Real Estate Prices and Home Values : Housing Prices in Relation to Income : The ZIndex and the Maximum Affordability Ratio of Ben Engebreth

Is real estate still vastly overpriced? It most certainly is at the high end of things, but that will probably never change. Buyers often pay a substantial premium for exclusivity (location, location, location) which often far exceeds the strict objective value of the actual property. Take a look at the videos at Christie’s Great Estates for good examples of what appear to us in many cases to be substantially overpriced homes.

Having lived in Greenwich, CT some years ago, I saw with interest that Dunnellen Hall (see also here) in Greenwich, Connecticut is for example being offered for sale now at $75,000,000 by the Helmsley Estate, a selling price which is $25,000,000 more than the highest estate price ever obtained in Connecticut. The original price paid in 1983 was $9,000,000 (plus $2 million for the furniture).

Dunnellen Hall thus far does not seem to be partnered with good luck (Feng Shui), but this is often not a problem of the property itself, but rather the fault of the property owners. A property that is filled with love will return love and one that is filled with mean-ness will be mean.

On the other hand, some properties do tend to have a bad “track record” as far as luck is concerned, but that is probably because they attract certain kinds of owners. Buyers of a property like Dunnellen Hall will WANT something from that property – exclusivity, snob acclaim, etc. – but are surely not buying the property to GIVE something to that property themselves, but only to TAKE out of it, so that a negative result is pre-programmed. By the way, just 9 months ago, the asking price for Dunnellen Hall was $125,000,000. Greed is not a good starting point.

Hat tip to CaryGee.

So what is the “true” financial value of a house in economic terms for those selling and buying houses? (A house is not a “home” until so made by the inhabitants.)

Back in 2005 Ben Engebreth put up an eminently sensible posting titled Housing Price-to-Income Ratio as a Way to Measure Maximum Local Affordability.

Engebreth came up with a so-called “maximum affordability ratio” of 3.86, based on an initial payment of 10% down and the rest of payment at a 7% interest rate.

In other words, based on that “maximum affordability ratio”, a house buyer with an annual income of $100,000 could maximally afford a house that cost $386,000 – proceeding from the assumption that maximum affordability for housing is calculated to a maximum of 28% of income.

Based on Ben Engebreth’s “Maximum Affordability Ratio” (which we hereafter call the housing “MAR“), he showed by means of a list of Median Home Price-to-Median Family Income Ratios for US Cities/Metros (Sorted by Home Price) that housing markets in numerous U.S. cities were at that time – in 2005 – already deep in an extreme housing bubble – at least, judged by his housing MAR.

Although Engebreth’s MAR is a bit of a housing value oversimplification and not infallible, it potentially gives us a very good tool to cross-check whether house prices are “in the ballpark” of affordability or not.

How do things look at the moment on the US housing market?

For the Fiscal Year 2008, the Tax Foundation estimated the average income in the United States to be $44,254 so that a family earning that amount, according to Engebreth’s MAR calculation, putting down 10% and paying 7% interest, should buy a home costing maximally $44,254 x 3.86 = $170,820 or about $171,000.

The amazing thing is how well that figure stacks up against the ZIndex which we very roughly calculated from the online data by averaging it for all States, coming up with an average ZIndex for all States of $171,000. That is quite a spectacular mesh with Engebrecht’s MAR. provides the median prices of houses listed for sale in the USA (the Median Price) and compares those prices to its own home value index, the ZIndex. Since this data fluctuates, the data below applies only at the time we looked at the Zillow figures, which was June 4, 2009. See for updated figures of houses for sale in your area of interest.

We have organized the data from the most expensive housing locations (by the Zillow ZIndex) to the least expensive. In addition, for comparison, one can view the Zillow Z-Index value for homes in each State.

We have roughly calculated the average Median Price of homes for sale in all States at ca. $221,000 which is $50,000 more than our calculation of the average Zillow ZIndex of ca. $171,000 for the entire U.S., so that house sellers are apparently still trying to realize an average $50,000 premium – over actual value – on the sale of their houses. Our calculations are only approximate, but they provide a good picture.

Here is the data as of June 4, 2009 – ordered by ZIndex – for each State, plus Washington D.C. and Puerto Rico (no data was available for Alaska, and no Zillow ZIndex was found for Maine, South Dakota or Puerto Rico):

Hawai’i Median Price $459,000 ZIndex $467,304
District of Columbia Median Price $410,000 ZIndex $391,468
California Median Price $348,616 ZIndex $324,605
New Jersey Median Price $356,748 ZIndex $278,880
Washington Median Price $299,793 ZIndex $258,105
New York Median Price $381,706 ZIndex $257,759
Maryland Median Price $306,992 ZIndex $256,212
Massachusetts Median Price $336,799 ZIndex $253,573
Virginia Median Price $268,925 ZIndex $236,958
Connecticut Median Price $339,743 ZIndex $236,218
Oregon Median Price $262,605 ZIndex $222,117
New Hampshire Median Price $235,266 ZIndex $211,061
Colorado Median Price $283,116 ZIndex $206,425
Utah Median Price $248,490 ZIndex $206,251
Rhode Island Median Price $287,411 ZIndex $190,858
Delaware Median Price $266,600 ZIndex $188,665
Montana Median Price $228,027 ZIndex $179,243
Wyoming Median Price $230,249 ZIndex $171,912
Illinois Median Price $227,227 ZIndex $168,184
Idaho Median Price $185,099 ZIndex $164,694
Minnesota Median Price $191,645 ZIndex $164,593
Arizona Median Price $208,957 ZIndex $162,521
Wisconsin Median Price $156,037 ZIndex $145,772
Pennsylvania Median Price $202,063 ZIndex $145,317
Nevada Median Price $196,009 ZIndex $145,206
Florida Median Price $215,510 ZIndex $145,061
North Carolina Median Price $195,823 ZIndex $142,607
Georgia Median Price $181,626 ZIndex $135,824
Vermont Median Price $240,434 ZIndex $130,819
Missouri Median Price $148,242 ZIndex $126,717
South Carolina Median Price $200,484 ZIndex $125,002
Maine Median Price $183,574 ZIndex ??
Louisiana Median Price $166,534 ZIndex $117,536
Iowa Median Price $136,398 ZIndex $117,479
Kansas Median Price $149,783 ZIndex $116,710
Alabama Median Price $162,799 ZIndex $114,467
Tennessee Median Price $162,320 ZIndex $114,030
New Mexico Median Price $205,458 ZIndex $113,087
Nebraska Median Price $133,442 ZIndex $112,589
Ohio Median Price $137,428 ZIndex $108,801
Indiana Median Price $134,183 ZIndex $105,064
North Dakota Median Price $151,969 ZIndex $104,967
Kentucky Median Price $140,447 ZIndex $104,649
West Virginia Median Price $136,199 ZIndex $102,990
South Dakota Median Price $146,457 ZIndex ??
Michigan Median Price $122,942 ZIndex $99,927
Arkansas Median Price $137,250 ZIndex $97,803
Mississippi Median Price $156,654 ZIndex $97,284
Oklahoma Median Price $134,272 ZIndex $94,393
Texas Median Price $191,718 ZIndex $81,916
Puerto Rico Median Price $250,000 ZIndex ??
Alaska – no data