Home Ownership and the Affordability Red Herring

The Census Bureau released some findings of its massive American Community Survey today. Among the headlines:

• San Diego has had the greatest price appreciation of any major US city since 2000 appreciation of 127%. Wow. The Feds are talking about 2005 prices so that number has crested in the subsequent year.
• San Jose is among the highest owner-occupied cities. 64% of the homes in San Jose (and roughly Silicon Valley, by extension) are occupied by their owners.
• Rents have decreased in San Jose by nearly 10% since the peak of the period-formerly-known-as-THE-bubble. (By the way, traffic decreased a lot since the peak of that bubble too.)

We are a nation (and even more so, a region) of home owners. But despite that fact, much of the attention from today's Census release focuses on "affordability." I submit that measuring the housing market by this so-called affordability number is like measuring the stock market by the Dow. Not entirely meaningless, but a red herring on the real data.

Typically "affordability" is measured by percent of people who could maintain the income/payment ratio on a mortgage of 80% of the median priced home (a "standard" mortgage arrangement). The California Association of Realtors has done some improvements on this formula lately to account for different mortgage products, but essentially that's it.

The biggest problem with this measure is that the definition of "income" is too narrow, essentially today's salary. The fact is that most properties in California are purchased (aided by) with some form of capital gains plus a vibrant growth economy that promises continued increase in wealth.

The vast majority of transactions are move ups. You don't buy a $1 million home with a chunk of savings and a fat mortgage. You do it with the equity from your first home, maybe a pile of options you're cashing out, and THEN a fat mortgage.

The second flaw in the affordability methodology is that it ignores home ownership rates. The affordability numbers would indicate that 80% of Californians can't afford a home. But the fact is that two-thirds of them ALREADY OWN ONE.

An anecdote:

We bought our home from the original owners who had been here for 50 years. (Picture the brown 1972 El Camino dripping oil in the driveway. Now THAT'S curb appeal.) He was a union laborer in the defense industry, she a homemaker. By any stretch of the above definition, they could not afford the home they'd lived in for fifty years. Nor could they afford the giant palace they built for retirement in the desert outside Tahoe. Nor could we afford the home that we purchased. Yet all completed smoothly, and profitably, I might add.

If affordability doesn't measure people's ability to own a home, what does? How about measuring home-ownership-rates? And Guess what? Home ownership is at record high levels. Joe Sixpack is telling us pretty loudly that homes are exactly as affordable as they should be. Rock On.

The Housing Bubblistas will argue that people have been suckered into buying and are overstretched. I'll accept that a bubble burst will shave a few percent from the ownership rates. But that change will merely mark a cyclical oscillation in the midst of a massive secular shift.

So rather than despairing about falling affordability rates, we should be cheering that home ownership is at record levels. Let's measure what counts.