New York Times and Housing Affordability

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Sunday, January 1. 2006

An interesting article in the Times a couple of days ago about the significant improvements in the average American's ability to afford a home.

Despite a widespread sense that real estate has never been more
expensive, families in the vast majority of the country can still buy a
house for a smaller share of their income than they could have a
generation ago.
A sharp fall in mortgage rates since the early 1980's, a decline in
mortgage fees and a rise in incomes have more than made up for rising
house prices in almost every place outside of New York, Washington,
Miami and along the coast in California.
Over 20 years, affordability has definitely improved because interest
rates are much lower," said Kenneth T. Rosen, chairman of the Fisher
Center for Real Estate and Urban Economic Research at the University of
California, Berkeley. Houses have also grown bigger during that time,
he said, so people are getting more for their money.

I noted in a previous post the effects of the declining mortgage costs as a function of home prices. Coastal California, of course, has a much lower affordability rate than most of the country, where official affordability rates have not improved as they have in the rest of the country. There are two possible reasons to attribute this condition, that I see:

1. Supply is much more difficult to add in the highly-desirable areas of California or New York. Regulations are thick, land-use restrictions are plentiful. So the supply continues to be added to Dallas and Vegas and Phoenix and voila that's where affordability continues to improve.

2. Income is a much more subtle factor. David Malpass at Bear Stearns has pointed out that common measurements of 'income' are very narrow. They ignore, for example, capital gains. So if you are one of the tens of thousands in Silicon Valley who sold some options to finance a home purchase, that purchase was likely measured as 'unaffordable' by the income yardsticks of the government economists who look at your income as basically your salary. It would follow that these factors are more significant on the less-affordable coasts than in the fly-over states.

By combining these factors, we can see that California is indeed less affordable than much of the country. It is however, likely more affordable that official studies would indicate.

Thanks to Cafe Hayek for the head's up.

Posted by Mike Simonsen in Economics, Housing Bubble at 09:34 | Comments (2) | Trackback (1)

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Krugman points out that this national statistic comes from averaging sprawl zone prices that have never got unreasonable, and coastal city prices that are very bubbly. If you just look at the coastal cities (such as the Bay Area), affordability has been declining sharply, despite the low interest rates. Correspondingly, low interest rates have made for excellent affordability in the sprawl-zone communities.

http://select.nytimes.com/2006/01/02/opinion/02krugman.html?hp

#1 Stuart Staniford (Link) on 2006-01-02 13:13

Well for once I agree with the good Dr. Krugman

Indeed the chronic supply vs. demand problems in the coastal cities don't show any signs of changing so "affordability", even with a bubble pop, is nowhere in sight. And places like Dallas have no motivation to slow their development growth so the disparity of the two regions is likely to stay intact.

My only quibble is what I referenced in point #2 above: Places like the Bay Area may not be as astronomically unafordable as they seem with basic income comparisons. For what ever that's worth.

-M

#2 mike (Link) on 2006-01-02 15:07

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