New Survey: Improving Housing Affordability – But Still a Way to Go

[phk]

New Survey: Improving Housing Affordability – But Still a Way to Go

The 5th Annual Demographia International Housing Affordability Survey covers 265 metropolitan markets in six nations (US, UK, Canada, Australia, Ireland and New Zealand), up from 88 in 4 nations in the first edition (see note below). This year’s edition includes a preface by Dr. Shlomo Angel of Princeton University and New York University, one of the world’s leading urban planning experts. Needless to say, there have been significant developments in housing affordability and house prices over the past year. In some parts of the United States, the landscape has been radically changed by rapidly dropping house prices.

Our measure of housing affordability is the “Median Multiple,” which is the annual pre-tax median house price divided by the median household income. Over the decades since World War II, this measure has typically been 3.0 or below in all of the surveyed nations and virtually all of their metropolitan areas, until at least the mid-1990s. There were bubbles before that time in some markets, but during the “troughs” most markets returned to the 3.0 or below norm.

Unfortunately, the most recent bubble was and continues to be the most severe since records have been kept. The Demographia International Housing Affordability Survey rates housing affordability using five categories, indicated in the table below.

    Demographia
    Housing Affordability Ratings

    Rating
       

    Median Multiple

    Severely Unaffordable
       

    5.1 & Over

    Seriously Unaffordable
       

    4.1 to 5.0

    Moderately Unaffordable
       

    3.1 to 4.0

    Affordable
       

    3.0 or Less

    Median Multiple: Median House Price divided by Median Household Income

At the height of the current bubble, some markets saw remarkable declines in housing affordability. In some Median Multiples exceeded three times the historic norm. Among major markets (metropolitan markets with more than 1,000,000 population), Los Angeles, San Francisco, San Jose and San Diego all reached or exceeded a Median Multiple of 10. Many other markets saw their Median Multiples rise to double the historic norm and beyond, such as New York, Miami, Boston, Seattle, Sacramento and Riverside-San Bernardino. Other major US markets – such as Portland, Orlando, Las Vegas, Providence and Washington, DC – rose to above 5, a figure rarely seen in any market before the currently deflating bubble.

America has hardly been an exception. Outside the United States, virtually all major markets in Australia were well over 6.0, as well as London and Auckland in New Zealand. Vancouver was the most unaffordable major market, with a Median Multiple of 8.4. Of particular note is barely growing Adelaide, which nonetheless has seen its Median Multiple rise to 7.1.
But, at least in the US, the unaffordability wave has crested. Generally, the house prices peaked in the United States in mid-2007. Since then the markets with the biggest bubbles took the lead in bursting. By the third quarter of 2008 (the Survey reports on the third quarter each year), the Median Multiple in San Francisco had dropped to 8.0, San Jose to 7.4, Los Angeles to 7.2 and San Diego to 5.9. Of course, even at these levels, housing affordability in these metropolitan areas remained worse than ever before. History would suggest that housing prices in these markets have a long way to go before they hit bottom.

Other markets have improved affordability more substantially. Inland California markets like Sacramento and Riverside-San Bernardino have gone from the “seriously” to only the “moderately unaffordable” category, with rates now in the mid-3.0s. Data for the fourth quarter is likely to indicate that Sacramento will be the first major housing market in California to return to a Median Multiple of 3.0, a rather large fall from its peak of 6.6 in 2005.

Outside California, other markets have experienced significant price declines. But some, like Miami still at 5.6, have a long way to go before they reach the historic norm of 3.0. Las Vegas and Phoenix (which nearly reached 5) may be closer, falling to the “moderately unaffordable ” category with Median Multiples of between 3.1 and 4.0. Seattle and Portland have fallen 10 percent or more as of the third quarter but remain severely overpriced, suggesting they, like Miami, have more price declines in the offing.

Much of the blame for the bubble has been placed at the feet of a mortgage finance industry that passed out money as if it was not its own. Not surprisingly, the ready availability of money had its effect on the market. Demand rose sharply and included many who couldn’t afford to pay.

But profligate lending practices represent only a relatively minor cause of the bubble. This was missed by all but a few economists, notably Dr. Angel’s Princeton colleague and Nobel Laureate Paul Krugmann. He could see that there was not one “national bubble” but a series of localized ones. The real villain, he noted, lay in land use regulations.

In reality the bubble missed much of the country – from Atlanta to El Paso to Omaha and Albany. There were house price increases, of course, but they were generally within the Median Multiple ceiling norm of 3.0. There were a few exceptions, but even they did not exceed 3.0 by much.

Rising demand was not the big problem. Housing affordability remained at virtually the same Median Multiple level in Atlanta, Dallas-Fort Worth and Houston, the three fastest growing metropolitan areas of more than 5,000,000 population in the developed world. Many other major markets across the South and Midwest experienced little price increase and maintained their affordability. Indianapolis, which has a Median Multiple of 2.2, continued to gain domestic migration from other areas and has a near Sun Belt growth rate. Kansas City, Louisville and Columbus remain affordable and are attracting people from elsewhere.

Although there are signs of a correction in parts of California, Nevada and Arizona, some bubbles in high-regulation markets are still in the early stage of deflating. New York, Boston, Portland and Seattle particularly may be in danger; the worst consequences of their bubbles lie ahead.

The longer-term question remains whether these and other still highly over-valued markets in California, the Pacific Northwest, Florida and the Northeast will return to affordability, at or near a Median Multiple of 3.0. The necessary price drops would be bad news for regional economies because of the losses homeowners and financial institutions would sustain.

At the same time maintenance of the currently elevated prices would also be bad news. In the past 7 years, 4.5 million people have moved from higher-cost markets to lower-cost markets in the United States. The formerly attractive markets of the California coast alone have seen more than two million people depart for other places since 2000. For these areas, a return to historic levels of housing affordability may be a prime pre-requisite to restoring economic health.


HOUSING AFFORDABILITY RATINGS UNITED STATES METROPOLITAN MARKETS OVER 1,000,000
      
Rank    Metropolitan Area    Median Multiple
AFFORDABLE    
1    Indianapolis    2.2
2    Cleveland    2.3
2    Detroit    2.3
4    Rochester    2.4
5    Buffalo    2.5
5    Cincinnati    2.5
7    Atlanta    2.6
7    Pittsburgh    2.6
7    St. Louis    2.6
10    Columbus    2.7
10    Dallas-Fort Worth    2.7
10    Kansas City    2.7
10    Mem[hios    2.7
14    Oklahoma City    2.8
15    Houston    2.9
15    Louisville    2.9
15    Nashville    2.9
MODERATELY UNAFFORDABLE    
18    Minneapolis-St. Paul    3.1
18    New Orleans    3.1
20    Birmingham    3.2
20    San Antonio    3.2
22    Austin    3.3
22    Jacksonville    3.3
24    Phoenix    3.4
25    Sacramento    3.5
26    Tampa-St. Petersburg    3.6
27    Denver    3.7
27    Hartford    3.7
27    Las Vegas    3.7
27    Raleigh    3.7
27    Richmond    3.7
32    Salt Lake City    3.8
33    Charlotte    3.9
33    Riverside-San Bernardino    3.9
33    Washington (DC)    3.9
36    Milwaukee    4.0
36    Philadelphia    4.0
SERIOUSLY UNAFFORDABLE    
38    Chicago    4.1
38    Orlando    4.1
40    Baltimore    4.2
41    Virginia Beach-Norfolk    4.3
42    Providence    4.4
43    Portland (OR)    4.9
SEVERELY UNAFFORDABLE    
44    Seattle    5.2
45    Boston    5.3
46    Miami-West Palm Beach    5.6
47    San Diego    5.9
48    New York    7.0
49    Los Angeles    7.2
50    San Jose    7.4
51    San Francisco    8.0

[TeePee4Prez]

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Good post.  Amazing how these Philadelphia realtors are still kinda insisting "we're not one of those markets" when in fact we're now worse than some of the previous bubble markets on this metric.  I hope some of these local realtors pull their heads out of their collective asses and read this (including one of my own friends).  Mike Smerconish's realtor wife Lavinia wrote an extensive article in 2008 for Philadelphia Magazine saying this.  And still some buyers are bending over backwards for sellers who are asking unreasonable prices.  In fact my other friend put in a bid for a place and actually came up to meet the seller and worst of all it was a house with old, original owners and lets just say the house never got "modernized."

Granted, I realize we're not San Francisco or NYC, but I can still see them with a higher multiple based on constrained supply and tougher geography.  Not so in Philadelphia- you can expand in every which direction forever.

[ilikeverin]

18    Minneapolis-St. Paul    3.1

Best bargain!

[opebo]

The article fails the mention the other aspect of this 'affordability' equation - incomes.  This is the problem.  Back in the fifties, sixties, and seventies, incomes for the majority of people were radically higher than at present.  Get everyone back on $35/hour union jobs and we won't have to have quite the deflation this author is so pleased about.

[CARLHAYDEN]

The article fails the mention the other aspect of this 'affordability' equation - incomes.  This is the problem.  Back in the fifties, sixties, and seventies, incomes for the majority of people were radically higher than at present.  Get everyone back on $35/hour union jobs and we won't have to have quite the deflation this author is so pleased about.

Don't be petty.

Sen. McCain alleged that you can get $50 an hour for picking lettuce.

[dead0man]

You can...if lettuce costs $200 a pound.  Lots of white guys doing the job then.

[opebo]

No, fellows, if wages were required to be at a useful level, 'lettuce' would be picked by a machine. 

It is only governmentally imposed remedies for capitalist subjugation (conversly put, reductions in governmentally-imposed privilege) which motivate technical innovation and productivity increases.

[CARLHAYDEN]

You can...if lettuce costs $200 a pound.  Lots of white guys doing the job then.

But, lettuce doesn't cost $200 a pound here.

An McCain said a couple of years ago that you could pick lettuce for $50 an hour.

Now, are you suggesting that McCain was something less than accurate?

[dead0man]

You can...if lettuce costs $200 a pound.  Lots of white guys doing the job then.

But, lettuce doesn't cost $200 a pound here.

An McCain said a couple of years ago that you could pick lettuce for $50 an hour.

Now, are you suggesting that McCain was something less than accurate?

yes

[CARLHAYDEN]

You can...if lettuce costs $200 a pound.  Lots of white guys doing the job then.

But, lettuce doesn't cost $200 a pound here.

An McCain said a couple of years ago that you could pick lettuce for $50 an hour.

Now, are you suggesting that McCain was something less than accurate?

yes

Good.

Its nice to see someone else on the forum recognize the McCain is 'less than accurate' in his many statements (which was my point).