housing affordability study: how even the cheapest metros are more unaffordable than big cities

AFFORDABILITY: HOW EVEN THE CHEAPEST METROS COULD SOON OUTPACE BUYERS

The most expensive housing markets in the US arent the only ones at risk of an affordability crisis. As part of

our ongoing Affordability series, this document compares data on housing prices and income to assess current

climate conditions in the least expensive metro areas, to better understand how rapid renewal affects the ability of

average local families to enter the market. Touching on a diverse range of trends and market conditions, this

introductory study sheds light on an often overlooked phenomena that may have a larger effect on the housing

economy in years to come.

by Nicholas Brown


INTRODUCTION

Affordability is a concern not only on the top end of the housing market, but on the bottom as well . . . and not just for the reasons youd imagine. Famously, in many of the largest and most competitive cities, average house prices have outpaced the earnings of median families considerably, forcing many people to continue renting or move to less competitive markets. High priced markets continue to appreciate value at a steady rate, mostly around 6.5 - 7 percent, leaving average buyers further behind as each year passes. Meanwhile the least expensive markets are undervalued considerably. Buying a home in many markets offers a considerable advantage over renting price wise (upwards of 40% or more according to Trulia). However, several of the least expensive metro areas in the country are among those where properties are appreciating in value most rapidly over the course of the past year. This is especially true in several Rust Belt cities. The highest percentage of appreciation in the nation over the course of 2013: Toledo, Ohio, which grew a staggering 22.3 percent year over year.

While this growth in real dollar value may be miniscule compared to a smaller percentage of growth in more expensive markets, if this trend continues and wages remain slack, there is a considerable risk that local median incomes will become priced out of homeownership in the coming years, despite historically low prices. At its current rate, Toledo is outpacing the amount its median family has left over after living expenses by more than double yearly. And while sustaining over-20 percent growth over the long term in Toledo is unlikely, similar bursts in lower income, lower price cities have a considerable impact on local aspiring homeowners, exacerbating present concerns about poverty and inequality.

The initial objective of this study was to shed some light on how home appreciation affects the ability of median income houses to keep up with growing markets. Finding an understanding of how stagnant wages interact with real time changes in real estate is key to expanding the conversation about how affordability affects high and low value markets differently. Without adequate wage growth to track home values, the potential for many longtime residents to miss out on a keystone of an urban renaissance is uncomfortably high.

FINDINGS Homeowners in the ten most expensive metros spend a higher percentage of their income on housing than the ten least expensive.

However, comparable housing appreciation growth affects median buyers in the ten least expensive metro areas more than the ten most expensive markets. Similar growth in housing prices cuts further into the income percentage for less expensive markets.

This effect on median income buyers across the ten least expensive makes their markets far more volatile. Changes in housing prices have a deeper effect on the bottom line of lower-salary prospective buyers, who pay more of their salary to get into a home year-over-year (according to my calculations, a difference in ratio of nearly double over prospectives in the high price markets).

Wide fluctuations in both gains and losses have substantial effect on smaller, inexpensive market cities. While the most expensive markets largely appreciate at a stable rate, the least expensive experience wide gains and losses that threaten to price buyers out or destroy the investment of homeowners accordingly.

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ANALYSIS In the ten most expensive metro areas in the country, buyers spend a higher percentage of their income on average than people living in the ten least expensive. At current Q3 projections for 2014, one years median household income in San Jose pays for approximately 10.8 percent of a home, compared to 28.9 percent in Youngstown, OH and nearly half of the total price of a home in Rockford, Il. Considering that properties in San Jose average ten times the market price of homes in Youngstown, this isnt entirely unexpected.

Excluding metros like Denver, Atlanta, and Austin that are exploding thanks in part to tech industry interest, downtown renewal, and/or local resource extraction efforts, the highest rates of appreciation year-to-year listed by the N.A.R. study are largely coming from markets that are below the national average--many far below. Much of this likely comes down to having ample room to appreciate value in currently undervalued spaces, along with concerted revitalization efforts in many parts of the country hit hard by recession and de-industrialization. If current housing price growth rates continue, the possibility that rapidly rebounding Rust Belt cities will grow in price too quickly and stress the average local income buyers capacity to purchase a home comes into play.

Comparing a ratio of home price to median income from year to year gives us an idea of the impact changes in appreciation have on the potential buyers ability to purchase a home based on their financial means. In San Francisco, where the average home price jumped 7 percent to $744,400 this year, buyers who waited can anticipate paying an additional $251 on their mortgage each month (note: I am using 15 percent down payment, 30 years, and 3.55 percent APR as calculated by Zillows Mortgage Calculator as standard terms for all examples). This amounts to approximately three-thousand additional dollars yearly for the life of the loan. An average home in South Bend, Indiana--a metro with comparable 6.8 percent appreciation--results in a $37 change monthly, or $444 yearly. And while this jump may seem paltry in comparison, when household salary is compared to localized MITs Living Wage Calculator, median San Franciscans average nearly $25K more in earnings than basic cost of living, whereas individuals in South Bend average less than a third of that (the Living Wage Calculator accounts for base local housing prices in its estimates, acting as a control. Additional costs borne from appreciation can be taken directly from this windfall without scaling as a result for our purposes). For a family whose earnings above basic survival needs amount to about $7,000, a jump of four-hundred dollars carries considerable magnitude. If the housing market in South Bend remains strong, that is an estimated $400+ in additional mortgage payments per year for each additional year a prospective home buyer waits to enter the market. Small jumps on smaller earnings, over time, create the type of downward force that prevents people from entering the market. This keeps them in rental properties--where they dont develop an investment or appreciate value--or prices them out of the metro.

Median wage families looking to purchase a home in San Francisco, its worth noting, are already priced out of both the city and the greater Bay.

Another metric needs to be taken into consideration when discussing lower cost markets covered in the N.A.R. study: instability. The ten least expensive metros are marked by big gains, big losses, and stagnancy in between. Toledo--appreciating nearly a quarter in value over the course of the past year--is growing at a rate that outshoots its median household income. Using the MIT Living Wage calculator, the median income does not cover costs for a family of two adults and two children and offers only $538 above basic expenses for a family of two adults and one child. The year over year growth in mortgage payments calculated from our data set is more than double this tiny income window, adding $101 to monthly payments. On the other end of the spectrum, properties in the



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Cumberland, Maryland metro--among the poorest metros in the nation--lost 15.2 percent of their value. For current homeowners, this is a substantial hit to their investment and one that may put recent homebuyers underwater on their mortgages.

Wide fluctuations of this variety introduce a degree of instability to cheaper markets, where substantial gains create a gulf between current homeowners and renters entering the housing market and substantial losses hurt local equity, demand, and the hopes for stable development. Furthermore, because of lower overall median incomes in less expensive markets, the comparison of home price growth/loss to wages could cause gaps to widen faster. The percentage of a total home price one years salary buys in South Bend versus San Francisco shows more than double the impact on a South Bend prospective buyers bottom line with comparable appreciation year over year.

CONCLUSION

Currently, many of the most affordable of metros are technically well within the range of the median local buyer, with home prices well below rent rates and many major inexpensive cities like Cleveland still seriously undervalued. But if this pace continues, that time could be limited.

For buyers with higher incomes in more expensive markets, the yearly difference in income-to-appreciation rate hovers at or below 1 percent for all steadily appreciating markets (aside from a couple outliers, most markets growing at 7 percent). Higher salaries cushion the blow to the bottom line of wealthier buyers, even as many cities make outsized gains in appreciation. In a market like San Francisco where middle class wages in the tech industry, for example, greatly eclipse those of nearly all other local industries allows for widespread cushioning against staggering housing prices--even increasing demand. For the traditional middle and even upper-middle class, theres little opportunity to purchase a home within the metro. The likelihood that a comparable event in actively redeveloping Rust Belt cities that are attracting new residents could occur is not only strong, it seems inevitable in



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some places. This feeds back into the cycles of poverty and inequality that have plagued upper midwest industrial cities since the rise of suburbanization.

Despite a surplus of available homes for sale in many markets, the possibility that current homeowners and out-of-town buyers/investors drive up the prices in these cities to the degree that renters cant enter the market or even afford their rents exists. (This is already beginning to occur in some Rust Belt cities, namely Detroit where the transition from rubble porn to gentrification is already occurring at an alarming rate). This familiar cycle of rising prices--started first in major metropolitan areas and now trickling into smaller 18 hour cities--has been putting immense pressure on lower income individuals across various markets already. With slow wage growth plaguing the economic recovery in many areas, the possibility for average middle class renters being priced out of property ownership in inexpensive cities as well is all too real.

ADDITIONAL CONSIDERATIONS

Income distribution across all metro areas is uneven. This fact is especially true in the most expensive markets, where the percentage of top earners is considerably higher than in the lesser markets (and top level earners make considerably more). Like any income metric designed to give an overview of a population, the median household income is also tied to the income of both super-high and low earners, making a thorough overview of individual market conditions difficult without individual scrutiny of each metro. Taking ratios of high to low earners into consideration with their earning power street by street and block by block is an undertaking for another project.



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APPENDIX

Understanding the Appendix: %chya = % changed over a year (also called value appreciation) Median Hous. Inc. = median household income by Metro/County census 2009-2013$ Ratio = percentage of total home price one years gross median household income covers~ Ratio % total income = change in home price-to-income ratio

METRO AREA 2013 III 2014 III %CHYA MEDIAN HOUS. INC.2013

$ RATIO2014

$ RATIO DIFF~ RATIO % TOTAL INCOME

San Jose, CA 805 860 6.8% 93500 11.6 10.8 0.8 748

San Francisco, CA 659.9 744.4 7.0% 75900 10.9 19.1 9.8 607.2

Anaheim-Santa Ana, CA 670.6 697 3.9% 75422 11.24 10.8 0.4 301.68

Honolulu, HI 679.8 677.6 -0.3% 72764 10.7 10.7 - -

San Diego, CA 485 517.8 6.8% 62962 12.9 12.1 0.8 503.7

White Plains, NY 483.3 489.9 1.4% 81946 16.9 16.7 0.2 163.89

Los Angeles, CA 448.9 481.9 7.3% 55909 12.4 11.6 0.8 447.27

Boulder, CO 410.9 439.9 7.1% 67956 16.5 15.4 1 679.56

Bridgeport-Stamford, Norwalk, CT 439 421.3 -4.0% 82283 18.7 19.5 0.8 -658.26

Nassua, NY 401.1 409.7 2.1% 97690 24.3 23.8 0.5 488.45

Youngstown, OH 84.6 84.5 -0.1% 24454 28.9 28.9 - -

Cumberland MD/WV 109.9 93.2 -15.2% 43188 39.2 46.3 -7.1 -1736.23

Rockford, IL 89.2 98.1 10% 47072 52 47.9 4.1 1929.95

Decatur, IL 91 101.9 12% 46559 51 45.6 5.4 2514.18

Toledo, OH 87.5 107 22.3% 3317 38 31.1 6.9 2298.87

Ocala, FL 103.6 108 4.2% 39453 38 36.5 1.5 591.79

Elmira, NY 116.1 110.4 -4.9% 48804 42 44.2 -2.2 -1073.68

South Bend-Mishawaka, IN 105.7 112.9 6.8% 44582 42.1 39.4 2.7 1203.71

Kankakee-Bradley, IN 115.2 115.9 0.6% 50102 43.4 43.2 0.2 100.2

Ft. Wayne, IN 116.7 116.6 -1.0% 49370 42.3 42.3 - -

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housing affordability study: how even the cheapest metros are more unaffordable than big cities

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