In the age of quick news cycles and social media, it can be hard to make heads or tails of housing market news.
With plenty of sources to pick and choose from, it’s easy for anyone to form a narrative that is inconsistent at best.
Take, for example, housing pundits that report the demand for housing is strong, while these same pundits, on another day say that we are in a housing affordability crisis. The “strong demand” card is useful when they are trying to convince buyers to get into the market before it is too late, while the “affordability crisis” card is slapped down when they need an excuse for weak demand.
In a coherent world, these two conditions cannot exist in the same time-space continuum. But nowadays, this seems to be the norm.
What is a rational, reality seeking consumer of news to believe? Math, facts and data, as always, stand ready to come to the rescue.
When we think about housing affordability in the U.S., it is meaningless to use nominal prices without considering location, location, location and the median incomes in those locations.
Take, for example, the area of the country where I reside, Irvine, California. In this Southern California burb, the median home price in my zip code is $1,176,938.
To most of the country, this dollar amount as a median price seems insane, but here, the market still finds buyers. Folks are still buying because the area is a hotbed for high paying jobs. As Einstein would say, it’s all relative.
The top home prices in California make many think that it is a hot housing market, but the truth is sales have gone nowhere for a decade (see below). But sales still hold up because enough people make enough money to keep buying homes at a steady rate. It helps, too, that mortgage rates keep on falling.
In a 2014 Bloomberg interview, I surprised many by saying that if you excluded both cash buyers and those who made two to three times the median income, then 82% of the working population in California could not afford to buy a home according to the traditional affordability calculation.
Eighty-two percent is a significant scary number, but it is based on an outdated premise.
First, this standard affordability calculation is based on the requirement that the buyer makes a 20% down payment. Hardly anyone, in these higher-priced markets, still does that, unless they’re in the selected group I mentioned above.
Second, while the real median household income in California is over $75,000, this analysis does not take into consideration that many homebuyers are in duel income households earning $150,000-225,000 per year as a couple. While they may not be able to afford a $1 million-plus home, they can afford to get into the market.
An affordability crisis would be a deflationary event, but we are seeing nominal home prices still rising. This increase is still based on low mortgage rates.
When you hear about an affordability crisis in America, does this chart of purchase application (see below) look like an affordability crisis? Are college-educated Americans who are going to make $2-5 million in their life really in a crisis?
The term crisis during this record-breaking expansion has been so abused that the Four Horsemen of the Apocalypse want their horses back.
The take-home lesson from all of this is that those homebuyers, even in the higher-priced zip codes, are doing okay, especially when one considers per capita income vs. home prices. Deputy Chief Economist at Freddie Mac Len Kiefer adds color to this point with his chart comparing home prices with per capita income.
In comparison, during the housing bubble years, home prices did outpace per capita income.
We “fixed” that problem by offering exotic loans that largely sidestepped financial qualifications. We all know how that worked out.
The difference today is that we no longer have the types of loans that feed a credit bubble, so price gains in housing are limited in most areas of the country. Real home price gains went negative last year in America on a year over year basis, unlike the real home price gains we saw from 2002-2005.
The barbell-shaped economy and the housing affordability crisis
In terms of homeownership, high priced areas typically have a “barbell-shaped” economy, with a large number of wealthier homeowners on one side and a large number of less affluent renters on the other.
The affordability crisis is not the cost of homeownership but rather the cost of renting.
We hear a lot about the need to build more lower-priced starter homes to assist those on the homeownership side of the barbell, but the real need is for less expensive rental units to accommodate the folks on the rental side of the barbell.
When is the last time you heard about booming construction in low-cost rentals anywhere in America? The demand is undoubtedly present, so where is the supply?
I am 44 years old, and I don’t remember seeing anything like that in the communities I am familiar with. Developers apparently don’t see this market as profitable. Added to this, NIMBYism and zoning create an additional barrier that prevents these developments from happening in many communities.
So here is a novel idea: Let’s stop making up stories that promote the so-called needs of the haves and start acknowledging the real problems we have amongst our neighbors on the other side of the economic barbell.