. We are normal. So there.
So here’s my advice to you, dear readers. Ignore national reports about the local housing market. Look deeper to figure out what they really mean. Or just ask me since I, and only I, hold the keys to the best hyper local data out there. Mwwhahhhahahah. The Wall Street Journal and Zillow have absolutely no idea what they are talking about.
- Linkage in Income, Home Prices Shifts (online.wsj.com)